Wednesday 08 March 2017 8:00 pm

The chancellor needs more than a rainy day fund to help Britain weather Brexit

In his final Spring Budget, the chancellor was already weaning his audience from this once important spring affair, with little of significant economic policy substance announced.

He was handed a gift by the Office for Budget Responsibility in the form of an upgraded outlook for 2017, in anticipation of more resilient consumer spending, although expectations for GDP growth in later years were scaled back slightly in line with the Bank of England’s outlook published last month.

As such, the chancellor may have been right to opt for a small, neutral Budget, resisting a premature splurge and prioritising prudence and consistency, with only a few necessary additions to address immediate needs.

The major changes to his spending plans included an around £2bn increase in social care funding over the next three fiscal years, which in total amounts to 10 per cent of spending on social care in 2015-16, and £2.2bn for education, mainly in later years, which amounts to just 2.6 per cent of education spend in 2015-16. And while the chancellor stressed the importance of improving the UK’s productivity performance, no further spending was announced beyond the small support for education.

No doubt he is saving as much as he can for any possible deterioration in the economic outlook later on. But if the UK economy is to absorb the shock of Brexit well, and emerge stronger from it, preparing a savings pot for a temporary boost on rainy days will not be sufficient. The chancellor must strive to transform the economy over the next few years, and make it ready to face the new economic realities.

There are two important areas where the UK economy was already lagging before the EU referendum, which may have contributed to the Brexit vote. First, UK productivity is below most of its peers, putting downward pressure on wages and on people’s future prospects at work. Second, access to opportunities vary significantly across regions, with not insignificant parts of the society disengaged altogether from the labour market. Brexit adds new challenges in the form of a potentially reduced labour pool and rising trade barriers with the EU.

Ever since the Great Recession broke out in 2008, UK productivity has been in the doldrums. In the nine years to the fourth quarter of 2007, output per hour in the UK rose by 21 per cent, but it has seen a mere 0.2 per cent rise in the nine years since. Productivity performance also varies significantly between regions, with London well ahead of the rest of the country – output per hour is 39 per cent lower in Northern Ireland compared with the capital and 34 per cent lower in the West Midlands and Yorkshire.

Education has an important role to play in increasing productivity, but total UK spending on education has fallen from 5.3 per cent of GDP in 2011-12 to just 4.5 per cent in 2015-16, with the biggest declines coming from cuts to local government spending on education, which in England fell by 13 per cent in the same period.

The funding available to universities is also under threat from the UK leaving the EU. Estimates from the Higher Education Statistics Agency suggest that 14 per cent of UK research funds come from the EU. So far, the chancellor’s announcements go some way towards addressing these challenges, but much more is likely to be needed if the UK is to upgrade its labour force in line with what is required.

Creating incentives that will integrate parts of the population currently disengaged from their local economies would also go a long way towards reducing inequality across regions and building a more inclusive society. This is an important area post-Brexit, since the availability of EU workers is likely to diminish in future, and it is therefore something the chancellor may wish to focus on in November.

Thankfully, with relatively strong growth and still many uncertainties ahead of Article 50 being triggered, the chancellor has some time on his side.