UK economy is doing well, thank you

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LAST week’s UK budget has prompted no end of hand-wringing and fault-finding. While the economy has some obvious flaws, much of the criticism ignores a simple fact: The UK is doing pretty well, thank you very much. With the economy growing, unemployment down, the trade deficit shrinking and prosperity improving, it could even be an international poster child for the benefits of austerity.

The election hangover is partly to blame for the naysaying. While it can be dangerous to put too much emphasis on what the man on the Clapham omnibus says, I have overheard enough conversations in my local pub and on the bus to work each day to be reasonably confident that London’s chattering classes still can’t quite believe what happened.

The Conservatives won the election — by a majority that no opinion poll predicted. Moreover, being in a coalition with the Liberal Democrats seems to have taught the Tories the benefits of stealing whatever finery is hanging in your neighbour’s closet.

You would think Chancellor George Osborne might win plaudits for this mix-and-match approach. By leavening his Thatcherite tendencies with such innovations as a living wage and tax changes designed to benefit the poorest, he’s moving toward what he called “the new centre of British politics” in a BBC radio interview last week: What we are saying to business is “pay higher wages but you get lower taxes.” What we are saying to people is “you get a bigger pay cheque but there will be a less generous benefit system.” What we are saying to the country is “we are going to spend less but we are going to live within our means.”

That less-than-dogmatic approach isn’t winning the applause Osborne might have expected. The Economist, for example, had this to say in uncharacteristically hyperbolic mode: This was a budget whose slick politics hid economics that were often wrong and sometimes dangerous.

The flagship substitution of tax credits for wage floors is a bad mistake; cutting benefits to the very poor while reducing inheritance tax for the wealthy is indefensible. Like it or not, the election victory gives the Conservatives a mandate to pursue their ideological predilection for shrinking the public sector and cutting spending.

Moreover, key elements of the economy are sufficiently rehabilitated since the financial crisis for the Tories to declare victory in the battle to deliver the best performance among the world’s major economies.

Slow wage growth and millions of workforce dropouts, for example, have sufficiently dented optimism about the US recovery to delay the Federal Reserve from raising interest rates. In the UK, though, pay rises are finally starting to pick up.

Most surprisingly, wages in the private sector (which includes burger flipping and other unskilled jobs) have caught up with the public sector (which is mostly white-collar desk jobs) for the first time in more than six years:

Moreover, as the unemployment rate has dropped to a seven-year low of 5.5%, Osborne’s contention that the private sector would absorb workers fired from government jobs as he cut spending has turned out to be true:

It’s not all good news on the British economy, or Osborne’s budget. The Institute for Fiscal Studies (IFS) reckons the combination of tax changes for the wealthy and cuts to government spending on things like welfare for the low-paid are “taking much more from poorer households than richer ones.” Moreover, pushing up pay by increasing the minimum wage is a “gamble,” the IFS said.

UK manufacturing, which has barely grown for the past four years, is also a disappointment. Figures for May showed an annual decline of 0.6%, extending April’s 0.4% slump. Osborne’s plan for a levy on companies to fund apprenticeships is welcome news to those of us who believe trying to push every kid into university is a mistake. But the vacuum in vocational training in recent years leaves a big gap to fill.

And the bubbly housing market remains, in the May 2014 words of Bank of England governor Mark Carney, “the biggest risk to financial stability.” In a nod to the lack of affordable housing, Osborne made some tweaks to the tax treatment of private landlords who accumulate property and accompanied that with a relaxation of planning laws. Yet a 2004 report suggested Britain needs to build at least 75,000 new dwellings per quarter to meet demand; the quarterly average in the past 14 years is fewer than 34,000. Berkeley Group, London’s biggest homebuilder, completed 5% fewer new homes in the 12 months through April than it did a year ago.

Moreover, a budget initiative to cut rents for tenants of low-income housing associations, combined with a right-to-buy plan for those renters, will massively constrain the ability “to meet the shared ambition of themselves and government to drive housing growth and new jobs,” according to David Orr of the National Housing Federation.

One of the more Thatcherite aspects of Osborne’s spending cuts is also the ugliest. It demonises those who rely on what the Tories call benefits, and what I grew up knowing as social security. Lumping together the most vulnerable members of society with the true slackers is offensive and unnecessary. If Osborne really wishes to capture a “new centre” for UK politics, he would do well to refrain from besmirching those who are unable to work, rather than those who are unwilling.

Above all, the UK budget is effectively a resume for a man who would be king — or at least prime minister. Osborne will likely be battling London’s mayor, Boris Johnson, for the leadership of the Conservative Party, now that David Cameron says he won’t run in the next election. Osborne lacks the charisma of Johnson and the smooth charm of Cameron. But judged on his stewardship of the economy, Osborne is doing a better job than his detractors acknowledge. — Bloomberg View

Mark Gilbert is a Bloomberg View columnist.


This article first appeared in The Edge Financial Daily, on July 14, 2015.