The autumn statement was the first step towards the next general election. This wasn’t because the chancellor made a clear offer to the electorate, far from it. But because the conditions that election will be fought under became increasingly clear.
Unlike 2015 (migration), 2017 (Brexit) or 2019 (Brexit), 2024 will be the economy, stupid. The real world effects of that, and the politics, will have big implications for progress on net zero.
Office for Budget Responsibility GDP forecast
Anything below 100 on this graph is GDP contracting. Unlike the OBR’s expectation six months ago, it shows we’ll be in recession until late 2024. While GDP may seem like an abstract measure – as a Question Time audience member quipped around Brexit, “that’s your bloody GDP, not ours” – this fall is driven by material problems.
Real household disposable income per person
Of all the charts in the OBR’s depressing forecast, the ones above should stand out. This will be the biggest fall in income households have felt since the government started measuring, and only the third time they will fall two years in a row.
It’s important to understand why this is happening. Some on the right will point to a rising tax burden. That is part of the equation. Increased interest rates play some part too, but not for all. Instead, it is a story of high prices and poor wage growth.
Lost real wage growth since 2008
Food prices rose 14.5 per cent in the year to September, the highest rate for 40 years. Energy prices will also remain high until 2025, going from an average of around two per cent of household consumption to well over five per cent.
This is dangerous territory for policy makers. Food price inflation in Egypt in the run up to the Arab spring was around 18 per cent.
The gilet jaune movement in France is often used as a modern parable against rising taxes, notably environment taxes. But it was broad dissatisfaction at falling disposable income that sparked it. Through 2018-19 disposable income fell by around 0.5 per cent for the lowest earning quarter of French people but rose by six per cent for richest one per cent.
In the UK we’re expecting a fall over eight times larger than this, at 4.3 per cent over the next year and then a further 2.8 per cent the year after. UK households are already poorer than most of their European equivalents, 16 per cent lower than Germany and nine per cent lower than France, a gap which widens for those worse off in society. UK voters haven’t taken to the streets yet, but they might not be far off.
UK household incomes are lower than in many other European countries
Source: Resolution Foundation
It is a ripe environment for the far right
Years of stagnation has led some to draw comparisons with Italy, notably The Economist, much to the displeasure of the Italian Ambassador. There are similarities though, with poor productivity driving poor growth; low capital stocks and investment (both public and private); and stark regional imbalances. While Italy’s economic decline preceded the UK’s by at least a decade its more recent effects are cause for alarm. Political instability has gone hand in hand with economic stagnation, with one constant, an ever growing far right presence, culminating in an election victory for the Brothers of Italy in September.
Now the rise of the far right, as many point out, is not purely driven by economics, far wealthier France and more equal Denmark or Sweden have seen similar patterns. But poor economic outcomes do change public sentiment. Perceived scarcity of resources leads to increasingly hostile attitudes towards minorities, immigration and higher competition over those resources. When people worry that they are getting, or are going to get, less, they’re more alert to where money is being spent.
This is one reason the ‘household budget’ analogy of successive Conservative governments is dangerous. Putting ‘spending only what we earn’ front and centre immediately raises the question of who loses out. This will feel much more real as household budgets shrink and people are forced to make choices.
That has big implications for the net zero agenda. The previous period of fiscal retrenchment under David Cameron and George Osborne stalled emissions reductions significantly.
It’s clear this is how the Conservatives think they will be best placed to fight the next election, as sombre custodians of the nation’s finances. Especially when pitted against a caricature of a profligate Labour party, borrowing for their Green Prosperity Pledge. But perceived scarcity, pushed by government, and a catastrophic economy in need of action, underlined by the opposition, is a ripe environment for the far right.
The government does face hard choices. As the risk of inflation continues and GDP falls, fiscal space is narrower than before. The economic environment should focus minds on what we borrow for.
Holding back investment is risky
Just because it’s the economy, stupid, doesn’t mean we should be stupid on the economy. Despite what some have said in the aftermath of the brief Liz Truss government, not all borrowing is created equal. The UK economy is like it is for many reasons, what is central though is underinvestment. A lengthy recession will mean that private investment falls; if public investment does too, growth, productivity and wages will all suffer.
The added risk is that a far right party will try to suck net zero into that vortex and, like Brexit, pull parts of the Conservative Party with it. Let’s be clear, some have tried that already, to zero effect. Desire for climate action and investment remains solid, at least for now.
This is, in part, because the Conservative Party was robust in defending net zero, and the need for investment. Boris Johnson, for all his flaws, was able to articulate why we need climate action in terms of jobs and industries. This was based in fact, going for net zero is cheaper than not acting, and, as even the Treasury acknowledges, green investment is more productive than traditional investment.
In the run up to 2024, the parties cannot ignore the suffering the OBR has forecast. However, an abundance of caution and backward steps will only make things worse. The public will be looking for a route out of this crisis, and one that can be trusted. That needs to combine the mainstream economics of cheaper energy and greater efficiency to bring costs down, with an economic populism framing of net zero. A growing green economy will only mean something to people if they can feel it in their pockets too.