Slower growth and perilous public finances: Can infrastructure and schools ride to Osborne's rescue?

Yael Selfin
Osborne must hope that measures to boost productivity will pay off (Source: Getty)

George Osborne’s eighth Budget since taking office as chancellor proved to be one of his most challenging. With the economy taking a turn for the worse, forecasts as recent as those made in November’s Autumn Statement had to be significantly paired back.

In fact, in the short term, the economy could weaken further than the current numbers suggest. Many of our clients are starting to register genuine concerns about the potential prospect of a Brexit, and the latest data point to confidence ebbing, with important implications for short-term investment and employment growth that could put a further dent in UK economic performance.

The public finances have proved to be in a more perilous state too, with a weaker economy expected to see a bleaker outlook for tax receipts. The chancellor can count on some alleviating factors, such as the expected lower spending on debt interest in coming years, but that still left him with no wiggle room to exercise much magic.

This deteriorating economic environment required some bold decisions. The chancellor abandoned his aim to lower net debt as a share of GDP each year, while the promise to eliminate the deficit by 2019-20 looks shaky. Prudence was not thrown out of the window entirely, however, with the announcement of further cuts in departmental spending for later years in this Parliament, closer to the next general election. How much of the cuts will actually take place is hard to tell, as the chancellor may have room to have them reversed in subsequent Budgets and Autumn Statements, when the course of the economy and public finances become clearer.

Sacrificing financial rectitude at a time when record low interest rates make the cost of public debt relatively low could be the right decision, provided that the extra money is well spent in propelling the economy into a better growth path. Productivity remains the UK’s Achilles’ heel and this Budget saw a number of measures announced that could help address that. But the challenge ahead should not be underestimated. The Office for Budget Responsibility anticipates continued weak productivity growth, a no-confidence vote in the chancellor’s plans to boost economic growth.

Three of the themes promoted in the Budget could go some way towards lifting productivity performance in the UK: education, infrastructure and devolution. Our analysis shows that improvements in infrastructure and human capital can have a major impact on the future of a country’s growth and wealth. Furthermore, the UK performs relatively poorly compared to its peers on transport infrastructure in our Variables for Sustained Growth (VSG) index, ranking only twentieth, well behind Germany and France. There is unarguably more to be done on education too, with the UK ranking only sixty-fifth in our index of 181 countries. Further devolution could boost productivity by improving the level of transparency in government policy-making, an area where the UK does not currently score strongly in our VSG index.

So the UK could see real benefits from investing in schools and transport infrastructure, but how the money is spent will be just as important. The chancellor must ensure that the investments he makes deliver as much “bang for buck” as possible.

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