Rebuilding Collective Prosperity - a Budget for jobs and growth through a sustainable demand led recovery
STUC submission to the Treasury in advance of Pre-Budget Report 2009
Executive Summary
The STUC believes that the UK’s current economic challenges are first and foremost an unemployment crisis and a revenue crisis. We recognize that in his 2009 Budget, the Chancellor took significant steps to mitigate the impact of the crisis through fiscal stimulus and in so-doing avoided a potential depression.
In this submission we urge the Chancellor not to withdraw stimulus too early and explain why compounding withdrawal of the fiscal stimulus with public spending cuts is potentially disastrous.
STUC recognizes that the deficit must be reduced medium to long term and we believe there is much the Treasury can do to maximise income by taxing high earners and companies fairly and cracking down on evasion and avoidance.
In PBR 2008 the Government introduced a stimulus package of some £20bn or 1.5% of GDP. The temporary cut in VAT which accounted for around £12.5bn of this total is due to end in January 2010. The STUC believes that this sum should now be spent on a range of measures that will help boost the economy, keep workers employed and address economic inequality and insecurity.
· Introduce a short-time wage/training subsidy
· Extend the Future Jobs Fund
· Increase out of work benefits and tax credits
· Reverse the proposed cuts in public service spending
· Invest in a public works programme focused on house building and investment in green jobs
A Budget for jobs and growth through a sustainable demand led recovery
Introduction
The impact of the global financial crisis and subsequent recession on the Scottish economy is reflected in the official data:
· Employment has fallen by 56,000 over the year to September 2009[i];
· Unemployment has risen by 67,000 to 194,000 over the year to September 2009;
· The number of JSA claimants has risen by 49,000 to 132,600 in the year to September 2009;
· Youth unemployment increased by 75% in Scotland between August 2007 and August 2009; and by more than 100% in a number of Local Authority areas;
· GDP has contracted by 6% over the four quarters since the recession began in second quarter of 2008[ii];
· Manufacturing output has fallen by 12.37% during the recession; output in the chemicals sector has fallen by 25% over the 3 quarters since Q3 2008; other manufacturing has fallen by 21% and electronics, transport equipment and mechanical engineering have all fallen by between 10 – 20%[iii].
The STUC acknowledges that the impact would undoubtedly have been very much worse without the unprecedented monetary response and the much more modest fiscal stimulus introduced in the PBR 2008. Together with the Government’s quick action to stabilize the banking sector, these measures have probably prevented the recession turning into a depression.
However, the STUC believes that profound economic challenges remain and that any upturn confirmed in the data for last quarter 2009 is likely to prove weak and potentially unsustainable.
The STUC is increasingly concerned that the history of the global financial crisis is already being selectively rewritten by those with a direct interest in avoiding a regulatory response to the irresponsible behaviour in financial markets which caused it.
The STUC is clear, as is most of the world, that the crisis stemmed from too little Government oversight of, and intervention in, the economy. The crisis is not, as some are now arguing, the inevitable consequence of Government becoming too big. If Government is to blame, it is for buying into the myth that deregulation and the financial ‘innovation’ it unleashed, fundamentally changed the financial sector; rendering it more robust through the wide dispersal of risk. In the complacent view of market participants, regulators and politicians, the deregulated financial sector would continue to drive GDP and employment growth as long as the Government’s commitment to light-touch regulation was maintained.
This herd behaviour is now being repeated. The same consensus which promoted the myth of the new financial paradigm, now argues that deficit reduction is the most pressing challenge facing the UK economy. Differences arise over the pace and scale of measures required to reduce the deficit but not its place in the hierarchy of economic challenges.
The STUC is profoundly concerned over the potential consequences of public spending cuts scheduled to be introduced in the short-term. The UK economy remains very fragile with unemployment rising, business investment plummeting and affordable credit still hard to access, despite the scale of measures introduced over the past year. Even, as is widely anticipated, growth resumes in Quarter 4 2009, there is no prospect of returning to pre-recession levels of employment, unemployment and output for some considerable time.
