IFS's Johnson: It's not been a great decade, and economists were right about Brexit
We have gone well past the brink of things not being good and the last 10 years have turned out to be so different relative to what was reasonably predicted, according to Paul Johnson.
The gap between forecasts and reality has been extraordinarily big since the financial crisis, with growth faltering in particular since the 2016 EU referendum, warned the Institute for Fiscal Studies (IFS) director who spoke at the Pensions and Lifetime Savings Association's Investment Conference on 6 March.
In his 2008 budget, then chancellor Alistair Darling predicted the economy would continue to grow by around 2% year on year. "But there has been a 14% gap between real GDP growth forecasts between what was predicted and what happened as of March 2018, and is on course to grow to 20% by 2022/23. This around £400bn lost forever from the economy is relative to what we might have expected," said Johnson.
"The current generation of savers have to save more to get the same kinds of retirement outcome as in the past. If growth is very low, then returns are likely to be very low into the future," he added.
National income per person is barely ahead compared to 2008, productivity has barely grown over the past decade and has now flatlined, and average earnings are below where they were in 2008 - now at around £23,000 from £24,000.
Median income growth has been "dreadful" in the past 10 years, said Johnson, growing 2% per year in the 40 years prior to 2007/08, and after that has grown by just 0.6% per year.
On the bright side, employment has grown faster than expected, and the UK now has its highest employment rate ever.
But worryingly, the savings ratio has collapsed as spending growth outstripped income growth. It was at 8% in 2007, rising to 12% in 2009, and has particularly fallen since the EU referendum to a low of 3% in 2017, now sitting at 4%.
Referring to next week's Spring Statement, Johnson said: "The chancellor isn't going to want to necessarily boost the economy for very long because encouraging people to spend more will just take the savings ratio down even further in the past of very low income growth."
The most worrying thing for the next few years is that business investment has flatlined, he said, pointing out it is doing "terribly" relative to previous cycles and relative to the rest of the G7 countries.
"It is growing faster in our competitor countries - partly down to uncertainty over Brexit, and to some extent businesses investing elsewhere due to that uncertainty. You want to avoid the brink and uncertainty where you can."
Brexit
He added that economists' predictions about Brexit have turned out to be almost accurate.
"Despite all of the insults that have come the way of economists, they actually pretty much got it right, essentially projected what would happen to growth post-referendum but got the timing wrong. They thought the growth would die and then pick up but actually growth carried on and then slowed down. But where we are today is roughly where the Bank of England and others projected we would be immediately after the referendum. We've lost around 2% of national income relative to where it would have been."
The UK recently moved from the top to the bottom of the G7 growth league. Forecasts by the Office for Budget Responsibility (OBR) that the UK economy will grow 1.5% per year for next few years are all predicated on a slow, soft, easy kind of Brexit, and will probably be reduced by the OBR alongside the Spring Statement, said Johnson.
"1.5% growth is way below what we have seen for the past 50 years up to 2008 - but comes off the back of a decade of way below average growth. If the economy was picking anything up, growth would have been 2% or more. A lot of this is driven by poor productivity, and some by uncertainty over Brexit."
"Based on averages from the BoE and elsewhere and the sort of deal we have, we're 4% worse off in the long run had we stayed within the EU," he added.
"The only other type of self-inflicted disaster is the three-day week in early 1970s which took 3% off national income. In the long run there is broad consensus that no-deal might have double the effect - maybe taking 8% off economy in long run and recession in [the] short run - although there are massive margins of error here.
"If these are right, the different between current trajectory and no-deal trajectory is pretty big in the short run. We may be on the brink of something pretty big. But this is not a forecast and there's massive uncertainty about what the impact would be."
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