Despite what we wish, there are no miracle economics Rishi can pull out of his hat

The economic pressures now known as “the cost of living crisis” were at the core of the criticism of the spring statement last week. Those who once eulogised the Chancellor have now been selling their stocks of Sunak.

While much of the commentary is unfair, politics is a trade in which the concept of fairness has always been in distinctly short supply.

World commodity prices have risen dramatically, energy prices are double what they were a year ago and other commodities are following suit in the wake of the crisis in Ukraine. Wheat, for example, has risen almost 50 per cent in the past month alone, and is up some 80 per cent year on year.

Britain is a net importer of commodities. As a matter of simple logic, this means our real national income has fallen. There is no possible way for governments to circumvent this. Even if a set of policies could be magicked into existence which immediately boosted our growth rate, national income would still be below what it would otherwise have been without the commodity price boom. The Chancellor is further constrained by the huge increase in public sector debt incurred as a result of the policies of lockdown and restrictions in the face of Covid-19.

There is much talk in the political class about the “windfall” the Treasury will receive in the form of higher tax receipts due to higher inflation.

Government borrowing so far in the financial year about to end is £25.9bn lower than projected by the Office for Budget Responsibility. But borrowing for the year is on track to be over £130bn, on top of the £324bn deficit in the 2020/21 financial year. In comparison, the “windfall” is a drop in the ocean. And at some point, these debts will have to be paid.

The public reaction to all this illustrates a fundamental problem of political economics which confronts not just Sunak but all Western finance ministers. Economists have known for a very long time that individuals give more weight to the present than they do to the future. A cost of, say, £100 incurred today has to generate a benefit of more than £100 in the future to make it worthwhile.

A key development in economics over the past twenty years or so has been a new perspective on how people value costs and benefits today compared to those in the future. Voters place far more weight on what happens now rather than what will happen as a result in the future – much more weight than standard economic theory presumed.

The work of the Harvard economist David Laibson did much to establish this idea, known as hyperbolic discounting, in the 1990s.

The concept crops up with policies such as the furlough scheme under lockdown. At the time the policy was hugely popular. It was a major factor underpinning the public support at the time for restrictive policies.

Now, confronted with the bill, voters just do not want to know. Someone else, anyone else, can pay as long as it is not them personally.

In principle, the increase in energy bills and fuel costs is a good thing, as it gives an incentive to reduce the consumption of these carbon-intensive products. But the reaction of the public illustrates all too clearly the huge difficulties of getting people to value future benefits while they struggle with current costs. This creates real problems for any elected politician trying to follow rational policies – including our Chancellor.

As published in City AM Wednesday 30th March 2022
Paul Ormerod
Image: Flickr

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ALEX O’BYRNE

Associate

e: aobyrne@volterra.co.uk
t: +44 020 8878 6333

Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.

ELLIE EVANS

Senior Partner

e: eevans@volterra.co.uk
t: +44 020 8878 6333

Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.