The UK Budget was presented on Wednesday, November 22, by Philip Hammond, the chancellor of the exchequer. He has been under fire from his Cabinet and backbench colleagues because he is not happy with a hard Brexit. He wants to retain the trade links with European Union (EU). The Budget was received with much cheer by his colleagues, and he has survived. But, the fascinating part of the Budget was not the politics, not even the short-run policy choices, but the long-term prospects for the UK economy. Back in 2010, when a coalition (rare in UK politics) came to power with Conservatives and Liberal Democrats, a fundamental reform was implemented. This was to have an Office of Budget Responsibility (OBR) which would be independent and objective. Forecasts made in the Budget about future trends as well as claims of past achievements have to be examined and certified by the OBR before the Chancellor can use it. This prevents false claims or denials because the OBR is like an umpire. It is a reform all countries should adopt.
The OBR reports at the time of the spring Budget, and once again in autumn. The latest OBR report has downgraded the estimates of future GDP growth for the next four years down to between 1% and 1.5%, instead of the 2 % or above projected earlier. The estimate of productivity growth has also been revised downwards. Each report since 2010 had optimistic forecasts of productivity growth regaining its pre-2008 pace but finally after seven years of hope, the OBR has taken the realistic view that productivity will not grow. After 2008, all Western economies suffered a growth shock, but European economies have had to face longer stagnation than the US. It is now said that the Eurozone has recovered but again the growth is just around 1-1.5%
Europe has low or zero productivity growth and low demographic growth rate. Immigration, which is politically unpopular, is the sole positive force for growth of the labour force. The UK, with its flexible labour markets, has managed very low rates of unemployment, persistently below 5% and a rising number of people in work 32.1 million in 2017, the highest ever going up to 32.7 million by 2022. But with low productivity growth, no real wage growth is possible. Thus, real wages will be the level they were nine years ago when they stopped growing. The problem seems to be that while the level of income is high, its growth has stopped. In classical political economy, mature economies were supposed to reach a stationary state of high levels of income but with zero growth. This seems to have arrived in Europe. America is still growing at 3% but it also has higher demographic growth and lot of immigration.
Thus, we have the global economy shifting its dynamic drive from West to Asia. Asian economies have plenty of room to grow before they reach the stage of maturity. Their growth rates, even though no longer high single-digit or low double-digits, are still some of the highest in the world. Thus, in terms of total GDP China is very high up—first or second depending on whether you use PPP or current foreign exchange rates. The loss of productivity growth is hard to explain. The population is well-educated. There is a lot of synergy between banks and firms to maintain their high quality. There is an incipient Fourth Industrial Revolution which is the talk of the town. Artificial intelligence (AI), robotics, driverless cars, renewable energy are predicted to take over. Of course, when that revolution really spreads, employment numbers will look worse than they do now. Once capital builds machines as well, becoming a daily supplier of labour, the future of employment is bleak. One answer seems to be better-trained young people, especially many more women, in the technical outlets.
Even so, Western economies are expected to have slow growth, but stagnant real wages and, very soon, mass unemployment. The only way to avoid high unemployment will be to shorten the working week. There will be a need to provide resources for lifetime re-skilling. But the challenge will be on income growth. With robots doing a lot of manual work, how will wages rise? Of course, people can take on the more complicated skilled jobs which robots cannot do. Person-to-person jobs such as in teaching or social care or personal advice can only be done by live humans. One estimate is that up to 40% of labour force will be employed in healthcare.
Some way will have to be found to tax the enterprises which are fully automated and which will be wealth-generating so that the rest of the economy can be funded. There is a lot of thinking going on about universal income which may become much more the norm in Western economies than has been the case thus far. This income may have to be more than just basic. The problem of rewarding different work in higher or lower scale of pay will still remain. The challenge will be to share the fruits of zero-income growth, but with falling hours of work more equitably.