Cutting public spending in these circumstances could push the economy over the edge. PBR 2009 must commit the government to maintaining stimulus measures over the next year at the very least. Introducing cuts now, will curtail any nascent recovery, restrict job opportunities and lay the grounds for huge costs in the years ahead, given the impact of extended periods of unemployment on individuals, families and communities. Slashing public spending may help reduce the deficit in the short-term but it will almost certainly hamper longer-term budgetary stabilization through the increase in social spending inevitably resulting from a cuts first agenda.
Since Budget 2009 was announced in April, economic debate has largely been framed in the context of the UK’s growing deficit and stock of public debt. And it matters how the debate is framed. The STUC believes that the UK’s current economic challenges are first and foremost an unemployment crisis and a revenue crisis.
With consumer spending and business investment so very weak, these challenges can only be addressed through Government intervention to support demand. Of course the Government has to be mindful of the demand for, and the price it must pay for its bonds. Yes, the PBR should follow on from Budget 2009 in setting out a credible path towards fiscal consolidation. But there are currently no signs (beyond the very early warning shots of discredited rating agencies) that yields on UK Government bonds will rise in the short-term.
In addressing the UK’s current economic challenges – which continue to be very substantial – the STUC notes the following:
· Advocates of immediate debt reduction have been perfectly content in the past to jeopardize the UK’s fiscal position through incurring unfunded liabilities for military operations abroad and/or through tax cuts for the rich i.e. Inheritance Tax. Panic only appears to set in when deficits rise to support the economic security of ordinary working people;
· The present and future costs associated with cutting Government spending when unemployment is rising are rarely mentioned in the public debate over the deficit. The figures show that business investment has been slashed over the past 2 years; not only on capital assets but also intangible investments such as product development and skills training. This and the impact of higher unemployment will reduce the economy’s potential for years to come. This is why Government spending to fill the output gap is so necessary.
· The cheerleaders for immediate deficit reduction also bemoan the impact of higher deficits (in the shape of higher future taxation) on young people. However, the STUC believes that anyone who is genuinely concerned about the prospects of young people will argue for more Government spending to create jobs. The evidence is clear – the burden of higher unemployment falls disproportionately on young workers with entrants to the labour market in years of higher unemployment suffering permanent career damage.
· In any case, it is far from certain that higher taxes will be required in the future to pay for stimulus spending now. Spending more on recovery will lead to a stronger economy – and a stronger economy means more government revenue.
The fragile economy
To the surprise of many commentators and economic forecasters, the first estimate of UK GDP in Quarter 3 2009 did not confirm a return to growth. Rather, the 0.4% contraction confirmed the longest recession (6 quarters) since quarterly records were first compiled in 1955.
Scottish GDP data for Q3 will not be published until the New Year. The Q2 data published on 21 October 2009[iv] confirmed that:
· GDP fell by 3.2% annually and fell by 0.8% in Q2 2009 – the comparable figures for the UK are 3.2% and 0.6%; and,
· In the year to end-June 2009, the Scottish service sector fell by 2.5%, the production sector fell by 5.7% and the construction sector fell by 6.3% - the UK experienced a 1.9% fall in services, a 8.8% fall in production and a 8.2% fall in construction.
Whatever the data will show for UK Q4 and Scotland Q3, the STUC believes that a sustainable, demand-led recovery is far from assured:
· Unemployment is widely anticipated to rise well into 2010 and possibly beyond;
· Business investment for the second quarter of 2009 is estimated to be 10.2% lower than the previous quarter and 21.8% lower than the same period last year[v];
· The availability of finance remains a key constraint for many, particularly small, businesses. The Bank of England’s latest lending report confirms that ‘the flow of net lending to UK businesses remained negative in September and lending to companies fell across all the main sectors of the economy in 2009 Q3’[vi];
· Despite a small rise in October 2009 due primarily to rising commodity prices, inflation remains low and fears remain that the UK could face a sustained period of deflation[vii];
· Scottish manufactured exports have declined despite the boost to competitiveness supplied by the falling pound;
· Wage growth is very weak; and,
· Bankruptcies and personal voluntary arrangements are at a record high.
There are also concerns that the slowing in the rate of decline in Q2 and Q3 are, in substantial measure, attributable to an inventory effect that will be time limited and not repeated.
