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30 October 2017

The UK is missing billions again – and this time the reason is clear

The Institute for Fiscal Studies has forecast a deficit £20bn larger than expected. 

By Julia Rampen

Earlier in October, The Telegraph splashed on “Britain’s missing billions” – a statistical revision by the Office for National Statistics which suggested the nation was £490bn poorer than realised. In fact, as I wrote at the time, the revision tells you more about statisticians than the management of Britain’s finances, but nevertheless it is about as helpful to Brexit negotiators as Boris Johnson. 

Now, though, respected thinktank the Institute for Fiscal Studies, has identified another sort of “missing billions”. It predicts that due to the weak performance of the economy, the deficit in 2021-22 could be £36bn – £20bn higher than the £17bn forecast by the Office for Budget Responsibility back in March. 

In particular, the IFS singles out terrible productivity – i.e. how much a worker produces at work. The UK’s “productivity puzzle” since the financial crisis has been blamed for stagnant wages, and held up as evidence of the need for more investment by companies and the government. If a company invests in faster computers, and the government rolls out the fastest broadband, a worker is going to spend a lot more time compiling spreadsheets and a lot less time waiting for web pages to load.

The IFS study also outlines the depressing fact that the government’s deficit reduction plans rely on cutting public services and raking in taxes at a level not seen since the 1950s, rather than economic growth.

And should we blame Brexit for the missing billions? The political uncertainty is having an impact on businesses, and it seems logical that a Spanish-owned company in the UK might think twice about investing in shiny new equipment in London if it is simultaneously considering uprooting the whole operation for replanting in Dublin. 

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But there’s also a link between Brexit and low productivity. Areas with low productivity voted for Brexit, suggesting that both are at least in part symptoms of a poorly-managed response to the financial crisis. There is also the fact that, while Britain escaped the spectre of high unemployment after the crash, it came at the price of pay – companies hired cheap workers rather than invest in new technology. Brexiteers like to claim that immigrants are the driving force behind low wages, but the IFS data suggests, once again, the financial crisis is to blame.