Exit strategy
There has been much talk at UK and international level about ‘exit strategies’: how and when countries should withdraw the stimulus packages implemented in response to the global financial crisis.
The STUC strongly believes that the lessons of the past must be learned: the early withdrawal of stimulus was the most important factor in prolonging the great depression and Japan’s ‘lost decade’. We do not believe that full withdrawal of the fiscal stimulus is justified, given the fragility of the economy. We believe that compounding withdrawal of the fiscal stimulus with public spending cuts is potentially disastrous.
The STUC believes that the deficit crisis is being deliberately exaggerated by those who stand to gain from an approach that prioritises deficit reduction. Investors continue to enthusiastically fund UK sovereign debt a fact conveniently overlooked by the budget hawks.
There is great uncertainty over the size of the structural deficit and too little recognition that the position can change quickly if robust growth resumes in the short to medium term. It may well be that some years hence, markets might get edgy over the structural deficit but by this time tax rises may well be justified for standard counter-cyclical reasons.
Indeed, the almost complete absence of the revenue side of the balance sheet during this current debate is particularly worrying. The STUC believes there is much the Treasury can do to maximise income by taxing high earners and companies fairly and cracking down on evasion and avoidance.
The UK’s budgetary position
Given the context of current debate on the public finances, it is important to clarify how the UK’s current budgetary position compares with other OECD countries.
Debt and Primary Balance[viii] (in percent of GDP)
Advanced countries / Current IMF World Economic Outlook projectionsDebt / PB
2009 / 2014 / 2009 / 2014
Australia / 13.7 / 25.9 / -4.3 / -0.4
Austria / 70.0 / 83.7 / -1.5 / -1.2
Belgium / 98.1 / 111.1 / -0.5 / -1.3
Canada / 75.6 / 65.4 / -3.5 / -0.4
Denmark / 26.1 / 30.0 / -2.2 / -0.7
Finland / 40.6 / 54.4 / -2.5 / -3.0
France / 77.4 / 95.5 / -5.3 / -2.1
Germany / 79.8 / 91.4 / -2.3 / 1.9
Greece / 108.8 / 133.7 / -1.5 / -3.1
Iceland / 139.9 / 134.1 / -7.7 / 7.6
Ireland / 59.9 / 82.2 / -10.3 / 1.6
Italy / 117.3 / 132.2 / -0.9 / 0.5
Japan / 217.4 / 239.2 / -9.0 / -5.1
Korea / 35.8 / 39.4 / -1.6 / 3.8
Netherlands / 66.2 / 80.9 / -3.1 / 0.2
New Zealand / 23.4 / 53.9 / -2.1 / -4.6
Norway / 67.2 / 67.2 / 4.9 / 8.4
Portugal / 73.3 / 87.5 / -3.3 / 0.8
Spain / 54.7 / 81.2 / -8.5 / -4.0
Sweden / 43.5 / 49.4 / -4.8 / -0.6
UK / 68.6 / 99.7 / -10.0 / -3.8
USA / 88.8 / 112.0 / -12.3 / 0.3
PPP weighted average / 95.8 / 114.7 / -8.0 / -0.7
G20 / 100.6 / 119.7 / -8.6 / -0.6
It is also important to note that the UK’s upfront costs of dealing with the banking crisis are proportionately higher than all other advanced nations apart from Belgium.
Financial Sector Support Utilised Relative to Announcement[ix] (in percent of GDP)
Amount used / In % of announcement
Austria / 1.7 / 32.7
Belgium / 4.7 / 97.6
Canada / n/a / n/a
France / 0.8 / 57.0
Greece / 1.7 / 82.0
Ireland / 3.8 / 63.6
Italy / 0.0 / 0.0
Netherlands / 2.3 / 68.8
Norway / 0.0 / 0.0
Portugal / n/a / n/a
Spain / n/a / n/a
Switzerland / 1.1 / 100.0
UK / 3.9 / 100.0
USA / 2.2 / 41.9
Average G20 / 1.1 / 41.8
Average advanced economies / 1.4 / 42.3
Those who promote deficit reduction on the basis of an immediate threat to the UK’s credit worthiness would be well advised to take some time to become acquainted with the facts: