Good morning from New Economy Brief. 

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Crises have haunted Spain’s economy since 2008. The country was hit hard by the 2008 global financial crisis: a housing bubble burst spectacularly, Spanish banks were bailed out and unemployment reached a record high of 27.2% in 2013. In fact the resulting economic crisis lasted until 2014. And as a major tourist destination, the country’s economy was also significantly impacted by the pandemic. 

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But in December the Economist named Spain the best economy in the world for 2024. So what happened?

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This week, we look into Spain’s economic recovery and how progressive policies helped bring it about. 

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Headline figures. 

The Economist’s annual ranking scores countries on five measures: GDP, stock market performance, core inflation, unemployment and government deficits. Spain’s economy grew by 3.5% in 2024, compared to the UK’s 1.7%. It also managed to keep inflation lower than in the UK: in Spain core consumer prices rose just 2.4% compared to 4.1% here. The number of people out of work fell to its lowest level since 2007, and Spain also outperformed many other countries on government deficit and share prices. So while the UK grapples with low growth and the effects of high inflation, the picture looks quite different in Spain.

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Responding to the cost of living

Back in summer 2023, we explored why inflation in Spain was dropping so fast from its peak, while it remained high in other countries – including our own. In short, it’s down to how Spain has used fiscal policy to tackle inflation, with Prime Minister Pedro Sanchez’s government tackling price rises head-on. 

• Price controls. Until August 2022, Spain’s inflation rate was above the Eurozone average. But by the end of that year, it was the second lowest. So what changed? The government capped the cost of essentials like energy, transport and housing. It capped the wholesale price of gas by subsidising producers to keep the prices of electricity down for consumers, and capped rent rises for tenants at 2% until the end of 2023, rising to 3% at the start of 2024. It also temporarily removed some taxes, such as VAT on essentials like eggs, pasta, vegetables and fruit until June 2024. 
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• Direct transfers. The Spanish government also ensured that those most affected by the cost-of-living crisis were given immediate support via direct payments. ‍
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• Rent controls. Evidence suggests that rent controls played a key role in suppressing Spanish inflation. A peer-reviewed paper robustly demonstrates that in Catalonia they reduced average rents by between 4% and 6% without lowering the supply of housing. 

And the success of this method has been recognised. The IMF’s Chief Economist, Pierre-Olivier Gourinchas, has argued that ‘unconventional fiscal policies’ have played a significant role in tackling Eurozone inflation by reducing expectations of future price rises and preventing inflation ‘passing through’ from areas hit with supply shocks into core inflation in the rest of the economy. 

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Wealth taxes and redistribution.

On the tax side of things, Spain is doing things differently too. In December 2022 it introduced the Solidarity Tax for Great Fortunes (ISGF) – a temporary tax on wealth of individuals exceeding €3 million (around 0.5% of the Spanish population). Wealth between €3 million and €5 million is taxed 1.7%, between €5 million and €10 million is taxed 2.1% and net wealth of over €10 million is taxed at 3.5%. The Tax Justice Network estimates that if such a tax (often described as “featherlight”) were applied worldwide, it could raise $2.1 trillion. 

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Structural reforms and investment. 

Beyond immediate relief measures, the Spanish government has also pursued structural reforms aimed at strengthening Spain’s long-term economic prospects. Labour market reforms, such as an historic agreement with trade unions to reintroduce sectoral collective bargaining, have been central. Reforms have also resulted in lower unemployment rates. By restricting temporary contracts while at the same time making permanent contracts more flexible, they helped keep seasonal workers in employment in sectors like tourism and agriculture, giving them more job security and improving overall employment figures.

Meanwhile, investments in renewable energy and infrastructure, supported by EU recovery funds, have positioned Spain as a leader in the green transition.

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A template for progressive economic policy?

Today’s global economic turmoil warrants a far more interventionist approach from governments in relation to the economy - as Spain’s economic turnaround and the way its government has responded to the cost-of-living crisis in particular has proved. 

Of course, Spain’s economy isn’t perfect: while unemployment has fallen significantly, it’s still the highest in the Eurozone. Yet while other countries have shied away from more active use of price controls and unconventional fiscal policies to tackle the cost of living, Spain’s success in containing inflation and securing strong growth suggests governments around the world should be looking to Madrid for ideas - as Isabella Weber has argued. Not least Keir Starmer, whose Labour government is pinning its hopes on turning round the UK’s stagnant economic growth and falling living standards by the end of this Parliament.

Happy New Year from New Economy Brief.

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“This is the year we roll up our sleeves and reform the NHS”, said the Prime Minister in a speech earlier this week. Keir Starmer outlined his government’s plans to reduce NHS waiting lists after the latest figures showed the massive strain the organisation faces over the winter. 

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How will the government’s plans work? How will they be received by healthcare workers, patients and the wider voting public? And is there a case for stronger action ahead of publishing the upcoming ten-year strategy to turn around the NHS? This week's New Economy Brief explores the complexities of what could be a make-or-break moment for this government's ambitions.

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The plan to tackle waiting lists.

Labour has made reducing NHS waiting lists a key part of its plan for government. It was elected on a manifesto promise to ‘build an NHS fit for the future’, and improving the health service is one of its five Missions for government. And only last month the Prime Minister announced new milestones to help track the government’s progress, including a pledge to end hospital backlogs. It's not hard to see why. Over seven million people are currently waiting for tests, treatments and procedures from NHS England. To combat this, this week the government has set out a plan to make sure 92% of patients wait less than 18 weeks for their treatment (up from 56% at the moment).

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The Elective Reform Plan will increase funding for community diagnostic centres – 170 of which exist across England and offer people diagnostic tests without the need to go to hospital – so they can operate for 12 hours a day, 7 days a week. (Elective care is non-emergency treatment that is planned in advance.) The government will also open 14 new surgical hubs within existing hospitals, and expand three more. It hopes that this will lead to nearly half a million more patient appointments every year. The plan is accompanied by a variety of other reforms to improve patient choice, convenience and standards of care.

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Will it work? The British Medical Association (BMA) welcomed the plans but said that the government needs to address “chronic burnout” if it wants to cut waiting lists. The King’s Fund, a healthcare think tank, also welcomed the announcement, but warned that the 18-week referral-to-treatment target shouldn’t be the only measure of progress when wait times for GP appointments and ambulances are also key. The Liberal Democrats have attacked the plan for “putting hip replacements over heart attacks.” 

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The economic case for improving public health is clear: a healthier workforce is a more productive workforce, which increases growth, boosts tax revenue and reduces strain on public services.The Institute for Public Policy Research’s (IPPR) Commission on Health and Prosperity last year concluded that better health can reduce the UK’s record economic inactivity due to sickness, increase productivity by reducing sick days, increase earnings and reduce funding pressures on the NHS. Similarly, the BMA regards health as “essential to prosperity” and sustainable economic growth. Specifically, IPPR’s Dr Annie Williamson and Dr Parth Patel have modelled the economic benefits of reducing NHS elective waiting lists, finding that increasing elective activity by 30% from 2019 levels by 2025 could deliver £73bn in economic benefits, such as growing the economy by £18bn over five years. It would also save £14bn for the government as more people return to work, increase their hours or do more work that benefits others, such as childcare. 

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Zooming out: why is the NHS in ‘critical condition’?

Though the plans to speed up diagnostics and save time are welcome, they are only part of the challenge in the NHS. Ultimately, it will require more money to compensate for more than a decade of austerity. The Independent Investigation of the National Health Service in England, led by surgeon, independent peer and former health minister Professor Lord Darzi, concluded in September last year that an important driver of declining NHS performance was austerity and underinvestment. Official papers from NHS trust board meetings and warnings from Matthew Taylor, Chief Executive of the NHS Confederation, have shown that hospital infrastructure is so run down that it is putting patients and staff at risk. The Darzi report highlighted a £37bn capital spending shortfall over the last 15 years, noting that this funding could have prevented the NHS’s maintenance backlog of over £11.6bn, as well as being used to modernise technology and equipment and pay for new hospitals. (For a demonstration of the effects of underinvestment in capital on NHS productivity, read this.)

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To its credit, the government gave the NHS £25bn in additional spending at the Autumn 2024 Budget. And there are other problems in the NHS, like management capacity, which require other solutions beyond more funding. Starmer’s speech also foreshadowed the government’s interest in using the “almost unlimited power” of Artificial Intelligence “to cut waste, speed things up and save lives”. (Look out for a future New Economy Brief analysing proposals to implement AI across public services.)

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But… Another root cause of declining performance is shortages of key staff in certain fields (e.g. radiology, district nursing), with the NHS struggling to attract and retain the skilled people needed to service the needs of an aging population. Improving the pay and working conditions of an increasingly overstretched workforce are central to maintaining and improving performance, argues Patricia Marquis, Executive Director for Royal College of Nursing (RCN) England: “Investing in nursing staff, who give the largest part of patient care in every part of the NHS, is the single best way to transform patients' experience.”

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Prospect of further strikes? The RCN estimates that more than 32,000 student nurses in England – "enough to fill every nursing vacancy” – could drop out of their courses by 2029, mainly because of low pay. This analysis was conducted just after the government proposed a 2.8% pay uplift for English nurses – an offer the RCN rejected in December as “an insult to workers, harmful for patients and counterproductive to rebuilding the NHS”. The BBC reports that some "unions are raising the prospect of renewed strike action unless the government is willing to stump up more cash". The TUC's Paul Nowak said "If you are serious about repairing and renewing our public services, you have to be serious about public service pay.” (For context, nurses lost a cumulative £37,000 between 2010 and 2023 as a result of below-inflation pay increases.)

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Waiting for the 10-Year Health Plan. Responding to a question about how the government plans to fix the staffing crisis immediately after the speech, Starmer suggested more detail will come in their future plans. The government is due to publish a 10-Year Health Plan in the Spring, which will involve a major nationwide public and staff consultation to inform long-term vision for reform and break the cycle of short term promises that don't deliver. (Staffing challenges are due to be addressed in a separate workforce plan). Meanwhile the Health Secretary Wes Streeting has repeatedly stressed the government’s “heavy emphasis on reform, not just investment”. IPPR’s Dr Annie Williamson and Victor Adebowale have suggested that, in the meantime, the NHS should not wait for the 10-Year Plan, but “get on with reform aligned with the government’s three shifts: towards prevention, digital, and community-based care.” This should be accompanied by a sustained increase in “local staff engagement” and “local empowerment” to increase morale and trust.

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A key test for re-election.

Health and the NHS are priorities for voters, and the government is already thinking about the next general election. This week's speech once again showed how much is riding on whether the government can deliver improvements to the NHS and demonstrate that “politics can be a force for good”, in Starmer’s words. Yet in a recent survey by NHS Providers, 71% of NHS trust leaders and and 100% of acute specialist trust and ambulance trust responders thought it was unlikely that the NHS will be able to meet the standards for wait times set out in its constitution over the next five years. The challenges facing the government – and the NHS – are huge. 

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Life expectancy targets. The government’s health mission is currently to “improve healthy life expectancy for all and halve the gap in healthy life expectancy between different regions of England”. IPPR and other experts like Lord Darzi argue that this should form the basis for cross-government and cross-sectoral collaboration between employers, civil society and more, comparable to the government’s approach to net zero (e.g. to increase life expectancy by 10 years by 2055). The impact of all public spending and investment decisions on health could then be assessed at every fiscal event through an expanded health index, which could be measured by a new body modelled on the Climate Change Committee. 

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Good afternoon from New Economy Brief.

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Last week, the Prime Minister outlined his ‘Plan for Change’ in a major speech at Pinewood Studios. Seen by many as a reset moment, the plan adds ‘measurable milestones’ to the government’s existing missions, with the aim of delivering ‘real, tangible improvements’ to people’s lives over the length of this Parliament.

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Keir Starmer set out six new milestones for his government to be judged against, and this week’s NEB explores one of them in particular: a pledge to ‘raise living standards in every part of the United Kingdom’. We take a closer look at what this new focus on living standards means, and why the government has chosen to prioritise it. 

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‍How did we get here?

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Most New Economy Brief readers will be pretty familiar with Labour’s missions by now, but there’s no harm in a quick recap. The ‘mission-led’ approach was popularised by economist Mariana Mazzucato and formed the basis of Labour’s election manifesto and subsequent approach to government. The five missions are: Kickstart economic growth; Build an NHS fit for the future; Safer streets; Break down the barriers to opportunity; and Make Britain a clean energy superpower. 

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‍More than missions. As we covered back in July, Mazzucato herself has warned that mission-driven government could become a case of “old wine in new bottles” if not properly executed, arguing that improving the NHS and boosting economic growth should not in themselves be missions. Instead, individual strands or sectors of public policy should be seen as contributors to bigger missions such as tackling the climate crisis. As the report explains, “missions replace sectors as the vertical aspect of industrial strategy.” Similarly, the Institute for Government (IfG) has argued that manifesto promises are not enough to direct government action, and that a detailed programme is needed. 

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‍The milestones.

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The government says its six new milestones will help track progress towards achieving its missions and provide accountability to voters. They are:

• Raising living standards in every part of the United Kingdom.

• Building 1.5 million homes in England and fast-tracking planning decisions on at least 150 major economic infrastructure projects. 

• Ending hospital backlogs to meet the NHS standard of 92% of patients in England waiting no longer than 18 weeks for elective treatment. 

• A named police officer for every neighbourhood, and 13,000 additional officers, police community support officers (PCSOs) and special constables in neighbourhood roles in England and Wales.

• Increasing the percentage of children in England who are “ready to learn” when they start school at the age of five to 75%. 

• Achieving at least 95% clean power by 2030.

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‍It’s all about living standards. 

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One of these milestones has received particular attention since the announcement last week: the new living standards target. And this should come as no surprise, given the re-election of Donald Trump as US President last month. 

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As we covered in our write up of Donald Trump’s election victory (parts one and two), the Democrats’ fate was sealed by failing to take enough action on the cost of living. While major policy interventions like the Inflation Reduction Act aimed to boost household incomes and deliver security, this simply didn’t happen fast enough. It’s no wonder, then, that Starmer has used his Plan for Change speech to shift the focus onto how his government will “deliver real, tangible improvement to the lives of working people across the country in this Parliament”. But how will he do that?

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‍Measuring improvements to living standards. Campaigners have long argued that there is no point in aiming for growth without a plan for how it will be distributed. By adding the living standards milestone to its growth mission, Labour appears to have listened. The government says it will measure progress against this milestone through higher Real Household Disposable Income (RHDI) and Gross Domestic Product (GDP) per capita by the end of the Parliament. It plans to track this at both regional and national levels. 

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‍The ‘absolute bare minimum’. But as the Resolution Foundation points out, RHDI and GDP per capita are not exactly stretch targets – they are the “absolute bare minimum”. The former has been achieved in every parliament since 1955, and the latter in all but two. The think tank explains that as RHDI and GDP per capita are aggregate measures, they can conceal the big differences between households that are doing well and those that are falling behind. Likewise, the Joseph Rowntree Foundation (JRF) has argued that action on living standards needs to be more targeted at low-income households. The bottom 40% of incomes are on average around £300 worse off per year than they were before the COVID-19 pandemic, and JRF forecasts this will rise to £750 by 2029.

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‍A good start, but more needed. 

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‍Living standards have been stagnating, and sometimes even falling, for years. And as we’ve seen in the US and beyond, voters often punish governments that fail to tackle this. It’s clear Labour has realised that if it wants to secure a second term, it urgently needs to switch things up.

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But the scale of action needed on living standards mustn’t be underestimated. For the first time since 2008, Child Poverty Action Group’s cost of a child calculations show that no family types on low and modest incomes can meet their costs or reach what the public deems a minimum acceptable living standard. Last week, Keir Starmer said that the route to better living standards is a better economy and better jobs. But as JRF argues, a strong economy can increase wages and employment but will not in itself reduce poverty. It suggests that without additional actions, poverty and deep poverty won't start to fall until late 2028, even if the UK has the highest GDP per capita growth in the G7. 

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The Plan for Growth shows that the government understands that living standards (as well as public services) are a priority for the public. And civil society groups have particularly welcomed the fact that the milestone applies to every part of the UK. But without a plan for social security, a plan to support the millions of households who cannot afford basic essentials, or measurements that go beyond RHDI and GDP per capita, campaigners argue that there’s still a long way to go. 

Good morning from New Economy Brief.

Last month, Donald Trump pulled off a major political comeback to be elected President of the United States for the second time. Because there is so much to cover, we’ve split our Trump election analysis into two parts. In part one, we examined the economic drivers behind his victory. 

Now, we’ll look at what Trump’s return to power means for the global economy. In particular, we’ll look at the impact of tariffs and protectionist policies, the likely effects of Trump’s climate denialism, and the lessons that progressives can learn from his success.

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Tariffs and trade. 

The promise of high import tariffs was a huge part of Trump’s campaign. Proposals include a blanket tariff of 10% on all foreign-made goods and a 60% tariff on Chinese goods. But as Bloomberg has outlined, it’s difficult at this stage to separate “protectionist campaign rhetoric” from actual policy. We’ll only know the shape and scale of Trump’s tariffs once he takes office in the new year. Trump’s tariff obsession certainly hasn’t died down post-victory. Just days ago, he took to Truth Social – the social media platform he owns – and threatened 100% tariffs on imports from the BRICS if they follow through on the idea of creating a rival currency to the US dollar. With the caveat of Trump’s unpredictability, Bloomberg’s best guess is that there will be three waves of tariff hikes, starting in summer 2025. It predicts that tariffs on Chinese imports will triple by 2026 with smaller increases for other countries. Overall, this would triple average US tariffs to almost 8% by the end of 2026. So what does that mean for the rest of the world and the UK?

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GDP. According to the LSE’s Grantham Institute, China would sustain the largest GDP drop as a result of Trump’s tariffs, at ‑0.68%, while the EU would see a -0.11% reduction in GDP. However, while the overall EU impact is relatively low, it is estimated that impacts on individual countries would vary significantly. Germany, according to the Grantham Institute, would see its GDP fall by more than twice the EU average (-0.23%), as the US is the top destination for its exports. Meanwhile France and Italy would both sustain very minor impacts (-0.15% and 0.01% respectively), with the UK closer to the European average, at ‑0.14% of GDP. 

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The UK’s vulnerable position. Modelling by the National Institute of Economic and Social Research (NIESR) suggests that as a small, open country, the UK would be even more vulnerable to Trump’s tariffs. Ahmet Kaya, a NIESR economist, said that were Trump to go ahead with the main tariffs outlined above, the resulting trade war would lower UK growth by between 0.7 and 0.5 percentage points in the first two years.

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EU relations. Governments now have a choice: they can either play along with Trump’s strategy or call his bluff and threaten retaliatory tariff increases. Keir Starmer, too, is under pressure to "pick a side". As Simon Wren-Lewis points out, those on the right of British politics will argue that they are much better placed than Labour to work with Trump, leaving Starmer’s government politically vulnerable. 

Instead of playing along with Trump, Wren-Lewis suggests that Labour could use Trump’s tariffs to argue that closer trading links with the EU are essential to protect free trade and boost growth. Starmer has committed to a ‘reset’ of relations with Europe, but how far this will go remains to be seen. 

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Impacts on the Global South. As with all things Trump, it is difficult to predict what the impact of his new administration will be on Global South countries. Concerns have already been raised  about his approach to trade with African nations. Since 2000 the African Growth and Opportunity Act (AGOA) has allowed some African countries to export to the US without paying taxes. However, AGOA is up for renewal in 2025, and the previous Trump administration signalled that it would not extend the agreement. Now Trump has been re-elected there are worries he will stick to this decision, with potentially significant impacts for African exporters.  

There are also suggestions that Trump’s isolationism will accelerate the end of the unipolar order and could further motivate Global South countries to re-orientate themselves away from the dollar and from reliance on raw material exports to richer, industrialised nations. This would align with growing civil society calls in the Global South to reduce economic dependency on exports to industrialised countries such as the US, and to to boost homegrown industrial capacity and regional and South-South trade. Macrodose has more on the trend towards a ‘multipolar’ world. 

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And then there’s inflation… Economists have warned that Trump’s tariffs will increase prices for US consumers, with some estimating that they could cost middle-income American families $2,500 to $3,900 per year. But what about the global economy? Clearly, any supply chain disruption – let alone a full-blown trade war – will cause price volatility across the globe. NIESR estimates that tariffs would push up the price of UK imports, reducing the spending power of households and businesses. It calculates that UK inflation could climb 3.4 percentage points as a result. While this could imply even higher inflation in other countries, Trump tariffs on China could actually lower inflation, according to the economist Swati Dhingra, one of the external members of the Bank of England's Monetary Policy Committees 

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‍Climate 

Donald Trump is one of the world’s most vocal and most influential climate sceptics, so his re-election has sparked deep concern among climate experts worldwide. During the election campaign, he promised to “drill, baby, drill”, vowing to replace renewable energy efforts with more oil and gas production. Consequently, researchers predict that his election could lead to an additional 4 billion tonnes of carbon dioxide equivalent emissions from the US by 2030, compared to Joe Biden’s plans. And as we discussed last week, the expectation that Trump will pull the US out of the Paris Agreement overshadowed COP29. 

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‍The legacy of Bidenomics

Trump’s victory has been viewed not only as a vindication of his political and economic strategy but also as a repudiation of his predecessor's approach. This means some will see the economic policy of Joe Biden – ‘Bidenomics’ – as a political failure. This matters because through measures such as the Inflation Reduction Act and the CHIPS Act, Bidenomics has in many ways become a blueprint for progressive, climate-focused industrial strategy and a new way to do economics. As Adam Tooze argues, “Bidenism wanted to respond to America’s many crises not with orthodoxy but by making a historically significant break”. For progressive governments that also want to break from an economic consensus that has failed to deliver inclusive growth and a just transition to net zero, that presents a political challenge.

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Lessons for progressives. As we explored in part one of this focus, Trump won in large part because while Bidenomics delivered economic growth, many Americans did not feel the benefits. Biden’s government did provide trillions of dollars of short-term help to families during the cost-of-living crisis in the form of the CARES (Coronavirus Aid, Relief and Economic Security) Act of March 2020. Yet despite the scale of this support, it still wasn’t enough to properly plug the gaps in a broken social security system or to bring lasting stability to households’ finances.

This was where the Inflation Reduction Act was supposed to come in. Through government investment and large-scale infrastructure projects, it was meant to create green jobs, cut families' bills and redistribute wealth via corporate taxes. But this didn’t happen quickly enough for ordinary Americans to feel the positive impact. So what does that mean for other governments promising long-term economic recovery? What does it mean for the likes of Keir Starmer’s government, which is promising a ‘decade of renewal’? Ten years is a long time to wait and see if the government will improve your lot, and Trump's victory shows that voters only have so much patience.

This could be one reason why Starmer is unveiling a new Plan for Change in a speech this Thursday. The Prime Minister will outline how his government plans to “deliver real, tangible improvement to the lives of working people across the country in this Parliament”. With voters desperate for higher living standards and better public services, the Prime Minister will now be very aware of the consequences of failing to deliver the improvements his government is promising.

Good afternoon from New Economy Brief.

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Though an agreement at this year’s international climate negotiations –  COP29 –  was reached at the 11th hour, some have judged the final deal as a ‘betrayal’. Many developing countries have received a climate finance pledge far lower than needed to decarbonise their economies, adapt to the increasing impacts of extreme weather and limit global warming to a 1.5°C trajectory.

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This week’s New Economy Brief hones in on the main focus of this year’s COP: the New Collective Quantified Goal on climate finance, looking at what was agreed and what gaps remain. We then turn attention to next year’s COP30 in Brazil, where there are hopes for progress despite fears that Trump will pull the USA out of the Paris Agreement. 

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Climate finance discussions dominated the agenda, but an agreement was also reached on carbon markets. Limited progress was made on other programmes, such as on adaptation and the Loss and Damage Fund, but we don’t have space to explore those or the carbon market agreement here; read Carbon Brief’s excellent explainer instead.

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The Finance COP?

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COP29 in Baku was billed as ‘the finance COP’. This was meant to be the year  industrialised “Annex 1” countries agreed a new, higher target for transferring trillions of dollars of climate finance to help developing countries decarbonise and adapt to the growing impacts of climate change. (Read our previous coverage of COP28, COP27 and COP26 for a timeline of progress of the international climate talks.)

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The importance of climate finance. ECIU’s Gareth Redmond-King reminds us that the UNFCCC COP process is the “only global process where the poorest nations have a seat around the table with the rich”. Industrialised countries’ ability to reach their agreed climate finance targets is also widely seen as an acid test for whether they are serious about tackling climate change, and essential for keeping trust in the process amongst developing countries. Next year all countries must also update their Nationally Determined Contributions – their emissions reduction pledges – so the level of climate finance directly affects developing countries’ abilities to cut emissions in line with a 1.5°C pathway. 

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Why do developing countries need finance? Developing countries argue that since the industrial revolution, developed countries have become wealthy by burning fossil fuels (and exploiting colonies in the Global South) and emitting vast amounts of greenhouse gases into the atmosphere, creating the climate crisis in the process. It is unfair to prohibit poorer nations, they maintain, from developing their economies in the same way that richer ones have done. For example, some countries oppose phasing out fossil fuels because they need the money from selling them to reduce poverty domestically. This means climate finance from developed countries plays a crucial role in allowing developing countries to industrialise and diversify their economies and tackle poverty while also decarbonising and adapting to climate impacts.

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Climate justice. Developing countries are already suffering disproportionately from the already very significant impacts of climate change, even though they bear limited historic responsibility for it and can least afford the costs of adaptation and mitigation. The IPCC finds that North America’s 4% of the global population is responsible for almost 24% of global emissions since 1850. In contrast, South Asia’s 25% of the global population is responsible for only 4% during the same period. Despite China now being the biggest emitter annually, their emissions since 1850 are still only half of the US, even though China has four times the population, many of whom are still in poverty.

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The history of negotiations. The idea that richer, industrialised nations have a responsibility to provide finance to poorer, less industrialised ones to help them mitigate and adapt to climate change has been agreed since the 1992 UN Framework Convention on Climate Change. At COP15 in Copenhagen in 2009, developed countries first proposed paying $100 billion a year by 2020, which was subsequently included in the Paris Agreement at COP21 in 2016. At the time this target was very substantially below what developing countries said was needed. This target was reached – albeit two years late, in 2022 – and included a mix of public funding and private money that had been ‘mobilised’ or ‘crowded-in’. However, Oxfam calculated that the true value of climate finance provided to developing countries is much lower than reported, once “dishonest and misleading accounting” is considered. The 2015 Paris Agreement included a mandate to assess and agree to an updated finance goal 10 years later. So since 2023, negotiators have been working to develop a new climate finance target – the ‘New Collective Quantified Goal’ (NCQG) –  to galvanise more climate finance from developed countries from 2025 onwards.

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The New Collective Quantified Goal (NCQG) on climate finance

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This year’s final COP29 text states that developed countries would aim to triple COP21’s nominal target of $100 billion a year in climate finance to ‘at least’ $300 billion a year to developing countries by 2035. It also agreed on a vaguer goal to ‘work together to enable the scaling up of financing...from all public and private sources to at least [$]1.3 trillion per year by 2035’. So why have campaigners and representatives from developing country governments branded the agreement a failure? 

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$1,000,000,000,000 a year short of what’s needed. Tripling the current goal of $100 billion a year in climate finance might initially sound impressive, but it is far less ambitious than what developing countries were calling for and falls $1 trillion a year short of what the Independent High-Level Expert Group on Climate Finance thinks is needed. Economists also pointed out that the real value of finance delivered may be far lower as it is not pegged to the rate of inflation. 

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Mixture of public grants and private loans. Developing countries wanted a higher target of around $600 billion of climate finance from developed governments in the form of publicly funded grants and ‘grant equivalent’ loans. A mix of additional public and private finance would be needed to reach the $1.3 trillion goal. In the end, however, the final COP text specified that the agreed $300 billion goal could come from “a wide variety of sources, public and private, bilateral and multilateral and alternative sources”. Debt Justice calculated that 71% of climate finance committed so far has been in the form of loans (and only 26% in grants). The final pledge means that much of the climate finance needed to decarbonise developing economies risks being heavily reliant on expensive loans from private finance institutions, leading to the further outflow of funds from developing countries to Global North financial institutions. 

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Why are public grants better than private finance? Developing countries' aversion to loans, particularly from private sector institutions, is very justified and well documented. Faced with huge development and poverty eradication needs, and with rich countries failing to honour aid and climate finance commitments, many governments in the Global South have had no choice but to take expensive loans from international capital markets. Many developing countries already spend more on debt repayments than on education, health and responding to the climate crisis. Relying on high-interest loans from private creditors for climate finance enables  richer governments to avoid their obligations to provide international climate finance and saddles poorer countries with more debt. A coalition of global justice organisations has highlighted the urgent need for debt cancellation and grant-based climate finance instead. (Read our previous New Economy Brief on the global sovereign debt crisis for more.) 

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Looking ahead to COP30

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Under the Paris Agreement, every five years the COP negotiations include a ‘global stocktake’ which reviews the progress that has been made to inform the next round of ‘Nationally Determined Contributions’ (NDCs) - countries’ emissions reduction pledges. At COP28 in 2023, this stocktake called on all countries to contribute to “transitioning away from fossil fuels” and to treble global installed renewable energy generation capacity, double energy efficiency, and halt and then begin reversing deforestation. COP29 was supposed to decide how to do this, and provide guidance for countries to develop their next climate pledges to keep global warming below 1.5°C. But agreement wasn’t reached, pushing the discussion to COP30 in Brazil next year.

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More ambitious Nationally Determined Contributions. All parties must update their NDCs by February 2025. The ‘roadmap’ to $1.3 trillion of climate financing will also have to be worked up in advance of COP30. If agreement can be found on a realistic way to secure a larger climate finance package, then countries will be more able to adopt more ambitious emissions reduction targets in line with a 1.5°C pathway. However, this will require trust from developing countries that industrialised  countries will provide the money. And experience to date provides very little reason for them to have this trust.  Last week, almost a quarter of the Parties objected when the COP29 Presidency forced through the NCQG decision, including India, Nigeria, Bolivia, and 45 Least Developed Countries. So some countries are refusing to accept the outcome of the talks, given there was no clear commitment to any amount of core public funding, no limits on lending instruments nor guarantees to keep countries from going deeper into debt.

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A multipolar world? The climate finance deal was eventually pushed through out of fear of a Trump presidency, which will likely be hostile to any climate finance and has signalled its intent to once again pull the US out of the Paris Agreement altogether. James Meadway has argued that we are entering a ‘multipolar world’, in which the US has less control over global politics than it used to and other nations step into a larger climate leadership role. 

‍All eyes on Belém. Next year’s COP will be hosted by Brazil, in the city of Belém. Brazil is currently governed by the centre left Partido dos Trabalhadores (Workers’ Party) and its President, Luiz Inácio Lula da Silva, has styled himself as a climate leader. However, he has faced challenges on this front since being re-elected in 2023. Lula has called COP30 “our last chance to avoid an irreversible rupture in the climate system”. The stakes couldn't be higher.

Good morning from New Economy Brief.

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Last week Chancellor Rachel Reeves used her speech at Mansion House to outline plans to consolidate the UK’s fragmented pension system into ‘megafunds’ that could divert investment worth billions more into UK assets, businesses and infrastructure. 

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This week’s New Economy Brief looks at the Chancellor’s plans for pension reform in more detail. It also explores how making the reforms more ambitious could ensure that pension funds not only give savers a better deal but also direct more of their capital towards green and socially useful investment. 

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What was in the Mansion House speech?

Rachel Reeves continued the annual tradition of chancellors addressing the finance sector at Mansion House. She started by focusing on the new Labour government’s first budget, calling it a “once in a parliament budget to wipe the slate clean”. She characterised her “difficult choices” on spending, welfare and tax as necessary to “draw a line under instability”.

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The speech also touched on regulation, growth and competitiveness in the financial sector, with Reeves promising to publish the UK’s first ever Financial Services Growth and Competitiveness Strategy in the spring. 

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But the main focus of the Chancellor’s speech was pension reform. The plans centre on consolidating the UK’s pensions funds to create ‘megafunds’ in order to direct more capital from UK savers to finance British startups, scaleups, and infrastructure projects. The Treasury estimates this could “unlock” a further £80bn to be invested in fast-growing British businesses and “vital infrastructure projects, including transport, energy and housing”. Previous chancellors have also attempted to get UK pension funds to invest more domestically (see our previous coverage of reform proposals from the last Conservative government). 

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The Chancellor’s speech was accompanied by an interim report from the Pensions Investment Review launched by the government in August, which provides more detail on plans to consolidate defined-contribution workplace schemes and the Local Government Pension Scheme. 

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Consolidating into megafunds

Pension funds have been making less risky investments since the shift from defined-benefit (DB) to defined-contribution (DC) schemes, meaning more money has moved from company equities and into safer government bonds. In 2022 the TUC, Common Wealth and the High Pay Centre found that the proportion of UK shares held directly by UK pension funds decreased from almost a third in 1990 to less than 1 in 25 by 2018. Overseas investors now hold 55% of UK shares, up from 12% over the same period.

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Part of this is because the UK pension market is very fragmented, despite being the third-largest in the world. Australian and Canadian savers have managed to increase their returns by consolidating their pension fund industries, making it simpler for them to invest in unlisted companies with higher growth potential. This is because larger funds are in a better position to manage higher-risk investments which can generate higher returns. According to the OECD, the percentage of UK pension fund assets invested in equities dropped from 55.7% in 2001 to 26.4% in 2021. In comparison, Canadian funds held 40.6% and Australian schemes held 47% of their assets in equities.

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Increasing savings and returns for people in retirement

One of the main objectives of the government’s pensions investment review is to “increase saver returns”. And in her speech, the Chancellor argued that consolidation would “enable schemes to deliver better saver outcomes”, suggesting that currently “savers are not seeing the returns on their investment which they deserve.”

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Pensions do need to deliver more for savers. This is for two main reasons: first, the UK state pension falls well below the OECD average. Second, 80% of the two thirds of the population who are paying into DC pensions are not saving enough to guarantee a minimum income in retirement. Women are at particular risk of retiring with an inadequate pension, with the gender pensions gap well documented. 

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Megafunds’ potential ability to generate higher investment returns would benefit savers. But helping people put more into their pensions is important too. Not only would this increase the size of savers’ pension pots directly; it would also generate larger pools of capital that could be used to make higher-yielding investments. 

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A progressive model for increasing pension savings. The Finance Innovation Lab (FIL), ShareAction and Make My Money Matter argue that the private pension contribution system must become more progressive if it is to meet the needs of those living on low incomes who will struggle to build up sufficient contributions. They propose increasing mandatory minimum pension contributions to at least 12% of income, with 5% coming from workers and 7% from employers. Currently, the minimum contribution for those auto-enrolled into a pension scheme is 8%, but just 3% of this must come from the employer. This is comparatively very low. In Australia, for example, the minimum employer contribution is 11.5%.

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Pensions, private finance and profiteering

However, increasing returns for UK savers could mean more investment in extractive businesses. Currently, many pension funds invest heavily in climate- and nature-destroying industries in search of profitable investments. For example, for every £10 in the average pension pot, an estimated £2 is linked to deforestation. Furthermore, civil society organisations are concerned that pension funds are helping drive privatisation of public infrastructure in developing countries and profiteering from investing in it through asset management companies. This is in order to extract higher returns for savers in developed countries. This ‘de-risking’ approach championed by the World Bank and others has been shown to undermine access to public services and extract public funds from the Global South.

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Do we want private finance profiteering from our public infrastructure? Some experts, like Daniela Gabor and the Financial Inclusion Centre’s Mick McAteer, have warned that Labour’s reliance on private finance to rebuild the UK’s economy risks a ‘PFI2.0’ situation, in which our public assets are increasingly used as a source of profit for institutional investors. (Brett Christophers uses Thames Water’s example to explain the risks of relying on private pension funds to invest in public infrastructure via asset managers.) 

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Managing risks with regulation. The risks associated with chasing higher returns need to be managed via effective regulation – which makes the Chancellor's suggestion that post-financial crisis regulatory reforms have “gone too far” a potential cause for concern. (See this New Economy Brief from 2022 for a critique of the previous government’s goal of light-touch regulation with a competitiveness target for financial regulators.)

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Threading the needle

Meeting the UK’s green investment gap will inevitably require a lot of private finance. FIL’s Jesse Griffiths thinks the government’s proposed reforms are unlikely to unlock £80 billion, and even if this is achieved, it is tiny compared to the £3 trillion UK pensions industry. A recent report by Phoenix Group and Make My Money Matter found that UK pension funds could invest £1.2 trillion by 2035 in UK climate solutions if key barriers were removed and policies changed. But there is also a question of how to limit the risk of private finance profiteering from public infrastructure and the green economy.

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Greening the pensions investment review. FIL wants the pensions investment review to be linked to the government’s clean power mission and the stronger Nationally Determined Contribution target announced at COP29 in Baku last week. This could include requiring all pension funds and other financial institutions to adopt transition plans that align with the Paris Agreement goal of limiting global warming to 1.5°C by the end of the century. It could also mean mandating the phasing out of climate- and nature-destroying investments. In fact, Labour's own manifesto included a commitment to mandate both FTSE 100 companies and UK-regulated financial institutions – including banks, asset managers, pension funds and insurers - to align with the 1.5°C global warming goal. 

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Reforming fiduciary duty. Investment decisions by pension funds are governed by laws known as fiduciary duties. These require them to act in the “best interests” of their beneficiaries, which is often interpreted to mean they should invest in whatever is most profitable. But this focus on financial returns can come at the expense of the environment and society more widely - which isn't really in pensionholders' best interests. A slightly higher income from their savings won't be much consolation for UK workers if they live out their retirement surrounded by poverty and environmental devastation.

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To address this, FIL, ShareAction and Make My Money Matter have recommended that the fiduciary duties of pension fund trustees should be reformed so that they assess the environmental and social impacts of investments and not just their financial returns. Last week the performing arts union Equity wrote an open letter to the government calling on it to clarify that ‘pension trustees must take climate and nature risks into account as part of the fiduciary duty to act in the best interests of their members’, alongside other suggestions to enable the pensions sector to tackle the climate emergency more effectively. Equity itself has recently moved to a pension fund that ‘extensively restricts direct investment in fossil fuel companies’. 

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Looking forward: ensuring pension investment delivers public value

The Chancellor’s Mansion House speech was further evidence of the new government’s focus on using private-public partnerships to redirect investment and deliver growth. Getting the balance right between public and private investment will be crucial for the long-term health, prosperity and resilience of the UK economy. Time will tell if Labour’s approach will be effective. How it goes about regulating private finance will also be critical – both to limit investment in climate-damaging industries and to redirect this investment towards social and environmental goals. 

Good morning from New Economy Brief.

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Last week, the world woke up to the news that Donald Trump had been once again elected President of the United States.

His victory came after an election where fundamental social and political issues were on the table. Major dividing lines like reproductive rights, racial justice, migration and the principles of democracy itself dominated the presidential race.

But at the heart of the election result, it seems, was the economy – or more accurately, how Americans feel about it. This week, we explore the economic factors behind Trump’s success and the radical (and controversial) policies he is proposing. This New Economy Brief will be the first of two focusing on Trump’s election. In part two, we’ll move onto what this result means for the rest of the world, including the UK. But first, let’s look at what happened last week.

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Follow the money

It feels trite to reduce the election to economic factors. And of course, there was so much more at stake here. But early analysis shows that the cost of living crisis – and the simple fact that Americans have not felt better off under the Biden administration – were major factors in Donald Trump’s victory.

But isn’t the US economy growing? Growth is often seen as the panacea for a nation’s economic woes. As with the UK Labour Party, it is often what governments claim to be focused on delivering – and the Democrats have done just that. During Biden’s premiership, the US saw the highest GDP growth in the G7 by quite some way (10.7% increase from 2019 to 2024 – for comparison, the UK managed just 2.9%). Judging by these figures, America is excelling. So why did two-thirds of US voters say the country was on the wrong track ahead of the election?

Growth and living standards. The reality is that headline economic figures mean very little to households who don’t actually feel any better off. Since Biden’s election, real median household incomes fell relative to their pre-Covid peak and poverty, unemployment and homelessness rose. The number of Americans spending more than 30% of their income on rent climbed. Government transfers such as boosting food stamps and extending child tax credit and unemployment-insurance payments helped households at the beginning of the Biden administration. But by the end, once these short-term measures expired, families were left battling the sticky, structural causes of inequality: high mortgage rates, extortionate groceries and unaffordable health care, child care and housing.

‍Living standards and Trump. The result? Voters who didn’t share in the wider success of the US economy punished Harris at the ballot box. According to the i’s housing correspondent Vicky Spratt, all key swing states shared a common statistic – they all had above average house price inflation. Voters’ negative feelings on the economy were key to the result, and this economic insecurity cut across different racial groups. This helps explain both the election just gone and Biden’s success in 2020. Analysis by academic Stephen Semler shows that in 2020, 50% of voters rated the economy as "not good/poor”, with Biden securing 80% of this group's vote. In 2024, 68% of voters rated the economy as "not good/poor”, with Harris earning just 28% of this group's vote and Trump getting 70%. 91% of those who rated the economy “Excellent/Good” voted for Harris. These statistics suggest that no matter the headline economic figures, voters will punish the incumbent if the economy doesn’t feel like it’s getting better to them. (We will cover the lessons for the UK and beyond in part two.)

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So, what's on offer?

‍If voters were driven to Trump by their personal economic situations, then what do they hope he can do for them? Trump’s economic offer is radical. His ‘America first’ programme is one of tax cuts, tariffs and protectionism. Here’s the run-down of what to expect:

Tax cuts. Trump has promised to cut the corporate income tax rate from 21% to 15% for companies who make their products in the US. He has also pledged to make several  tax cuts from his first term permanent, such as those in the 2017 Tax Cuts and Jobs Act, which would have otherwise expired next year.

Tariffs. To pay for proposed tax cuts and to, as he sees it, put “America first”, Trump has promised huge tariffs on imports. A 60% to 100% levy on Chinese products and a 10-20% levy on goods from the rest of the world have been floated. Experts warn that any revenue generated by the tariffs will be offset by higher prices for US consumers. The Center for American Progress think tank estimates that the tariffs will mean middle-income families lose  $2,500 to $3,900 loss. Although Trump promises the tariffs will boost employment, figures from his first term suggest otherwise. In 2018, he imposed 25% tariffs on imported steel to protect US producers, but by 2020 total employment in the US steel sector was 80,000 – still lower than the 84,000 it had been in 2018. Importantly, Trump is talking about tariffs not just as a trade policy mechanism but as an important source of government revenue, even claiming they could entirely replace federal income tax (an idea that economists have comprehensively debunked).

Energy and defence. Trump has vowed to cut climate initiatives that were central to Biden’s Inflation Reduction Act such as offshore wind projects, which he deems to be too expensive. Instead, he plans to “Drill, baby, Drill”, promising that American oil and gas will lower energy  bills. As well as green energy, Trump also sees defending other countries as a waste of money and has suggested he will scale back support for Ukraine. We’ll look at the global impacts of Trump’s climate and foreign policy in part two.

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Watch this space

Behind all the chaos and emotion, it seems that Trump’s victory can largely be put down to a common electoral theme – people struggling to get by. A new regime of deregulation, cuts to green energy infrastructure and lower taxes is unlikely to fix the structural issues with the US economy that ultimately ended the Biden-Harris era. If anything, it will make them worse. Tariffs will push up prices for consumers while tax cuts will increase demand, making the Federal Reserve more cautious about cutting interest rates. Mass deportations, as well as being deeply traumatic for communities across the US, will reduce the supply of labour and push up business costs. American voters are desperate for a solution to the cost of living crisis – but will they get one? In the second part of our Trump Focus, we’ll look at what his election means for the global economy, for the climate and for progressive regimes across the world.

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Good afternoon from New Economy Brief. 

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Kemi Badenoch was elected as the Conservatives’ new leader on Saturday, securing 56.5% of party members’ votes to Robert Jenrick’s 43.5%. 

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Her victory comes hot on the heels of the new Labour government’s first Budget last week, in which Chancellor Rachel Reeves set out a very different economic philosophy to that of her Conservative predecessor, Jeremy Hunt. 

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So today we’re exploring what we know about Badenoch’s economics, what her approach to economic policy as Leader of the Opposition might be, and how this compares to the last Conservative government’s approach. We’ll also look at the potential key economic dividing lines between the government and Badenoch’s Conservative party.

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The context

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In the last round of the leadership election, where party members chose between the two remaining candidates, Badenoch won by a healthy margin. But in the first round of voting – among Conservative MPs – she received only 18.6% of the vote. In the fourth and final MP ballot she received 34.7%, with rivals Jenrick and James Cleverly close behind on 33.9% and 30.6% respectively. This means that Badenoch now leads a parliamentary party where only a third of her MPs voted for her. This is a challenging inheritance for any leader, and one made even tougher by the scale of the Conservatives’ defeat at the general election in July, which left the party with only 121 MPs. 

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Badenoch’s immediate response to the Budget

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The timing of the Conservative leadership election meant that the new leader wasn’t chosen in time to respond to the Budget in Parliament on the day – leaving Rishi Sunak to lead the official opposition response. He focused on Labour’s fiscal rule changes, the increases to both borrowing and taxes, and the harm he claimed the Budget would do to economic growth. 

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In her own media response on Wednesday (and before her victory on Saturday) Badenoch made similar criticisms, summarising the Budget as “higher taxes, more borrowing and lower growth”. She said she would use her time as leader of the opposition to build “a plan that will rewire the state, bring down taxes and reward the risk-takers and the entrepreneurs who create jobs and fuel economic growth”.

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Badenoch’s economic philosophy – Conservative continuity or radical change?

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In some ways Badenoch’s response was a continuation of the Conservatives' 2024 manifesto, which promised to cut taxes and support entrepreneurship. Then-Prime Minister Rishi Sunak was particularly keen to make tax cuts a sharp dividing line with Labour, despite widespread scepticism about how they would be paid for. Badenoch has also appointed Sunak loyalist, former Work and Pensions Secretary and fifth-placed leadership candidate Mel Stride as her Shadow Chancellor. Picking Stride, seen as belonging to the One Nation wing, looks like an attempt to shore up support from the left of the parliamentary party.

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But while the Conservative manifesto focused on ‘cutting government bureaucracy’, Badenoch’s desire to ‘rewire the state’ could go further. In a leadership campaign video from August she warned of ‘a state that is too big, too bureaucratic, and toppling over’, and  while launching her campaign back in early September she argued that ‘government should do fewer things but better.’ When asked ‘what specific areas should government not be doing’, Badenoch gave the example of the bill to phase out smoking that her own government tabled in March 2024 (although this wouldn’t involve any lower spending). Her comments on the level of statutory maternity pay in the context of a wider conversation about regulation and tax also caused controversy. 

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Badenoch’s victory speech on Saturday did not mention the economy directly, focusing instead on the broad themes of change and renewal. But a mention of ‘a clear plan to change this country by changing the way that government works’ hinted once again at the importance Badenoch places on remodelling the role of the state in her political and economic philosophy. 

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Dividing lines with Labour

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The clearest articulation so far of Badenoch’s position on economic policy came in her interview with Laura Kuenssberg on Sunday.

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Badenoch argued that “as a country we are getting poorer, we’re getting older, we’re being outcompeted by many other competitor countries and we need to look at how we can reorganise our economy to be fit for the future.” She immediately drew a dividing line with Labour, saying “thinking about the economy in a different way, in my view, is going to be completely the opposite of what Rachel Reeves is doing.”

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Dividing line 1: growth and investment 

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Badenoch stated that one of her guiding economic principles is that ‘it is not the government that creates growth’, pointing instead to business as the growth engine. Given the Budget’s strong focus on public investment as a critical driver of long-term growth, this is likely to develop into a key divide between the government and the opposition. 

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Labour has committed £100bn more in public investment over the course of the next Parliament compared to the plans they inherited from the last Conservative government. Those plans implied a real-terms cut in public investment of 7% a year until 2028/29 – despite growing consensus from economic experts that “under-investment is a central cause of the UK’s poor recent economic performance and the root of many of the problems we now face as a country.”

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Labour is already keen to play up this divide: on Sunday the Chancellor threw down the gauntlet, saying “if Kemi Badenoch opposes this budget, then she has to tell the country if she opposes investment to cut waiting lists, investment to recruit teachers and investment to build critical infrastructure. Labour has made its choices, now the Tories need to make theirs.” Senior Labour frontbencher Pat McFadden was equally bullish, saying “if the Tories want to go round the country opposing every new public investment, they can be our guests.”

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Dividing line 2: tax and public services

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Unsurprisingly, another dividing line is emerging on tax and public services. Badenoch admitted to Kuenssberg that she believed the tax burden was too high under the previous Conservative government. However, she implied that lower taxes “doesn’t mean we have to cut public services”. 

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Badenoch’s claim has already been refuted by Henry Hill, Deputy Editor of Conservative Home. Responding directly to Badenoch’s comments, Hill argues that “if you want taxes to come down, spending has to come down, and that means services and entitlements need to be cut. Accepting this is the difference between paying lip-service to the principle of lower taxation and actually holding it.”

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It is also important to remember that the previous government’s manifesto – which Badenoch stood on – was criticised for promising dubiously funded tax cuts while also committing to spending plans that implied massive real-terms cuts to public services. In fact, both the Conservatives and Labour were accused of a "conspiracy of silence" about these implied cuts in the run-up to the general election. 

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Indeed, the rationale Rachel Reeves gave for raising taxes at the Budget was that they were necessary to keep public services adequately funded. 

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The path to power?

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Ultimately the Conservative economic message will need to be shaped by the political context. In recent history oppositions have tended to need an economic crisis to turf a sitting government out of office. However the ‘sandcastle’ nature of the current government’s majority may mean the next election bucks that trend. But this will only be possible if the Conservatives are clear about what their economic vision is and which voters it is designed to appeal to. 

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With the Conservative vote now largely concentrated among pensioners (who tend to be the main users of public services), how much room is there for a ‘shrink the state’ economic offer? If the plan is to appeal to younger voters then will the Conservatives back radical planning reform even when their voter base and many of their MPs oppose this? Will tax cuts be seen as credible in 2029 if public services are still struggling? And if the Conservatives are to argue for even stricter controls on immigration in a bid to win back voters from Reform, how will they account for the impact this would have on economic growth and public services? 

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Stephen Bush argues in his FT column that “ it is only when you have decided what services you are going to provide and who is going to provide them that you can start thinking about what level of tax you need to pay for it all”. Ultimately the grim nature of the UK’s fiscal position could leave the new Conservative opposition with as few options as it did the old Conservative government.

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The first Labour Budget for 14 years, and the first Budget ever delivered by a woman, has certainly been a large one (and not just in terms of the length of the speech). The Chancellor set out significant rises in tax and borrowing, almost all of which will be used to prevent further public spending cuts. This was the Budget where the implications of the projected spending settlements, dubbed a ‘fiscal fiction’, were finally out in the open. 

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Ultimately the Chancellor has decided that delivering the cuts set out by the last government would be neither economically nor politically feasible. So what is the overall narrative of the Budget? In short, it is a Budget of two halves.

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It was a good day for capital investment, with the government vowing to “invest, invest, invest” and new fiscal rules opening up room for additional public investment. But on current spending, there is less to celebrate. A huge £40 billion worth of tax rises have left public services merely treading water, with the exception of the NHS which received significant extra funding. 

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In today’s New Economy Brief we look at both sides of this Budget, unpack the key measures, and look at how the fiscal framework has contributed to this fragmented narrative.

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Towards a pro-investment fiscal framework?

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The government wants today’s take home message to be that it is now serious about investment. Recognising the benefits of borrowing to invest, the Chancellor announced changes to the debt rule which has previously curtailed public investment. As a result of the headroom opened up by the change to the fiscal rules (more on this below), the Government is aiming to spend an average of £20 billion extra a year on capital investment over the next five years. The OBR notes that this will increase GDP growth by 0.6% by 2029, with even greater growth benefits felt beyond the five year forecast period (IPPR's Carsten Jung believes the real growth impacts could be twice as big). The OBR also calculates this extra public investment will ‘crowd in’ billions more in private investment. 

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Cancelling the cuts. This has allowed the government to keep public investment broadly flat at 2.4% of GDP over the parliament, and avoid inherited cuts which could have left public investment falling more at the end of Labour’s first term than across the entire 2010-24 Conservative administration. IPPR’s analysis shows that this “major revision in investment plans between the Labour manifesto and now” leaves “public investment in Britain approaching the average for the rest of the G7”.

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What will it get spent on?  The government is using some of its new headroom to “invest in the industries of the future”: key industrial strategy priorities like gigafactories, ports, green hydrogen, aerospace, automotives, transport and R&D, as well as housebuilding and broadband. DESNZ’s also received a 35% boost to its capital budget, while £6.7 billion of capital investment will be spent to rebuild schools and £3.1 billion to address backlogs in the NHS. But there are still huge investment gaps. EY warned of a £700 billion+ infrastructure investment shortfall to meet the UK’s long-term economic, social, strategic, environmental and defence priorities by 2040 and the Climate Change Committee (CCC) recently recommended a stronger emissions reduction target for the UK by 2035 which will further increase the need for green investment. While avoiding the planned cuts to public investment is likely to be welcomed by campaigners, keeping it flat at 2.4% of GDP is still some way below the ambition called for by many institutions (it’s half of what NIESR are calling for, for instance).

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Changing the time horizon of the debt rule. Reeves criticised the previous government for making short-termist decisions, such as raiding capital budgets to meet day-to-day spending commitments and cancelling public investment projects. Changing the definition of debt to open up more space for public investment avoids some of this short-termism by unlocking more headroom now, but the Chancellor's new timeframe for meeting her fiscal rules leaves a lot of it intact. The Chancellor has given herself five years to get debt falling as a percentage of GDP, which will then have to be met every three years afterwards in a rolling target. This shorter three year timeframe could restrict future chancellors from making long-term decisions as they will have less time for the benefits of public investments to generate growth impacts, which tend to accrue over the longer term (She did announce that the OBR will judge these benefits beyond the forecast horizon, but as yet it is unclear how or if this will be integrated formally into the fiscal framework).

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Implications of Targeting Public Sector Net Financial Debt (PSNFD)

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As predicted, the government is redefining the definition of ‘debt’ (public sector net debt excluding BoE) to a more expansive measure that also includes the value of financial assets held by the government (such as student loans, guarantees to businesses, equity holdings by public sector banks, and assets held by public sector pension schemes), as well as its liabilities. Targeting falling PSNFD rather than falling PSND more accurately reflects the benefits of borrowing to invest by capturing the value of the financial assets created through the investment as well as the debt taken on to fund it, whilst also discouraging the government from selling some kinds of public assets to reduce short-term debt.

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PSNFD and PFI2.0? A PSNFD target could create incentives for the government to channel investment through financial mechanisms rather than directly building and owning infrastructure. This effectively makes public sector borrowing to invest in illiquid private sector financial assets (for example loans made by public banks like the National Wealth Fund) fiscally neutral. Conversely, investment in non-financial assets held by the public sector (such as MRI machines in hospitals) would only register as a debt under PSNFD; under more comprehensive measures of debt like Public Sector Net Worth, these physical investments would also be fiscally neutral. Barclays note this “raises the prospect of a change back to a “PFI-type” world of the early 2000s” (read our previous New Economy Brief on ‘derisking’ and the National Wealth Fund). 

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All eyes on the ‘guardrails’. This is why many experts have called for ‘guardrails’ to help guide additional public investment and maximise its value and quality. This includes  greater oversight and assessment by independent bodies, such as the new Office for Value for Money to scrutinise spending, alongside a new infrastructure oversight body and an expanded role for the National Audit Office. Will these beefed up institutions prevent what Daniela Gabor has called ‘government-by-Blackrock’ and ensure public value is retained in a new wave of public-private-partnerships?

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Questions remain over government incentives over PSNFD. Former Permanent Secretary to the Treasury and head of the Civil Service, Lord Gus O’Donnell, has argued that “all public investment decisions should be based on non-financial as well as financial returns as set out in Treasury guidance in the Green Book”. But the portfolio of investments delivered by the National Wealth Fund must have a return higher than gilts, so it is likely that necessary investments with social or climate returns may be sidelined over more profitable ones. Will the less profitable investments needed for climate mitigation/adaption still be pursued under this more financialised logic? (New Economy Brief will explore these questions in future briefings.)

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Golden rule: higher taxes to fix gaps in current spending.

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Whilst the government has new powers to borrow for capital investment, they are steadfastly committed to not using borrowing to pay for current spending; this must be paid for by higher taxes. This ‘golden rule’ means that tax receipts must balance with current spending, initially in five years and then in a three year rolling target after that (with ‘balance’ being defined as a range of plus or minus 0.5% of GDP) . 

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Tax focus. To ‘prevent a return to austerity’ the government raised £42 billion in tax, over half of which came from increasing employer National Insurance Contributions (NICs). Here the government was significantly constrained by its manifesto commitments on income tax, employee NICs and VAT, meaning most of the big revenue raisers were off the table. Other manifesto commitments were enacted such as applying VAT on private school fees and scrapping the non-dom tax status, alongside new measures such as closing inheritance tax loopholes and raising the rates of capital gains tax. The result is a progressive set of measures, but tax campaigners will feel there is more to do to ensure wealth is more fairly taxed compared to work (Note that IPPR found these changes still leave the UK broadly in the middle of other OECD economists on tax as a % of GDP).

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Did we avoid a return to austerity? This allowed the government to avoid the real terms spending cuts inherited from the last government (widely regarded as ‘politically unfeasible’ to deliver), and increase spending by 4.8% this year. Seven Departments will still be getting real terms spending cuts in this one year settlement; the Home Office, Foreign Office, DEFRA, DCMS, Business and Trade, Transport and the Cabinet Office. But the overall envelope for current spending will grow 3.1% next year and on average by 1.5% between 2026-27 and 2029. Whilst preventing even deeper austerity baked in from the last government, this will still result in very tight budgets for departments ahead of the longer-term spending review in March. 

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NHS is the big winner. The NHS is consistently top of voters’ concerns, and is one of the key issues (along with the cost of living crisis) that Labour will be judged on at the next election. It’s no wonder, then, that Reeves has announced a £22.6 billion increase in day-to-day health service spending and a £3.1 billion increase in the capital budget, including £1 billion for repairs and upgrades, and £1.5 billion for new beds in hospitals and testing capacity. The government has promised that the boost will help to bring down waiting lists to a maximum of 18 weeks. 

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Investment via current spending? However, there hasn’t been a significant change in either spending or rhetoric from the previous government when it comes to social security. The government is looking at continuing an Osbornite tradition of sanctions in Universal Credit by continuing the last government’s reforms to Work Capability Assessments and looking for cost savings by cracking down on benefit fraud. A Child Poverty Taskforce is sure to report by next Spring which campaigners will hope recommends more substantial action on welfare. A recent report from NEF argued that this spending on social security, such as reducing child poverty, should be recognised for its growth benefits, not just its effects on poverty reduction. 

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Verdict on the cost of living? The Chancellor highlighted some measures in the Budget that she argued would help ease the cost-of-living crisis, including a rise in the minimum wage, a boost of carers allowance, the extension of the household support fund, and a curtailment of deductions from Universal Credit. Overall the OBR suggested there will be an uptick in real earnings growth compared to their last forecast. However, poverty campaigners are worried that a 1.7% uplift to Universal Credit (likely to amount to a real-terms cut) will leave millions destitute and are disappointed by the Chancellor’s failure to end the two-child benefits limit. (For more on the cost of living context, see our New Economy Brief from earlier this week).

Good morning from New Economy Brief. 

Evidence suggests that the longevity of Labour’s ‘sandcastle majority’ depends on success in two key areas: the cost of living and the NHS. Voters want to see their finances improve. And they want to see it fast. Nearly a third of those who voted Labour expect the party to have made a noticeable difference to the cost of living in as little as a year. Another third expect to see a noticeable difference within two years. A significant chunk (10%) expect results within six months (they’ve had nearly four already). So when the Chancellor delivers her first Budget this week, voters will be watching and wondering “how will this make me better off?”

Today, we explore the Budget’s cost-of-living context, what action the new government may take on the issue, and the policies that campaigners are calling for to improve living standards. 

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The backdrop 

The cost-of-living crisis has been a major feature of British politics over the last few years. Polling commissioned by campaign group Stop the Squeeze just before the election was called found that 86% of people felt that there was an ongoing cost of living crisis. At that point, inflation was hovering just above the Bank of England’s target rate of 2%. Now it has dipped to 1.7%, but the crisis feels as stubborn as ever. This week, Stop the Squeeze revealed that 43% actually feel worse off than they did this time last year. This research, carried out by YouGov, also found that 17% of people struggle to afford basic essentials either ‘often’ or ‘sometimes’. Meanwhile, 58% said that although they can afford essentials, they are having to cut back in other areas. This means Rachel Reeves will be delivering her first Budget to a nation where the vast majority are feeling the squeeze. 

• The fiscal picture. This will be a Budget of two halves. On the one hand, much of the debate as it approaches has centred on borrowing, and many are expecting more spending on infrastructure projects as a result. We already know that any additional borrowing that changes to the 'fiscal rules' make possible will be ring-fenced for capital spending only. Day-to-day spending, on the other hand, is a different matter. The Chancellor will need to get this from tax rises – over which the wrangling continues. Rumoured changes to Inheritance Tax, Capital Gains Tax and employer National Insurance Contributions have drawn criticism from some, while others call for the government to go even further with a 2% tax on assets above £10 million. But even raising a few taxes would give the Chancellor very little to play with. Ministers are worried about being able to protect their departmental budgets from cuts, let alone introducing additional cost-of-living support. 

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What could be done?

If the government can find money for cost-of-living support – either at this Budget or in the future – then what would be the most impactful way to improve living standards quickly? One obvious course of action is for the government to improve incomes, both from work and for those receiving social security payments. It may be true that wages are no longer as stagnant as they once were, but there is still a lot of catching up to do after they spent years falling in real-terms. In two thirds of the country, inflation-adjusted wages are still lower than in 2008. Campaigners have called for a ‘living income’ – a system that would set an ​‘income floor’ (using the ‘minimum income standard’ calculation) beneath which nobody – whether in or out of work – could fall.

• Social security. Poverty campaigners argue that one of the quickest ways to improve living standards for millions would be to reform the conditionality associated with Universal Credit. The Child Poverty Action Group (CPAG) argues that more than 10,000 children have been pulled into poverty since the general election due to the two-child limit on universal credit and child tax credits. 
• Some good news? Over the weekend, the Government announced the ‘Fair Payment Rate’: a cap on the amount that can be cut from benefit payments each month to repay short-term loans and debts. Save the Children estimates the measure could see single parents receive up to £39 more of their universal credit entitlement each month. However, most poverty campaigners simply see the move as a “first step”. 

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What to look out for

The recent dip in inflation made little difference to how people feel about their finances, and in many cases it could even make things worse. The September inflation rate is usually used to calculate benefit upratings, so unless the government decides otherwise, universal credit would increase by just 1.7% from April. With many predicting the dip in inflation to be temporary, this would likely mean a real-terms cut to social security. The Joseph Rowntree Foundation has said the increase will “barely touch the sides” of already insufficient universal credit levels and has called for urgent cost-of-living support in the Budget.

• A triple lock on social security? One way to avoid such issues in the future could be a ‘triple lock’ on social security, like the one used to uprate state pensions. For more on how this could work, check out our New Economy Brief on the topic from last year.
• Unfreezing Local Housing Allowance. The Joseph Rowntree Foundation is already calling for the freeze on Local Housing Allowance (LHA) to be lifted. Experts say that unless the Budget re-links LHA to local private rents, private renters on housing benefits will be around £700 a year worse off. This will pull 50,000 renters into poverty, 60,000 into deep poverty and 80,000 (including 30,000 children) into very deep poverty. 
• Child poverty strategy. Last week, the Government published its plans to develop a child poverty strategy, due to be announced in full in the Spring. Trussell’s Sumi Rabindrakumar said that the Government’s statement reflects the scale of the problem, but that the key test of whether the strategy succeeds will be how far it centres social security reform as the solution.

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Action needed now

The last government had a particularly poor reputation on living standards. Labour will be keen to be the ones to reverse the trend and ultimately, need to succeed in order to be re-elected. The government’s current narrative focuses on investment and longer-term plans for growth – and they want to be given a chance to make this work. But with the cost of living continuing to bite as hard as ever and with public services under such strain, people will be eager to see a boost to current spending in the Budget alongside measures to end this crisis once and for all.

In the run-up to July’s general election, the Labour Party pledged that it would publish an Employment Rights Bill within its first 100 days and last week, just days before the deadline, the government did just that. 

With MPs due to debate the Bill in Parliament next week, we explore whether this legislation will make life substantially better for workers or if, as Unite the Union has claimed, it “leaves more holes than Swiss cheese” for employers to exploit. 

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The Bill at a glance

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The new legislation brings forward 28 individual employment reforms. It promises to end “one-sided flexibility” and create a level playing field in which “good employers aren’t undercut by bad ones”. Reforms are wide-ranging, and cover issues from zero-hour contracts and fire-and-rehire to day-one parental leave rights and strengthened trade unions. It also includes changes to statutory sick pay, with plans to remove both the lower earnings limit and the waiting period before workers start receiving money. To enforce all this, the government has announced the Fair Work Agency which would bring together existing enforcement bodies. Trade unions have welcomed many of these reforms, but some say that plans have been watered down and need to be strengthened. 

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Day-one rights. The eleventh hour publication of the Bill comes after months of behind-the-scenes bargaining between ministers, unions and business leaders. One of the most significant points of contention is around day-one rights. A key promise is that workers will have basic rights from day one, such as protection against unfair dismissal and access to bereavement and parental leave. With some businesses pushing back on this, the government has hatched a “compromise”: a statutory probation period in which it would be easier for employers to dismiss someone “fairly”. The government is pushing for this to last nine months, however this will be subject to a lengthy consultation in which businesses are expected to push for longer probation while unions call for less of it (or in some cases none at all).  

Zero-hour contracts. The government has promised to “end exploitative zero hours contracts”. The proposal is subject to consultation, but currently stipulates that everyone who works regular hours over a 12-week period would have the right to a guaranteed-hours contract (unless they actively opt for a zero-hours one). However, some including Unite the Union argue that failing to ban zero-hours contracts outright leaves too many “holes” for “hostile employers” to exploit. 

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Fire-and-rehire. The practice of firing employers and re-hiring them on lower pay and/or poorer conditions has received much attention in recent years, perhaps most notably in the case of P&O Ferries which has of course been at the centre of recent political news. The Employment Rights Bill proposes to end the practice, however there are reports that there may be more leeway for companies facing insolvency to restructure if it is deemed necessary to save jobs. This is another part of the Bill that Unite the Union has criticised for not going far enough.

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Subject to consultation. In many areas, a lot of detail is yet to be fleshed out. A lengthy consultation process is expected, and realistically reforms are unlikely to take effect until at least 2026. On flexible working, for example, the government has said that this should be “made the default where practical”. However, it still has not provided details of how this would be enforced. Similarly, while a “right to switch off” law will not be introduced, the Government could announce a “code of practice” like in countries such as Ireland, though plans for this are also likely to be subject to consultation. 

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Single status of worker. Labour’s ‘New Deal for Working People’ promised a ‘move towards a single status of worker and transition towards a simpler two-part framework for employment status’. This would replace three existing employment categories and aims to strengthen protections for self-employed and gig economy workers. In the ‘New Deal’ paper, Labour suggested that this may take “longer to review and implement” and promised to carry out a consultation on moving towards a single status of worker within the first year of government. 

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Trade union access 

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Among the bill’s less-discussed areas are its efforts to strengthen trade union rights. Mainly, it would repeal various pieces of legislation introduced under the Conservatives, such as most of the Trade Union Act 2016 which the TUC says included “unfair hurdles to workers taking industrial action”. According to the TUC, the new legislation would also introduce fairer balloting rules, greater protection for trade unionists and improved union access to workplaces. The government also plans to use existing laws to allow unions to use electronic and workplace voting.

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Unions will hope that these more under-the-radar reforms prove the most significant of all, by creating a platform to rebuild union membership in the private sector (currently hovering at just over 12%). They have long argued that they need better access to workplaces and an easier route to recognition by employers before they can grow this number substantially, and the Bill certainly removes some of the barriers erected by the last government.

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Why this matters

As we have previously explored in New Economy Brief, strong workers’ rights are not only good for individual employees but for the economy as a whole. Research shows that stronger worker representation on boards, for example, boosts innovation and can also promote investment in R&D. There is also evidence that growing inequality is linked to declining trade union membership and that efforts to promote trade union membership could help reverse these inequalities. With growth so central to Labour’s programme and with voters so desperate for living standards to improve, this suggests that strengthening workers rights as much as possible – particularly by improving trade union access – should be a priority.

Good morning from New Economy Brief. 

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Speculation is rife about how Chancellor Rachel Reeves might change her fiscal rules ahead of the Budget on October 30th. 

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What options does she have for redefining public debt to create more fiscal space for investment? And could these reforms signal the end of austerity economics? 

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This week’s New Economy Brief looks at various proposals on the table to reform the UK’s fiscal framework.

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Fiscal rule reform likely at Autumn Budget.

The debate about UK fiscal rules has been blown wide open in recent weeks. The Chancellor’s speech to Labour Party conference hinted that “it is time the Treasury moved on from just counting the costs of investments, to recognising the benefits too”. Since then, many of the UK’s top economists, institutions and media commentators have been lining up to propose their favourite new configuration of fiscal rules. Now, many options for reform are on the table and Labour are widely expected to change the definition of public debt to unlock more borrowing for public investment.

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Once again for those at the back: What’s wrong with the current debt rule? The main fiscal rule preventing higher investment at the moment is the Government’s commitment to have debt as a % of GDP falling between the fourth and fifth year of a forecast by the Office for Budget Responsibility. The previous government defined debt as Public Sector Net Debt (excluding the Bank of England’s interventions buying and selling government debt), but that isn’t the only possible definition. We have covered how this rule drives an anti-investment bias in our fiscal policy framework extensively. Essentially, the government assesses the stock of debt as a % of GDP at one point in time (and at such an early point that public investment hasn’t yet had much chance to increase growth), without also judging how the flows of debt and GDP will change over time. This effectively rewards it for cutting investment spending that could increase productivity, growth, tax receipts and thus the sustainability of public debt over the longer term.

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Why change debt definitions? 

During the general election, Rachel Reeves committed to these fiscal rules, but she didn’t specify which measure of debt should be falling. (Labour had also precluded raising more revenue from the main tax levers of VAT, NICs and income tax, which together make up around 75% of all tax revenue.) Redefining how debt is measured under the fiscal rules should allow the government to find extra fiscal space for borrowing to invest. 

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Why borrow to invest? Many economists warned that these fiscal rules have made the UK's public finances less sustainable, not more, as prolonged underinvestment has stifled productivity and growth. For instance, the government inherited plans to cut public sector net investment from 2.4% to 1.8% of GDP by 2028-29 in order to meet this debt rule. New analysis from LSE’s Centre for Economic Transition Expertise (CETEx) shows that cutting investment will jeopardise the government’s mission to achieve the strongest growth in the G7. It shows that, even in a best case scenario, the proposed cuts will reduce GDP by nearly £10bn after five years, rising to over £23bn of lost potential output after ten. (Note that this was calculated using the Office for Budget Responsibility’s (OBR) conservative multipliers, whose methodology was criticised by the National Institute for Economic and Social Research (NIESR) last week, meaning the real impact of the cuts could actually be far worse. Economic stagnation will continue if the government does not change approach and borrow to make sustainable investments. 

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So what reforms could be coming?

But you can measure government debt in many ways, and speculation is rife that Reeves could adopt a different definition from the last government's for the purposes of the fiscal rules. Estimates are starting to appear for how much additional borrowing each option might unlock for investment. One option that CETEx proposes is to exclude the debt generated from the investments made by public finance institutions like the National Wealth Fund (NWF) and GB Energy from the debt rule. Positive Money calculated that this, along with other reforms to make the NWF function like Germany’s public investment bank, should free up £180bn for public investment over the course of the parliament. Another option on the table – one that could coexist with the last – is to free up more headroom by excluding the Bank of England’s losses from selling the bonds it bought during quantitative easing from debt calculations, which could let the government borrow a further £16bn a year.

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Including government assets as well as liabilities. Another interesting suggestion gathering heavyweight support – it’s advocated by the Institute for Public Policy Research (IPPR) and Martin Wolf, and in a joint paper by the Resolution Foundation and OBR head honcho Richard Hughes, among others – is to broaden the definition of debt to include more government assets (such as student loans, guarantees to businesses and more illiquid/non-financial assets like equity stakes in companies or the value of the public transport network and other infrastructure), as well as its liabilities. A new paper from IPPR explains that a Public Sector Net Worth (PSNW) target would give investors a better picture of the government’s true financial position - just as they take a company's assets and growth strategy into account when valuing it, not just its borrowing.

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Time to target Public Sector Net Worth? IPPR calls for swapping the current rule that says debt:GDP must be falling in year five and instead targeting an increase in PSNW at the same point. This could provide an additional £57bn of headroom than it has under the current debt rule. A recent IMF paper notes that fiscal rules based on PSNW are “more conducive to public investment and economic growth, while providing for sensible policy reactions [to changes in financial conditions]”. IPPR’s second-best option is targeting Public Sector Net Financial Liabilities (PSNFL). This would be more incremental and easier to implement, but still permits around £52bn of extra space which could be used for investment. PSNFL leaves out hard-to-value assets like buildings and infrastructure, but it does include financial ones like stakes in companies’ equity held by public sector banks. (For more on PSNW, read our previous New Economy Brief.)

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Is this the end of austerity economics?

As the Resolution Foundation’s recent paper on this topic notes: “the interest should not be solely in which rule ‘allows’ the largest expansion in borrowing. Instead, any changed rule needs to be seen as telling us something about the fiscal priorities of the new Government.” This budget is particularly important as it is the first time Labour have had control of tax and spending decisions in nearly a decade and a half, so they have an opportunity to signal an alternative economic approach 16 weeks after winning the election (and potentially reverse some of the ‘doom and gloom’ headlines since cutting the Winter Fuel Payment). Any change to fiscal rules will signal that the new government appreciates how borrowing to invest contributes to growth, tax receipts, fiscal sustainability and ultimately, a better society. But it might not signal the end of austerity for a few reasons: 

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Will the headroom get spent (and on the right things)? Just because the government can borrow more doesn't mean it will. While some suggest that bond investors would support additional borrowing for investment – see our previous New Economy Brief for more on this – the government may still want to take an incremental approach. Reeves has argued that there isn’t a “race to get money out of the door”. However this needs to be balanced against the clear need for quick action – last week consultancy EY warned of a £700bn ‘investment gap’ by 2040. And some investments really are needed to secure long-term debt sustainability, like increasing resilience to climate change to stop public debt spiralling out of control. (On this, WWF has an interesting proposal – a Net Zero Test to assess whether all spending and tax changes would  help or harm decarbonisation, and to identify investment that’s needed to reach this goal but isn’t currently being made.) 

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A decade of national renewal will take longer than five years. Until we start looking more than five years ahead to assess the public finances, the media will keep fretting over the smallest downturn in forecasted fiscal headroom and putting pressure on politicians to cut spending. This can only harm the government's chances of rebuilding the economy. Last week, economists from Bloomberg and the Financial Times’ editorial board both made proposals to extend the horizon further out. The former say this would account better for the medium-term benefits of both physical and human capital spending, to enable “the government to articulate a clear plan for the public finances in this parliament, with a view to ensuring debt sustainability in the next”. The FT writers want “a more holistic analysis of debt sustainability”, and say the OBR should allow debt to rise over five years if it thinks this would ultimately lead to lower borrowing in the long run. (Neither set of proposals is incompatible with moving to a better debt metric like PSNW.)

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Current spending vs capital. Though the government seems to appreciate the growth benefits of capital investment, day-to-day spending is likely to remain tight – it’s constrained by the government’s other fiscal rule, which states that current spending must be covered by tax receipts. There is a legitimate debate over whether current spending on things that drastically enhance productivity growth in the future (like healthcare and childcare) – could also count as investments. This debate is likely to grow in volume if the new fiscal framework treats current and capital spending very differently. 

Good morning from New Economy Brief.

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Rumours have been circulating that the Labour government may water down their plans to scrap the non-dom tax loophole amid fears it could cause a ‘wealth exodus’ and end up not actually raising any money to fund public services.

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Does the evidence support this? Or are the risks of capital flight just more self-serving noise from the tax-averse super-rich? This week we dig into the debate around the non-dom tax regime and outline the economic case for ambitious reform.

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What is a ‘non-dom’?

The non-dom scheme, which is almost unique to the UK, dates back to the introduction of income tax in 1799 and was designed to help colonial investors avoid paying UK tax. A ‘non-dom’ is a person who lives in the UK but claims that their permanent home/domicile is abroad, and that they plan to move abroad eventually. They enjoy a tax break which lets them avoid paying any UK tax on foreign income or capital gains, unless they bring these into the country. Research from CAGE at the University of Warwick shows that most of those who benefit from ‘non-dom’ status are very rich. They make up ~30% of people with incomes over £5m, compared to ~0.3% of people with incomes below £100,000, and include the highest-earning bankers, oil industry executives, top film stars or sportspeople. 

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The politics of non-doms. Labour originally proposed scrapping the non-dom status, but then-Chancellor Jeremy Hunt made a surprise announcement in the March 2024 Budget that the Conservative government would phase out the non-dom tax regime by 2028/29, raising an annual £2.7bn. Since then, Labour has pledged to remove concessions and loopholes in Hunt’s plan that give current non-doms a 50% discount in the first year and protect them from paying UK inheritance tax on foreign gains and income held in trusts. The new Labour government calculated that this tougher crackdown would bring in £1bn in tax in the first year to fund public services, like universal school breakfast clubs and more hospital and dental appointments.

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Watering down to stop capital flight?

However, in recent weeks rumours have been circulating that the plans risk being watered down. The Guardian reports that “senior government sources said they feared the Office for Budget Responsibility (OBR) may forecast that the measure would cost the government revenue rather than raise it, because of the number of non-doms expected to limit their time in the UK”, while the Telegraph warns of a ‘wealth exodus’ if millionaires migrate to more competitive tax jurisdictions. But while it is understandable that those facing higher taxes might tell journalists they will leave, is there any reason to believe them?

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High earners won’t leave, actually. Looking at the evidence, perhaps not. The UK made the regime more restrictive in 2017, limiting post-tax incomes of non-doms by almost a fifth – and yet this only led to an extra 5% of non-doms leaving the country. This means the reform resulted in a net gain in revenue, but Centre for the Analysis of Taxation (CenTax)’s Arun Advani argues that “the striking thing about the people who left in response to the tax reform is that they were the ones who were paying the least tax anyway, so it actually doesn’t cost much to lose them”. Most non-doms have very highly paid jobs in the UK, so leaving just to pay a little less tax on their foreign investments doesn’t make financial sense. 

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Non-dom’s don’t migrate for tax reasons. Furthermore, researchers from the London School of Economics interviewed affluent Britons and concluded that “tax is not a key consideration for wealthy and high-earning individuals when considering emigrating from, or immigrating to, the UK”. Most were far more concerned about the risks to their careers, the upheaval to their families, the pain of leaving their homes, the punishing amount of admin to be done – even the risks to their reputations. The research found a “powerful stigma” attached to those who change country based on taxes alone; interviewees saw them as “unduly economically self-interested or accepting boring and culturally barren living environments”. Indeed, non-doms want to live in London, drawn by factors like its vibrant cultural scene or ability to access good healthcare and private schools.

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What do the wealthy think? Many wealthy people want to pay their fair share and invest in the UK. But by giving tax breaks to investments made in other countries, it actively discourages non-doms from putting capital to work. With public services desperate for more money, inequality accelerating and private investment at record lows, it isn’t surprising that the new government is looking to ‘those with the broadest shoulders’ for more revenue. Gio Notarbartolo, a non-dom, impact investor, entrepreneur, and member of Patriotic Millionaires, concurs that “the trickle of stories about people leaving say more about their resistance to change, and to a fairer society, than they do about what the majority of wealthy people think. Believe me when I say that there is a growing community of wealthy people, like me, who love living here and want to see and contribute to greater investment in this country. And we aren’t going anywhere.”

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Models and behaviour

Finally, this case offers an interesting perspective on two idiosyncrasies around the politics of taxing the very richest in the UK. First, those who oppose such tax proposals often do so by speculating about behavioural impacts of tax changes (for which there is often little evidence), rather than by arguing the merits of the change itself. Often this happens via intermediaries – here, observe the role of wealth advisors who, for obvious reasons, may not be totally impartial on the topic. A similar pattern has played out over the proposed change to VAT on private school fees. 

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Fiscal rules. The second point worth making is that, because the government has limited headroom against its fiscal rules, the OBR’s assumptions really matter. Its calculation of how much revenue removing non-dom status could raise (again based on behavioural assumptions and limited evidence) makes a huge difference for a government that is trying to meet its own fiscal rules. The public debate would be much better informed if there was more transparency around the assumptions and uncertainties inherent in such models.

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Good morning from New Economy Brief.

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A debate is raging about public investment ahead of the Budget next month, and there have been significant interventions over the last few weeks that have transformed that debate’s character. 

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The Office for Budgetary Responsibility (OBR) has released two papers with big implications for the politics of public investment and fiscal sustainability, while some of the most respected economists from all over the political spectrum have called on the government to reform their fiscal rules.

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This week’s New Economy Brief dives deep into the political economy of public investment, and explores a new campaign seeking to reform the UK’s fiscal framework: Invest in Britain.

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Trapped in a political cycle of underinvestment

The Labour government has talked up the benefits of public investment, but the positive rhetoric is set against a gloomy policy background. In order to claim ‘fiscal responsibility’ ahead of the election, Rachel Reeves committed to stick to the previous government’s central fiscal rule – that debt must always be forecast to fall as a percentage of GDP in five years time. To do this, Labour’s current plans imply cutting public investment from 2.4% of GDP to 1.8% by the end of the Parliament. But this will harm their ability to grow the economy and service debt in the long run. 

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How did we get here? Many economists feel that OBR’s current mandate makes it an actively unhelpful force in our fiscal policy debate by forcing it to scrutinise the short-term impact of decisions but ignore their longer-term impact. For example, the OBR itself accepts that raising or cutting public investment affects growth hugely over the long term. But this does not show up within the five-year time horizon over which it assesses government policy decisions. (We have previously covered the OBR’s role in our fiscal framework, locking us in a cycle of underinvestment and economic stagnation).

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How the OBR calculates the effects of public investment. Labour have argued that the OBR should take a longer-term view of public investment decisions, and as it happens the OBR recently released a paper doing just that. It outlines how they model the impact of raising public investment by 1% of GDP. The authors find that the impact of public investment on the supply side of the economy increases over time. After five years they think such an uplift in public investment increases GDP by 0.5%, but over 50 years that rises to 2.5%. This is really useful information from the OBR, but the reality is that our short-termist fiscal rules simply don’t take this impact into account. In fact the benefits of public investment on GDP are at their lowest point after five years, meaning the OBR’s approach likely artificially suppresses public investment. 

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Political implications for our fiscal rules. The OBR paper also considers the return on investment from public investment. It finds that on average a 1% increase in public investment has a 1.7% return for the government and a 8.7% return for the wider economy over 10 years. Crucially, this is higher than the government’s borrowing costs – so borrowing to invest is worth it on average. Yet once again, despite this evidence that public investment is good value for money for the government, our fiscal rules are still set up to ignore everything after the next five years . This means most of the economic benefits of public investment are artificially excluded. By ignoring the positive impacts of public investment, these rules encourage governments to cut it, and this damages long term growth and traps us in what many have termed the fiscal ‘doom loop’.

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Longer term fiscal risks and debt sustainability 

It turns out big OBR reports are like London buses, because no sooner had that first report been digested than a second even longer one appeared. This was the latest of its regular 'fiscal risks' reports, which examine longer-term sources of danger for the public finances, such as climate change, declining health, and demographic shifts. (These reports get much less attention than the OBR’s Budget assessments and are not used to assess government fiscal policy choices.) Their 2021 Fiscal Risks report found that long-term debt:GDP ratios could rise to 289% by the end of the century without action to stop climate change. A slower transition to net zero would cost the government and the economy more than acting quickly, through economic disruption, loss of export potential and more need to import new low-carbon technologies from abroad. IPPR’s Carsten Jung highlighted that the latest fiscal risks report, released last week, shows that “fixing these societal problems can hugely boost fiscal sustainability”. 

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We can reduce tomorrow's fiscal pressures with more targeted spending today. In the OBR’s words: “limiting the rise in global temperatures to… 2°C rather than 3°C could alleviate around 10 percentage points of upward pressure on the debt-to-GDP ratio” and “improving the health of the population could reduce the rise in debt by a further 40 per cent of GDP”. Perhaps most significantly: “boosting the productive capacity of the economy…could make the biggest difference of all, with every 0.1 per cent increase in productivity growth reducing the rise in the debt-to-GDP ratio by 25 percentage points.” They note that returning to pre-financial crisis rates of productivity growth could keep debt below 100% of GDP for the next 50 years. Taken together, the OBR’s two latest reports show that failing to tackle these fiscal risks, for example by investing in decarbonisation or improving the health and productivity of the workforce, is grossly fiscally irresponsible. 

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Reform the rules and Invest in Britain

Following hot on the heels of these reports, a new campaign has launched aiming to give the government an escape route from the fiscal doom-loop. Invest in Britain coordinated a joint statement from eight of the country's most senior economists – including Lord Jim O’Neill, Lord Gus O’Donnell, Mariana Mazzucato, Mohamed El-Erian and others – urging the government to change its approach. Commenting on the public investment cuts inherited from the last government, they warned that “To follow through on these plans would be to repeat the mistakes of the past, where investment cuts made in the name of fiscal prudence have damaged the foundations of the economy and undermined the UK’s long-term fiscal sustainability”. Former Bank of England Chief Economist Andy Haldane made similar arguments over the weekend.

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Escape the doom-loop. The campaign has provided a briefing collating resources and key stats and showing broad public and establishment support around the new economic consensus for raising public investment and reforming fiscal rules. The briefing concludes: “Given the circumstances they have inherited, a fiscally responsible approach for the new government which focused on the long-term health of the economy would involve: 

1. Cancelling the planned public investment cuts and setting out a strategy for significantly raising public investment as a percentage of GDP across the parliament. 

2. Implementing a pro-investment fiscal framework, which recognises the vital role of public investment in long-term debt sustainability.” 

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Political space? Taken together, the reports from the OBR and the interventions from a range of economists appear to have given the government a little political room to move away from the restrictions of the debt rule, while still being able to argue that their approach is fiscally responsible and in line with mainstream economic thought. There have already been hints that the government might look at the definition of debt in the fiscal rules, but could something more substantial be on the cards? All eyes will turn to the Chancellor’s conference speech on Monday to see if there are any clues.

Good morning from New Economy Brief.

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Wealth inequality is growing, and experts increasingly point to higher taxes on wealth as a way to rebalance our economy. Just last month, we covered a proposal for a global wealth tax. But at a more local level, wealth inequality’s role in perpetuating regional economic imbalances is often overlooked.

The Institute for Public Policy Research (IPPR) recently published new research which finds that the current tax system is actively constraining ambitions to regionally rebalance the UK. This week, we take a deep dive into this research and into proposals for a fairer tax system that could be the key to unlocking the economic potential of all areas of the UK.

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The extent of inequality

Wealth is spread very unequally across the UK and is generally concentrated in the south of England. Wealth per person in the South East is £415,200, around £195,400 higher than the North’s £219,750. This gap is growing rapidly. In 2010, the difference between wealth per person in the South East and in the North was £105,000. Based on current trajectories, it could reach £228,800 by the end of the decade. What’s more, the current gap of £195,400 could still be an underestimate, given that the super wealthy, who are more likely to avoid appearing in survey data, are generally concentrated in London and the South East. It’s also worth noting that there is substantial inequality within regions too. Median wealth per head in Surrey, East and West Sussex, for example, is over ten times higher than in Inner East London.

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Why does regional wealth inequality matter? Political agendas such as ‘levelling up’ show that there is widespread acknowledgement of the harm done by regional inequality. The IPPR paper finds that wealth inequality has a negative impact on living standards, financial security, health, housing and political power. Relevantly to the government’s growth mission, the IPPR also argues that regional wealth inequality harms prosperity. Alongside an unfair tax system, it not only locks communities out of entrepreneurship, but also encourages financialisation and rentierism rather than productive investment in local economies.

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‍Overlooked inequalities. The BBC’s impartiality review into its coverage of taxation, public spending, government borrowing and debt found that the media can often overlook how taxation affects different regions of the UK. In both the North East of England and in Wales, more VAT is paid than income tax. However, the review found that while VAT is the biggest tax for “a large proportion of the UK”, it receives far less coverage than income tax.

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A fairer tax system

‍Income from work is taxed much more heavily than income from wealth in the UK. This means the current tax system disproportionately benefits certain regions and entrenches inequality. Below, we explore how different taxes exacerbate regional inequalities:

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‍Capital gains tax. At the basic rate, non-residential capital gains are taxed at only 10% compared to income from work which is taxed at 28% if national insurance is included, meaning that the rate of “under-taxation” is 18%. This rises to 22% for higher rate taxpayers, and to 27% for additional rate taxpayers. Someone earning £50,000 purely from capital gains would therefore be taxed £6,000 less than someone earning £50,000 from work alone. Given that capital gains vary dramatically between regions (gains per head are five times higher in London than in Wales), some parts of the country disproportionately benefit from capital gains’ favourable tax treatment over earnings from work. The IPPR estimates that taxing capital gains at the same rate as income would raise £68 billion by 2029/30. ‍

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‍Council tax. Campaigners like Fairer Share say that council tax is “poorly designed, out of date, unpopular and unfair” and places “the heaviest burden on the young, low-earners and those living in less prosperous parts of the country”. Council tax bands are calculated based on property valuations from almost 34 years ago, which is problematic given the fact that property values have not changed equally across the country. According to the IPPR, owner-occupiers in the North East can expect to pay 0.1% of their property value in council tax annually, compared to less than 0.04% in London.

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‍Inheritance tax. The IPPR estimates that by increasing Inheritance Tax (IHT) from 40% to 50%, 61% of the additional revenue would come from the South of England compared to just 11% from the North of England. On the other hand it finds that abolishing IHT (without a replacement) would represent a significant redistribution of wealth to London and the South East and away from to the rest of the country'.

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Dividend income tax. The difference between tax on income from dividends and from work is 19.25% at the basic rate. At the higher rate it is 8.25%, and 7.65% at the additional rate. According to the ONS, the South East has the highest levels of share ownership (16%), twice as much as in the North East (8%).

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What action can be taken?

As these examples show, our current tax system is accelerating regional inequalities. The IPPR proposes a number of measures that could help “take our foot off the accelerator, or even try the brakes”. They include combining all forms of income into a single tax schedule. As a first step, this could look like equalising the tax rates for capital gains, dividends and savings incomes with those on earnings from work. In the longer term it could also involve replacing council tax with a proportional property tax, perhaps after more immediate reforms such as increasing council tax premiums on empty and second homes and reforming council tax bands. The IPPR also suggests that replacing IHT with a capital acquisitions tax levied on those receiving transfers above a lifetime threshold, in line with the broader income schedule, would help reduce wealth inequality. 

Using revenues raised. The money raised through fairer taxation could be used for targeted regional investment. For example, the IPPR suggests that additional money could be used to build up a citizens’ wealth fund and to offer a universal inheritance that would share the gains of investment more equitably. As the IPPR has shown, the tax system itself can be a source of inequality. However, missed revenue from under-taxation of wealth also makes it harder for the government to proactively tackle regional inequalities. The new government says it wants to see growth in every part of the UK – perhaps fairer taxation of income from wealth would be a helpful first step.

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Good morning from New Economy Brief.

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Most economists understand that climate change is going to reduce incomes, destabilise financial systems and damage economic growth rates across the world by destroying productive capacity (capital, real estate, investor confidence), displacing workers and pushing up prices of food and other essentials. 

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Forward-thinking central banks are grappling with this idea, but how can monetary policymakers ensure that their own actions to change interest rates don’t make it harder to mitigate and adapt to climate change? 

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This week’s New Economy Brief explores a recent paper from the Network for Greening the Financial System (NGFS) on how monetary policymakers should respond to ‘climateflation’.

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How will extreme weather affect the economy?

The paper is from the NGFS monetary policy workstream, chaired by the Bank of England’s James Talbot. It surveys the evidence on how “severe weather shocks” affect growth and inflation. The global cost of damage from events like droughts, floods and storms has more than doubled since the early 2000s, reaching $275 billion in 2022, and the paper warns that this is likely to get much worse as we approach 1.5°C of warming.

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Impacts on growth. These events don’t just destroy infrastructure and disrupt supply chains; they also cause indirect economic losses, such as reduced investment, lower consumption, and disrupted trade. This can have a significant impact on GDP growth rates, although the authors say it's unclear whether this is transitory or persistent – a one-off cost or a long-term drag on the economy. Severe weather events have huge effects on global commodity prices, especially in agriculture and energy where production is concentrated in vulnerable regions. For instance, the paper’s authors found that a 10% increase in global food prices due to bad weather will lower the average country’s GDP by 0.5% after a year and a half. And 10% is a relatively modest increase by recent standards, so there’s the potential for much more painful economic effects. Advanced economies are particularly vulnerable because they often produce little of their own food and rely on imports.

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Supply and demand impacts on inflation. The destruction of productive capacity leads to supply-side inflationary shocks, which can prompt monetary policymakers to increase interest rates. However, severe weather can also reduce demand in the affected economy. This is due to economic losses from unusable infrastructure, less spending due to declines in wealth (e.g. house prices on flood plains) and incomes, disrupted trade flows, investor uncertainty about future climate events, and more. The authors note that “when insurance mechanisms fail to carry a significant share of the costs, the burden placed on government finances limits the space for other productivity-enhancing public investments.“ They suggest that before changing interest rates, monetary policymakers need to clearly identify the supply and demand components that are pushing inflation in opposite directions.

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Investment in adaptation is key.  

The NGFS authors explain that how much economic damage a disaster inflicts depends on the vulnerability of the affected area, which in turn rests on “factors like construction quality, building codes, and disaster preparedness”, pointing out that these are often tied to a country's wealth and development. They note that investing in climate adaptation and resilience can reduce the economic damage from increasingly severe weather events, but warn that current spending “focuses more on disaster recovery than on risk reduction, with new risks emerging from development in high-risk areas. Adaptation measures can lower potential damages, reducing the burden on insurance markets and improving risk protection.”

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The UK’s poor progress in adapting to climate risks. The Environment Agency warned the previous government to “Adapt or Die” , pointing to the impacts of increased rainfall and flooding in the UK under a 2°C warming scenario. The report details sea level rises, changes to winter and summer rainfall and peak river flows, and the need for extra public water supplies. The Climate Change Committee’s Third Independent Assessment of UK Climate Risk argued that “Adaptation action has failed to keep pace with the worsening reality of climate risk. The UK has the capacity and the resources to respond effectively to these risks, but it has not yet done so. Acting now will be cheaper than waiting to deal with the consequences.”

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How could monetary policymakers respond?

The NGFS paper emphasises that grappling with persistent inflationary pressures from extreme weather poses a challenge for central banks, which “have to wrestle with the question of long-term implications of physical hazards for potential and output and growth and the appropriate longer-run stance of monetary policy”. This is part of a much bigger debate on how monetary policy should adapt to a new environment of accelerating climate shocks and permanent instability. There is a particularly clear need to make sure central banks’ actions don’t actively impede efforts to mitigate and adapt to climate change. (Read our previous New Economy Brief on inflation and instability for more on this.)

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Central banks shouldn’t impede investment in decarbonisation and adaptation. Preventing the worst economic damage from extreme weather requires investment (both public and private) to decarbonise quickly and build resilient infrastructure, supply chains and more. If monetary policymakers across the world respond to accelerating severe weather shocks by raising interest rates, they will slow down investment by increasing borrowing costs. Green projects are particularly vulnerable to higher interest rates because they need so much upfront capital investment. Higher interest rates in the developed world have also deepened the sovereign debt crisis in the developing world, as borrowing costs for governments in lower-income countries have soared. This has reduced their ability to invest in adaptation, which will come back to hurt advanced economies as extreme weather shocks push commodity prices up and lead to imported inflation.

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Shield green investment from interest rate hikes. One solution to this is for central banks to let low-carbon projects borrow more cheaply. Since 2022 the Bank of Japan has been providing zero-interest financing to banks that in turn lend to projects that address climate change, arguing this falls within its price and financial stability mandates. The New Economics Foundation proposed that the UK could do this by repurposing the BoE’s Term Funding Scheme – which currently reduces borrowing costs for businesses and households – to instead encourage banks to provide cheap funding for sustainable projects. (Read our previous New Economy Brief for more on Green Credit Guidance)

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Moving beyond 2% inflation targets. Olivier Blanchard, former chief economist at the IMF, thinks it is time to revisit the 2% inflation target, arguing that ”the right target for advanced economies…might be closer to 3 per cent”. Raising the target would reduce the pressure on monetary policymakers to put the brakes on investment whenever inevitable climate-induced supply shocks hit. It could reduce borrowing costs and encourage investment in making economies more resilient. Some economists have suggested enhancing the Bank of England’s financial stability mandate to make it coordinate more explicitly with the Treasury. They argue that it shouldn’t be targeting inflation at all, but growth, concluding that “the proper regulation of employment and investment in the economy is a matter of policy for Government, not the central bank.” (Read our previous New Economy Brief for more on the case for monetary and fiscal coordination).

Good morning from New Economy Brief.

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Joe Biden led US economic policy through a paradigm shift away from the neoliberal norms of the past few decades, pioneering green industrial strategy and new competition policy while taxing the rich and supporting trade unions. But now that he has stood down, with VP Kamala Harris now the official Democratic candidate for President, how much of Bidenomics will outlast its creator? 

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This week's New Economy Brief examines the economic policy proposals that emerged from last week's Democratic National Convention and maps out how a Harris victory in November could continue the turn away from neoliberalism.

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Bidenomics and the turn away from neoliberalism.

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US economic policy under Joe Biden broke with previous administrations through its focus on what economist Dani Rodrik termed ‘productivism’, and US Treasury Secretary Janet Yellen called ‘modern supply-side economics’. We have covered elements of this extensively in our previous briefings, but in short: The Inflation Reduction Act (IRA), CHIPS and Science Act and other massive US investments in green industrial strategy catalysed a ‘green arms race’ across the Western world. Many governments are moving away from ‘Washington Consensus’ of free trade in favour of state-directed reindustrialisation. They have pledged billions in public investment to compete for private capital and grow their domestic low-carbon economies. The Biden administration also upended four decades of ‘hands off’ competition policy, setting out to curb monopoly power through stronger antitrust law. Biden’s final budget put ‘greedflation’ at the heart of his re-election campaign, outlining plans to tackle corporate price gouging. He also sought to unite climate activists and trade unionists through a new green jobs agenda, making state support for companies investing in sustainability carry obligations to recognise unions and uphold certain workplace standards, e.g. ending share buybacks and providing employees with affordable childcare.

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What is Kamala Harris planning to do if she wins? Various communications from the Democrats in recent weeks suggest that Kamala Harris is planning to double down on the progressive aspects of Biden's economic platform. Perhaps this isn’t a surprise given the continuity of economic advisers between the two teams. (Blogger Noah Smith credits the Roosevelt Institute, Hewlett Foundation, Employ America and the Washington Center for Equitable Growth as some “principal protagonists” and thought-leaders in the US post-neoliberal era.) 

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Principles of Kamalanomics: full employment and non-exploitative markets. 

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The Harris campaign’s agenda, released last week, shows they plan to use the power of the state to lower the cost of living for families through antitrust law and the prevention of corporate price gouging. The political case for prioritising this agenda is clear. The FT’s Martin Sandbu explains the cost of living is by far the most important factor for US voters. A huge majority say food prices have the biggest impact on their finances, and most blame large corporations for price increases. The Roosevelt Institute’s Felicia Wong argues that the Democrats’ political coalition is held together by an economic vision of building the middle class. This rests on two principles: providing full employment with strong union recognition and bargaining power; and healthy competitive markets where “corporations cannot hold and wield excessive power to suppress competition and set unfair prices and wages.” 

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Supporting the care economy. Though Biden chalked up political wins on green industrial strategy, his proposals to build the care economy were stripped from the IRA and Build Back Better plan during the filibuster-prone negotiation process. Wong says that Harris aims to revisit this agenda and sharpen the focus on the care economy, for instance by reducing medical debt as well as student debt, by making housing and childcare cheaper, and by providing as much support to teachers and carers and as construction workers. She is proposing families a $6,000 tax credit for children in the first year of their lives, and plans to permanently restore the $3,600 tax credit for children that was passed during the pandemic. She also wants to cap the price of insulin, reduce prescription costs, increase competition in the healthcare industry and cancel medical debt. 

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“Building the American dream” by lowering the cost of housing. In common with many governments around the world, house-building is high on Harris’ list of priorities. To make housing cheaper, she wants to build 3m new housing units by ‘partnering with industry’, offering tax breaks for builders that create homes for first-time buyers while giving those buyers up to $25,000 in grants towards their deposit. For renters, she wants to pass a Stop Predatory Investing Act to stop  financial investors buying up homes and shut down rent-fixing websites that help corporate landlords drive up rent. 

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Preventing profiteering and price gouging in the food industry. Harris’ most eye-catching economic policy proposal by far is her plan to prevent ‘price gouging’ by food companies. The US food industry has become increasingly concentrated, with many CEOs publicly bragging about exploiting their market power to restrain production and drive up profits. Harris’s plan acknowledges this “extreme consolidation” and pledges to block “unfair mergers and acquisitions” among big food corporations, and to “support smaller businesses, like grocery stores, meat processors, farmers, and ranchers, so those industries can become more competitive.” Harris has promised a plan in the first 100 days to prevent food industry profiteering through a federal ban on price gouging on food and groceries, with stronger regulation to stop corporations “unfairly exploit[ing] consumers to run up excessive profits on food and groceries”. Businesses that break the rules would face stricter penalties from the Federal Trade Commission. The details of how this would work are still unclear, but it is a step towards the idea of price caps.

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Funded through higher taxes on business and the rich. The Committee for a Responsible Federal Budget estimated that the measures unveiled last week would increase the budget deficit by $1.7tn over 10 years (largely to pay for the increased tax credits for children). The Harris campaign aims to fund this through higher taxes on businesses and wealthy Americans, while giving tax relief to the working and middle classes. She plans to raise corporation tax to 28% (from 21%), increase the top rate of tax on capital gains and dividends to 44.6%, and introduce a levy on 'unrealised gains' for those with over $100 million in assets.

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The new centre-left populism?

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Whoever wins the US election, the direction will continue to be away from the declining neoliberal consensus. In contrast to the right-wing populism offered by Trump and advocates of the Project 2025 agenda, Harris’ Democrats are pursuing an electoral strategy that blames big business for creating a ‘rigged economy’ that makes the ‘American dream’ unaffordable, and want to position strong government as defending the middle class from corporate power. They enter this election cycle as one of the first major left-of-centre parties seeking reelection after being in power during the recent inflation crisis, which explains a great deal of the campaign’s policy platform and rhetoric. 

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Similarities with UK Labour. US politics is not UK politics, and the US economy isn’t the UK economy. Nevertheless it is interesting to compare the Democrat and Labour policy platforms, especially given that Chancellor Rachel Reeves has talked about being inspired by the modern supply-side economics agenda before. There are clear similarities in areas like green industrial strategy, planning reform, housebuilding and workers’ rights. There is also a consensus on tax in that both parties reject asking those in the middle and at the bottom to pay more. 

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Differences with UK Labour. But there are also important linguistic and policy differences, Some of these stem from one party having held power for four years and the other for barely four weeks. Rhetorically, as Round our Way’s Sofie Jenkinson notes, Harris’s Democrats are far more willing to identify ‘baddies’ whether they are businesses keeping prices artificially high or the rich who ‘aren’t paying their fair share’. And in policy terms the Democratic offer has an urgency and sense of retail politics that was largely absent from Labour’s manifesto, especially on the cost of living with its talk of cheaper groceries and cut price medicine. It is also notable how confidently the Harris campaign justifies borrowing for their policies due to the returns on investment for the taxpayer, both through boosting economic growth and broadening the tax base, especially compared to Labour’s mantra “if we can’t afford it, we won’t do it”.

Good morning from New Economy Brief.

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Although they might not sound exciting, pensions are at the heart of some of the most pressing issues we face today. The Finance Innovation Lab has called the pensions system “a perfect storm of social, economic and environmental challenges, with big risks for people, prosperity and the planet”. Pensions should be a source of economic security, both for the people paying into them and the wider economy. But in reality, pensioners are often left without adequate income while pension funds invest in harmful practices like deforestation and fossil fuel production. 

Last month, the new Chancellor launched a “landmark” two-part Pensions Review. The first phase will focus on how pensions are invested while the second phase, due to start later this year, will focus on “retirement adequacy”. In this edition of New Economy Brief, we’ll be focusing on the latter. How pension funds are invested is an incredibly important issue, with significant repercussions for the climate crisis and global inequality - we’ve touched on this before and will give it the space it deserves in the future. But for now, we will focus on the adequacy of pensions and what can be done to boost retirement incomes.

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The scale of the problem 

The current pension system means that most people are saving far too little to expect adequate income in retirement. The UK state pension falls well below the OECD average and 80 per cent of those that are saving into defined contribution (DC) pensions (over two-thirds of the population) are not saving enough to expect a minimum income in retirement. Women are at particular risk for pension inadequacy, with the gender pensions gap well-documented. This is because the full state pension is linked to National Insurance Contributions (NICs) meaning that those with employment gaps due to caring responsibilities (often women) aren’t entitled to adequate pensions. The occupational pension system also reinforces labour market inequalities because contributions are linked to salaries, meaning that women, people of colour, disabled people and other groups will fare worst in retirement.

‍Adequate Pensions for All. So what can be done to ensure that everyone has access to an adequate pension? A group of trade unions and civil society organisations, led by the Finance Innovation Lab, have recently called for a number of measures to boost savings:

‍Increasing contributions. The group suggests that as well as retaining the “triple lock”, the state pension scheme could be reformed so that fewer years’ of National Insurance Contributions (NICs) are required to receive it. For occupational pensions, minimum employer contributions could be increased with support provided for smaller employers. Currently, the total minimum contribution for those auto-enrolled into a pension scheme is 8%, but just 3% of this must come from the employer (the rest from the employee). This is comparatively very low. In Australia, for example, the minimum employer contribution is 11.5%. Auto-enrolment could also be reformed so that people often left behind by the current system such as the self-employed and those with time out of the labour force can be included. For those on the lowest incomes, minimum absolute levels of employer contributions could be mandated so that, for example, those on the Living Wage or less could receive adequate employer contributions without having to pay large employee contributions.

‍Defined contribution vs. defined benefit. As we have already mentioned, the vast majority of workers pay into a defined contribution (DC) pension. This is the default model, in which the employee and employer pay into a pot which the retired person must then survive on until they die. There are of course two types of risks associated with this: an investment risk (the value of their savings at the point of retirement) and a longevity risk (how long the person will live in retirement and therefore how long the money will need to last). On the other hand, defined benefit (DB) schemes guarantee a set income for life. They depend on things like how long you worked for the employer and what your salary was, rather than how much you paid in or the investments made. The pension is paid each year for the rest of the retired person’s life, meaning that there is no risk of running out of money. The DB model, however, has been in decline for a number of years. The number of private sector employees still accruing new DB benefits reduced from 3.5 million in 2006 to just under 0.9 million in 2022.

‍Collective defined contributions. Another way that the risks associated with DC schemes can be reduced is via collective defined contribution schemes or CDCs. CDCs are very new in the UK, and were introduced via the Pensions Scheme Act 2021. Like traditional DC schemes, the value of pensions is subject to the success of investments. However the longevity risk of DCs are reduced by paying pensions based on average life expectancy across the scheme’s members. Some also argue that because investments are pooled between members, CDC schemes can take a longer-term investment strategy because they will contain a mix of members who are contributing to the scheme and receiving income from the scheme. The Royal Mail’s pension plan is due to be the first CDC scheme to go live in October.

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‍A wider context

‍Having said we wouldn’t get into the investment side of pensions, it is worth mentioning that how pensions are invested will affect the quality of life of future generations in retirement. Currently, many pension funds invest heavily in climate and nature destroying practices. It is estimated that for every £10 in the average pension pot, £2 is linked to deforestation. The more optimistic flipside to that is that as huge investors, pension funds could be key to providing the much-needed investment in a green transition. As is well-documented, the climate crisis brings with it economic insecurity and financial risks. What pensions invest in, therefore, has direct implications for living standards later on. Let’s hope that the two-part Pensions Review takes this wider context into account.

Good morning from New Economy Brief.

The New Popular Front was the surprise winner of the recent French elections, beating Marine Le Pen’s far right National Rally, but what does the alliance want? The UK media is well-versed in the economic ideas of centre-left parties in the UK and US, but less so across the Channel in France. 

This week’s New Economy Brief looks at the new economic ideas of the largest bloc in the French parliament, and explores what its strategy and platform shares with the victorious UK Labour Party and the Democrats in America. 

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What is the New Popular Front?

The recent French elections led to the victory of a new alliance of four left and green parties, the New Popular Front (NPF). Consisting of France Unbowed, Socialist Party, French Green Party and French Communist Party, the NPF is now the largest bloc in the French parliament, though still short of an overall majority. The NPF’s ‘shock win’ was due to a tactical alliance to keep Le Pen from power, following the heavy defeat suffered by President Macron's party in the earlier European elections.

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What does it want to do?

The NPF’s manifesto is full of new economic ideas. Essentially, the coalition wants to reverse the residual ‘trickle down’ economics of the past, strengthen climate action and protect living standards from being eroded. This will all be funded through higher taxes on the rich and businesses. We summarise and analyse some of the NPF’s more interesting policies below:

‍Climate change and environment. The NPF proposes to establish “an energy climate law that will lay the foundations for ecological planning”, recognise the crime of ‘ecocide’ and create an international climate tribunal. On energy, it wants to “make France the European leader in marine energy with offshore wind power and the development of hydroelectric energy” and block the privatisation of hydroelectric dams. It also wants to create a compensation and protection fund against pollution, and establish a “remunerative” floor price for farmers, with a tax on the super profits of agro-industrialists.

‍Green public and private finance. It also plans to create a “public banking centre” by strengthening the capacity of the French government’s public finance institutions to take stakes in strategic companies that are in difficulty or looking for shareholders. This will also finance green projects and activities which private investment has underfunded. The NPF also wants to stop banks investing in fossil fuels by forcing them to redirect reserves towards mitigating climate risks like floods, drought etc. The new institution would be funded by a “popular savings account or the sustainable development account”, whose interest rate the State would set.

‍Restoring purchasing power. The NPF proposes increasing the monthly minimum wage by 14% (€200) to bring it to €1,600 a month and index all salaries to the rate of inflation (Read our previous New Economy Brief on how wage indexation works in Belgium). It also wants better pay for interns, apprentices and students. It plans to improve working conditions for all by including burnout in “occupational diseases”, and to reduce some workers’ hours to a 32-hour week, as well as reversing recent retirement age reforms by changing the pension age back to 62 from 64, creating menstrual leave in both public and private sectors, and numerous other things. It also aims to boost social security by establishing an ‘autonomy guarantee’ to supplement the income of households below the poverty line. 

Price controls on essentials. The NPF wants to freeze the price of basic necessities like food, energy and fuel by decree (although price falls would be allowed). It argues that this kind of temporary price control to absorb supply-side shocks can stop inflation snowballing into the rest of the economy. Along with the indexation of wages and a higher minimum wage, this should protect living standards from future inflation. Meanwhile to help with housing costs the NPF proposes to build 200,000 social housing units per year.

Tax justice is a priority. Macron’s government cut taxes for the wealthiest and introduced a flat tax for holders of capital income, as well as various unconditional schemes to support businesses which have all been expensive for the taxpayer but failed to stimulate the economy. The NPF intends to reverse this, with businesses and the richest individuals shouldering more of the burden, as part of a plan to raise an additional €30bn to fund their promises. It wants to end the flat tax on capital income and to re-establish a solidarity tax on wealth “reinforced with a climate component”. It is also planning to re-establish an ‘exit tax’ on the latent capital gains of business leaders who decide to move their tax domicile abroad. The alliance to increase the number of income tax brackets from 5 to 14, and to increase rates for the highest incomes while making sure that those earning less than €4,000 per month don't pay any more. “Ineffective, unfair and polluting” tax loopholes are in the firing line.

Forecast impacts on the economy. Economists from the Institut Rousseau, a French think tank, analysed this policy programme in a macroeconomic simulation and concluded that it “will not cause an explosion of the public deficit, a recession, or an inflationary fever. On the contrary, apart from the trade balance…, all the variables of the French economy (GDP, debt, etc.) will be improved by the NPF measures.” They also found that implementing the programme will reduce inequality and unemployment, increasing citizens' purchasing power while keeping inflation around the 2% target. Not only is decarbonisation an opportunity for the French economy, but taken together the NPF's plans could create at least 495,000 new jobs over the next five years.

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What can other governments learn?

Many Western centre-left parties are competing with an insurgent populist far right. Biden’s Democrats pioneered a new green industrial strategy, but incumbency during the cost of living crisis means Kamala Harris will have a harder time beating a resurgent Trumpism. In France, Macron’s failure to stop living standards being eroded from inflation has fueled both the left and the far right, but the NPF has shown that a policy platform aimed at improving living standards for most of the population, funded through higher taxes on the rich, can blunt the electoral momentum of the right.

‍Labour parallels. While the politics of the two countries clearly differs in many ways, there are many parallels to be drawn between the NPF manifesto and the recent victorious Labour platform. An emphasis on green industrial strategy with climate change presented as an economic opportunity; workers’ rights given significant prominence alongside housing; taxes on big polluters. But the NPF embraces ideas that Labour shied away from – most obviously on taxation of wealth, but also on areas such as the 32-hour week and (very significantly) on price controls. The political situation in France, with Macron still President, means the NPF’s platform is unlikely to be fully implemented. But the coming years in France will be an interesting test of whether this bolder policy thinking can prove electorally durable in the face of far right populism.

Good morning from New Economy Brief.

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Wealth inequality is surging. Over the past decade, while living standards stagnated or even fell across much of the globe, the collective wealth of the world’s 2,781 billionaires rose by 120%. At the same time, governments are struggling to fund public services and measures to reduce the cost of living. One possible solution to these twin issues is gaining global popularity: wealth taxes. 

Last month, G20 finance ministers explored a proposal for a “coordinated minimum effective taxation standard” on the ultra-rich. This would no doubt be welcomed by the public, with a recent Ipsos poll conducted in G20 countries showing that 70% support the principle that wealthy people should pay higher income tax rates. But would such a standard change anything? This week, we look at the issue of taxing global wealth and what might happen next.
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Why a global agreement?

Opponents of wealth taxes often object that the wealthy will simply leave the country if you tax them more. While there is evidence that wealth taxation does not cause large-scale ‘capital flight’, some suggest that international coordination will overcome any risk of race-to-the-bottom taxation policy and the use of tax havens. However, domestic fiscal policy cannot be determined by an international body, so the proposal being discussed is simply a common standard requiring only domestic legislation, rather than a multilateral treaty. This idea has been championed by Brazil, who have used their presidency of the G20 to push forward proposals on global wealth taxation and force the issue onto the table.

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‍‍When is a wealth tax not a wealth tax? Wealth taxes can take many forms, such as an annual levy on net assets. But French economist Gabriel Zucman, the author of the G20 proposal, has suggested that a global standard should stay within “the realm of income taxation”. Zucman says that the reason the mega-rich usually pay such low effective tax rates is because they pay relatively little income tax. He argues this is because they minimise taxable income from investment dividends, avoid realising capital gains and also use holding companies and also use holding companies and similar structures to avoid tax. Zucman’s proposal aims to tackle this phenomenon by applying a top-up tax to the ultra wealthy should their income tax contribution be under a certain threshold. Wealthy people who already paid enough income tax would be unaffected. ‍

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‍Domestic implementation. Zucman suggests that the common standard could allow for flexible domestic implementation. As long as the minimum standard is met (for example, individuals pay taxes worth at least 2% of their wealth), individual countries could arrange things as they choose. At present, Zucman’s proposal doesn’t stipulate whether the money should be spent domestically or pooled to tackle things like inequality and climate change. What we do know is that US treasury secretary Janet Yellen has unequivocally said that she does not support these taxes being used to redistribute across borders. So for now, the focus is very much on domestic application.

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‍What has the G20 agreed?

‍The G20 finance ministers have not announced any concrete measures. After the meeting, they all signed a document reaffirming the G20’s commitment to reducing inequalities and promoting fairer taxation. The document applauds recent tax reforms in several G20 countries and encourages higher wealth taxes “with full respect to tax sovereignty”.

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Where do the different countries stand?

A few countries such as France, South Africa and Spain have shown some degree of public support for the proposal. In others, like the UK, wealth taxes might be gaining public popularity but less so among the political elite. But with an election looming in November, all eyes are on the US. The G20 proposal is compatible with Biden’s plan to tax the super-wealthy (at least 25% of annual income for billionaires), but this plan is of course at risk of being overturned by Donald Trump if he is elected later this year. However, as Zucman points out, we do not need all countries to adopt the 2% tax - simply a “critical mass” in order to “avoid a scenario where the ultra-rich flee to fiscal havens”.         

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So what's next?

The good news for those who want to see fairer tax systems is that the G20 seems to have reached agreement on the diagnosis of the problem. The fact that the output of last month’s meeting focused so much on the role of progressive taxation in tackling inequalities and strengthening “fiscal sustainability” shows that fairer taxation is a priority for G20 countries. There is also a precedent for international tax cooperation with the recent move on minimum corporation tax levels. The bad news? There is very little in the way of a plan for next steps. A global tax agreement could be a key step towards reducing tax avoidance and making the murky finances of the mega-rich more transparent. But the likelihood of that happening any time soon hinges on what happens domestically in G20 countries in the near future – particularly in the US.

Good morning from New Economy Brief.

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In early 2023, Keir Starmer promised a mission-driven Labour government. He committed Labour to five missions: get the UK’s economic growth to the highest sustained level in the G7 by the end of Labour’s first term; make Britain a “clean energy superpower” by 2030; improve the NHS by reforming health and care service and reducing health inequality; create safer streets with 13,000 more neighbourhood police and police community support officers; and finally, create more opportunities for all citizens by improving childcare, schools, further education and lifelong learning.

But what does ‘mission-driven’ mean? This week, we explore whether the government has actually grasped the concept of missions, and what this can tell us about what to expect from Starmer’s government.

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What are missions?

‘Mission-driven’ might sound like classic political spin. But in fact, the idea has been percolating (at least in the wonk world) for a number of years. The academic behind the concept is Mariana Mazzucato, an economics professor and Founding Director of University College London’s Institute for Innovation and Public Purpose (IIPP). For Mazzucato, missions are a new way of governing in which everything is geared towards achieving an ambitious goal. She likens them to the ‘moonshot’ programmes of the twentieth century: large-scale efforts to solve problems so big they require the innovation and boldness of both the public and private sectors.

Old wine, new bottles? In a new report, the IIPP warns that mission-driven government could become a case of “old wine in new bottles” if not properly executed, with Mazzucato arguing that improving the NHS and achieving more economic growth should not in themselves be missions. Instead, individual strands or sectors of public policy should be seen as contributors to bigger missions such as tackling the climate crisis. As the report explains, “missions replace sectors as the vertical aspect of industrial strategy.”

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How do Labour’s plans hold up?

Some of Labour’s missions clearly don’t fit the IIPP’s definition, either because they concentrate on one particular sector or because they are, as with the growth, focused on the result rather than the mission itself. But another issue with Labour’s approach is how it plans to work with the private sector. Labour, like the IIPP, sees missions as a partnership between government and the rest of society, including the private sector. But the two approaches differ on how to do this.

Don’t de-risk, share risks. Labour’s flagship National Wealth Fund aims to boost investment (and therefore growth) by ‘crowding-in’ private investment. It seeks to do this by ‘de-risking’ investments (see more about this in our recent New Economy Brief on the subject). Instead, the IIPP argues that missions are inherently risky, because they are ambitious, and that the public and private sectors should share the risks (and rewards) associated with them. What’s more, government should partner with business only on the condition that it works in alignment with its missions. The IIPP offers the example of the CHIPS and Science Act in the US, which puts conditions on access to CHIPS funding, including limiting shareholder buybacks, requiring workforce development plans, mandating commitments to sustainability in construction and operations, and sharing profits.

Rewiring the Treasury brain. To be truly mission-driven, with missions rather than sectors the ‘verticals’ of public policy, the government must be structured accordingly. One infamous issue with current policy-making is the ‘Treasury brain’, whereby the Treasury’s influence over all types of spending restricts investment and innovation. The Institute for Public Policy Research (IPPR)’s Harry Quilter-Pinner has argued that public spending should go through a ‘missions test’ where policies must not only be fiscally responsible, but are also relevant to the government’s missions and make sense in the long term. 

Mission boards. One indication that Starmer’s government is taking missions seriously is the commitment to setting up new ‘mission boards’. The IPPR has proposed replacing existing cabinet committee structures with mission councils chaired by the Prime Minister and with senior Treasury attendance.

Putting principles into practice. In a separate report published earlier this year with the Future Governance Forum, Mazzucato set out six principles for making mission-driven government work. Crucially, she argued that making a success of missions was not just about policy design and structure, but also about political will and fostering a sense of togetherness through “strong storytelling”. The words and phrases that pepper the recommendations include “courage”, “tolerance for disagreement” and “bold bets” which hint that, for Mazzucato, missions are as much about an attitude towards decision-making as about the goals themselves. How much the new government has taken this on board remains to be seen.

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What can we expect from mission-driven government?

By nature, missions are ambitious, long-term goals. They are presented as the antithesis to ‘sticking-plaster politics’. Most would agree that this is a good thing, but it also makes quick wins unlikely. Telling voters that things will be better in five or ten years time is a hard sell, and the temptation to return to the sticking plaster will be strong. Furthermore, missions require a different fiscal approach. The IIPP report argues that for missions to work, governments must not “fall into the trap of austerity”, and warns of the temptation to focus “on debt reduction… at the expense of investing in the long-run drivers of investment-led growth”. If done properly, mission-driven government will require a radical shake up of how government operates, how it works with business and how it spends money.

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Good morning from New Economy Brief.

The new government outlined their legislative programme with 40 bills in last week’s King's Speech. Among them is the Budget Responsibility Bill which forbids the government from making any “significant and permanent tax and spending changes without an accompanying independent assessment from the Office for Budgetary Responsibility (OBR)”.

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This week’s New Economy Brief explores the role the OBR plays in our political and economic debate, and asks whether a modest tweak to the ‘fiscal lock’ could ensure proper scrutiny of the government's plans in relation to longer-term risks to the public finances from underinvestment and climate change.

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The political history of the OBR.

This is the first major change of governing party the OBR has experienced. It was created early in the 2010 coalition government to make a point that the previous government had overspent and that an external institution was needed to discipline government borrowing through independent and objective scrutiny of the public finances. It was given a strict mandate to assess the effects of the government's tax and spending decisions on debt and deficit levels over the short to medium term. The Treasury had previously done this in-house, often prompting charges that the government was ‘marking its own homework’.

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Labour’s Budget Responsibility Bill. The new bill is also an attempt to accuse the last government of recklessness with the public finances. It will require independent OBR forecasts whenever a policy implies a 1% change in GDP. The suggestion is that Labour will inspire confidence in financial markets, in contrast with Truss’ 2022 mini-budget and its £45bn of unfunded tax cuts with no assessment of the impact on government debt levels.

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Shaping the political debate on fiscal sustainability. The OBR forecasts how each fiscal event’s new policies will affect the government’s ability to meet their fiscal rules – assessed in the short term on a simple pass/fail basis. These assessments are hugely significant in policy-making. Although the public no longer place as much importance on debt and deficit levels as benchmarks of economic success, commentators and the political class still see meeting fiscal rules as an important signal of fiscal responsibility. 

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OBR methodology locks in a cycle of underinvestment and economic stagnation. 

Ben Clift’s new book explains that these judgements have serious economic and political ramifications, despite being “political constructions founded on contestable normative assumptions”. Many economists have criticised the OBR’s methodology for creating a ‘surplus bias’ which (ironically) sacrifices the public finances’ longer-term sustainability in order to signal short term fiscal sustainability to the media and financial markets. Relying on The OBR’s current ‘pass or fail’ judgements for meeting precise (yet highly uncertain) fiscal targets encourage short-termism and distract from more useful commentary about long-term debt sustainability. 

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Self-defeating fiscal contraction. Many economists have criticised the OBR’s approach. NIESR’s Jagjit Chadha thinks it has institutionalised “a deflationary bias in fiscal policy” by encouraging successive Chancellors to tighten fiscal policy to meet arbitrary targets in order to seem ‘fiscally responsible’. Cutting spending to meet short-term targets can paradoxically increase debt-GDP ratios – the economy doesn’t grow, but failing public services mean more spending is needed on crime, healthcare, social security and housing. This means UK government efforts to cut the deficit over the last 15 years have been self-defeating. (For more evidence on the ‘self-defeating’ effects of fiscal contraction, read this paper from Larry Summers: “Attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their long-term negative impact on output.”)

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Austerity and fiscal multipliers. The OBR persistently underestimates the ability of public investment to create growth. This is partly because its remit focuses on short-term output and debt projections, with a five-year time horizon, and many growth-producing investments (whether in transport infrastructure or education and training) take much longer to pay off. This short-termism goes alongside the low fiscal multiplier the OBR’s models assume, making it underestimate the growth benefits of government spending. Its first assessment in 2010 formed the basis for then-Chancellor George Osborne’s spending cuts, and drew criticism from IMF Chief Economist Olivier Blanchard. The OBR’s low fiscal multiplier had led it to believe that austerity would strengthen the public finances without harming growth much, but Blanchard argued the damage was worse, and fiscal multipliers were usually much larger, than it thought. (We now know that government spending cuts harmed GDP in every advanced economy that tried them.) 

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Modernising the OBR.

The OBR itself is bound by its mandate from the government. It can only assess policy against the government’s own fiscal rules, not offer broader commentary on fiscal sustainability. Economist Nick O’Donovan provides a useful summary of the anti-growth conservative bias of its methodology, but warns that dragging their methodology into a political debate could risk delegitimising it. Instead, he suggests forcing the OBR to assess fiscal sustainability more holistically – this would both improve the OBR's assessments and make it harder for future politicians to run down the public realm under the mantle of fiscal rectitude.

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Long term fiscal risks of a slow transition to net zero. The OBR already undertakes longer-term forecasts to calculate the fiscal risks of events like climate change or an ageing population on the public finances. For instance, its 2021 Fiscal Risks report found that long term debt:GDP ratios could rise to 350 to 400% without action to stop climate change. A slower transition will cost the government and the economy more than acting quickly, through economic disruption, the loss of export potential and more need to import new low-carbon technologies from abroad. If the UK delays progress on its net zero objectives until 2030, GDP would be 3.2% lower by 2050 compared to an ‘early action scenario’. This would follow a period of disruption in which the loss of output relative to this scenario peaks at 6.6% in 2033-34 (towards the end of the government’s planned ‘decade of national renewal’). In the ‘delayed action scenario’, reaching net zero costs the state double, with debt in 2050-51 23% of GDP higher than in the early action scenario. Failing to tackle these risks, for example by investing in decarbonisation, is grossly fiscally irresponsible. 

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A modest change to create fiscal space for the ‘decade of national renewal’... And yet this never comes up in the OBR’s Budget assessments, where its role is limited to assessing individual policies and judging whether the government is passing or failing its self-imposed fiscal rules. This means Chancellors are rarely held to account for underfunding the measures we need to mitigate these “large, and potentially catastrophic, sources of fiscal risks”, in the OBR’s own words. To combat this, Nick O’Donovan suggests that the OBR should integrate their judgements of wider fiscal risks into a new, much broader, fiscal sustainability statement. Similar measures have been supported by the Institute for Government before, where they argue that the Chancellor should be forced to read out the OBR’s statement ahead of their speech. This would hugely improve political debate around Budgets, while making it difficult for Chancellors to put short-term expediency before long-term sustainability.

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 …through an amendment to the Budget Responsibility Bill? Could a simple tweak to the Budget Responsibility Bill greatly improve the role of the OBR in our political and economic discourse? The important lesson from the history of the OBR is that it helps to define the very idea of fiscal sustainability. This relatively small and technocratic change could turn the OBR from an institution that locks in political cycles of austerity, underinvestment and fiscal short-termism, to one that guards against climate-induced fiscal risks, presses for green investment and makes the economy and public finances more resilient. As economist Mariana Mazzucato noted in an interview with Mehreen Khan last week, “the best way to be fiscally responsible is to stimulate the economy”; could this humble change start to reverse 14 years of austerity economics?

‍Good morning from New Economy Brief.

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Last week the Labour government launched the National Wealth Fund (NWF), one of its flagship policies aimed at combating the UK’s woefully low levels of investment. This was accompanied by a report from the NWF’s task force on how the £7.3bn fund should be designed, governed and managed.

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Experts like the Financial Inclusion Centre’s Mick McAteer have warned that the influence of financial sector lobbyists could make the new government’s economic strategy too reliant on ‘de-risking’ private investment and lead to a ‘PFI2.0’ scandal. 

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This week we take a deep dive into the politics and economics of ‘de-risking’ and highlight a few important things to look out for as Labour announces more detail on its policies to grow and decarbonise the UK economy.

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The purpose and design of the National Wealth Fund.

Investing in the green economy is risky for private capital. Reaching net zero requires developing new low-carbon technologies and rolling out infrastructure to support new markets, such as electric vehicle charging stations and heat pump networks. Nascent technologies like these are perceived as having higher credit risk, so it's harder for businesses to borrow the money they need to expand production. By supporting technologies early on, when private financial institutions do not, public investment can grow low-carbon projects, demonstrate viability, and attract more private investment. To achieve this, the government has aligned the UK Infrastructure Bank and British Business Bank under the umbrella of the new NWF. 

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Crowding in via ‘de-risking’. The NWF has been allocated a £7.3bn initial investment to target five sectors (green steel, green hydrogen, industrial decarbonisation, gigafactories and ports) that together make up over half of the UK’s carbon emissions. It aims to catalyse further capital from the private sector by “de-risking” investments through a variety of products. This could include making loans to develop portside infrastructure, or taking equity stakes in riskier projects like recycling technologies for batteries. It could also mean guaranteeing the money investors lend, or making sure a company meets certain price or revenue targets (stepping in itself to make up the difference if need be) – all aimed at persuading the private sector to make investments in green tech that it might otherwise see as too risky.

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Taking borrowing out of fiscal rules? Interestingly, the task force suggests excluding borrowing by public development institutions when calculating public sector net debt, in order to take pressure off fiscal rules. A new paper from LSE’s CETEx – co-authored by Andy King, a former economist at the OBR – calls for something similar – exempting the UK’s public finance institutions from fiscal rules to create space for investments to address climate change and other industrial strategy priorities. It thinks the government's plans to unite the UKIB and BBB under the new NWF is 'an opportunity to implement a better approach'. (The New Economics Foundation, meanwhile, argues that £7.3 billion over five years isn't nearly enough to accelerate the transition to a clean, low-carbon future and calls for more public investment.)

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What is ‘de-risking’, and why is it risky?

Achieving the UK’s climate targets requires shrinking high-emission activities and massive investments in new green productive capacity. Funding these through private investment keeps the costs off the public balance sheet, which some see as preferable in a period of  limited fiscal room for manoeuvre. Economists Daniela Gabor and Benjamin Braun define ‘de-risking’ as government policies to redirect private investment by making infrastructure and manufacturing capacity more investible; that is, more profitable, by the state taking on many of the risks.  This could be done by providing demand guarantees for renewable energy to persuade an asset manager it’s safe to invest in a new wind farm, or by providing cheap loans (or sometimes grants) so a factory can buy new machinery and make more wind turbines.

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Stability and industrial strategy. The new government has argued that there are multiple elements of their approach that will encourage private investment. The ‘stability premium’ coming from having a government with a consistent agenda and personnel is one of these, as is the existence of the new ‘Missions’ and accompanying industrial strategy. All of these reduce what might be described as ‘policy risk’ for business; the idea that the government might get cold feet on certain projects or technologies. This kind of risk reduction is something very few economists would object to, and it is certainly true that political chaos has impacted on investment decisions in recent years.

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The private sector controls the path and pace of decarbonisation. The problem with relying on ‘de-risking’ as a way of reducing emissions is that it gives private investors the final say over whether a project gets funding or not, and they will only invest if projects are profitable. (Check out Brett Christophers’ interview on the Break Down for an explanation of why the private sector can’t decarbonise the energy system – because renewable power isn’t profitable enough.) Letting decarbonisation depend on the profitability of investment projects has coordination risks. Common Wealth’s Melanie Brusseler explains that a more disorderly transition could cause bottlenecks in the supply of critical materials, which could lead in turn to inflation and further political instability. 

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De-risking risks a slower and more disruptive transition to net zero. Making low carbon infrastructure more profitable for private investors could also make it more expensive for consumers, potentially harming electoral support for net zero. It would also make decarbonisation more expensive for the government in the long run. This is not only because a slower transition to net zero would cost the taxpayer more, but also because the government can borrow more cheaply than the private sector. Daniela Gabor also argues that “The risk is not only that our climate future will be vastly more expensive if [asset managers] are driving it, but that this future will also produce a more unequal society, where citizens equate green measures with unaffordable public services.”

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Maximising public value through conditionalities: carrots and sticks

The government is yet to release more policy detail on how the NWF will function, but its task force’s Terms of Reference report is very focused on providing carrots (incentives) to entice private capital to invest more. Sticks (conditionalities) are notably absent from the recommendations so far. Perhaps this is to be expected given the task force’s composition – most members are from the financial sector, with no representation from trade unions, industry, climate groups or other parts of civil society. Yet conditionalities will be crucial for making sure businesses and projects that get public support work in the public interest. 

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Conditionalities share the benefits of growth. Economists Mariana Mazzucato and Dani Rodrik argue that “it is not enough to guide investments in desired directions; it is also necessary to ensure the benefits are as widely shared as possible…when companies receive public investments in the form of subsidies, guarantees, loans, bailouts or procurement contracts, conditions can be imposed to help guide innovation and steer growth towards achieving the highest public benefit.” They point to the US’s CHIPS and Science Act as a recent example where government support was conditional on limiting share buybacks, making supply chains more energy-efficient and improving working conditions for staff.

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Embedding conditionalities into the National Wealth Fund. Mazzucato and Rodrik also note that to design effective conditionality, the state must be ‘autonomous’ from firms and private interests. Public institutions must “further public goals and discipline private firms as needed without being co-opted themselves” whilst remaining “sufficiently ‘embedded’ in the private sector’s decision-making processes with respect to investment, production, and technological innovation”. They warn that the absence of conditionality can lead to “parasitic relationships, or capture, whereby businesses simply get handouts and subsidies from lobbying”. (Others have warned that the proximity of financial sector lobbyists to Labour’s plans risks a PFI2.0-style scandal.)

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How will the NWF be governed and managed? We are still waiting for the details, but the NWF’s task force recommends that it should define successful investment broadly (for instance it might aim to reduce carbon emissions or create new green jobs in deprived areas), but says “private capital mobilisation should be a primary objective.” The report suggests that in order to crowd-in as much capital as possible, the NWF should be operationally independent from the government, even though this “will make it more challenging for government to enact priorities through directly controlling the deployment of capital”. It recommends that the NWF’s investment mandate be “determined by government in consultation with the fund”, and that government should be represented on an independent board, able to “influence but not veto”. 

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Things to look out for.

Many questions remain about how the NWF will work, and in whose interest. Will it use equity stakes in manufacturing firms to steer them towards other social and environmental goals, such as reinvesting profits to innovate and reduce costs? Or will it just facilitate share buybacks? Will its support come with conditions aimed at maximising public value in the economy so the rewards are shared beyond private shareholders? Will its investment mandate go any further than attracting as much private capital as possible? Will whether or not the UK hits its legal climate targets depend on how profitable our infrastructure is? The answers could determine whether the NWF becomes a vehicle for further privatisation of UK infrastructure (and the poor management this often entails) or succeeds in stewarding capital in the public interest and coordinating an orderly, just transition to net zero.

Good morning from New Economy Brief.

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Well, that’s it. Labour are in power for the first time in 14 years and have wasted no time with a string of appointments and policy announcements aimed at showing they are serious about ushering in a ‘decade of national renewal’.

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But given the vast challenges facing the country, and the relatively thin manifesto they were elected on, how can the new government show they can rise to the challenge? This week’s New Economy Brief looks at the economic inheritance the Conservatives have bequeathed Labour and suggests a few policy areas where there might be more scope for action now the election is behind us. 

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The Conservatives’ economic legacy.

Communications over the first few months of the Labour government will focus on defining the Conservative’s economic legacy. As George Osborne demonstrated in 2010, effectively delivering this message can win support for otherwise unpopular decisions. One challenge Labour faces is deciding which aspect of that legacy to choose. We have covered their fiscal inheritance previously, and have also analysed the fallout from Liz Truss’ infamous mini-budget. But one question will be how much Labour ties two other political choices into its narrative: Brexit and Austerity.

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The price of failure? Oxford Economist Simon Wren-Lewis thinks the UK economy is 5% smaller than it would have been, mainly because of how austerity, Brexit and the bungled Covid response have suppressed growth. This is a huge amount. As Wren-Lewis puts it: "A UK government that enacts policies that reduce GDP by around 2% during its time in office is pretty unusual. To reduce it by 5% is extraordinary, but then since WWII we haven’t had a government that has cut public spending in a recession when interest rates were stuck near zero, or one that deliberately raised trade barriers with our largest market." Even this is a conservative estimate; other academic studies have shown that Brexit alone cost between 5% and 10% of GDP.

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The (absolute) state of public services. 

The Institute for Government’s ‘Performance Tracker’ examined nine separate public services in 2023 and concluded that all, apart from schools, are performing ‘much worse’ or ‘worse’ than in 2010. The maintenance backlog now exceeds £37bn across hospitals (£10.2bn), schools (£10.6bn), criminal courts (£1bn), prisons (£1.4bn) and the road network (£14bn). The Centre for Progressive Policy (CPP) found that £142 billion more spending per year is needed by 2030 just to keep public services at their current (struggling) levels.

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Re-election requires fixing them, fast. To keep their majority, Labour need to show they can fix them. But this is an uphill task. The Institute for Public Policy Research found that even if the Labour government manages to improve public services faster than any government in recent decades, getting them back on track could take a decade or more. 

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Funding the decade of national renewal?

This is why Rachel Reeves emphasised delivery in her first speech on Monday, where the Chancellor outlined Labour’s approach to unlocking private investment, along with reforms to the pension and planning system. The new Cabinet have been keen to demonstrate quick progress in contrast to the previous Government. Reeves’ speech also outlined new analysis from the Treasury showing the UK economy would be £143.3bn (6.3%) larger if it had grown at the OECD average since 2010 (this is more than £2k per person, or £5k per household) while tax receipts would be £58bn higher. 

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“New chancellor, new rules”? It still remains to be seen how the Chancellor will pay for fixing public services and growing the economy, given the fiscal situation she has inherited from the Conservatives. Reeves reiterated her commitment to “robust fiscal rules” – arguing it was important that she does not break the promises in the manifesto. (Meanwhile, the Institute for Government and former Bank of England chief economist Andy Haldane join the chorus of mainstream experts and institutions calling for reform of the UK’s fiscal rules.) 

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Off the table. She also reiterated that Labour won’t increase VAT, income tax or NICs to raise money. Neither will she fiddle with the way commercial bank reserves are remunerated at the Bank of England, nor slow down Quantitative Tightening to give herself more fiscal space to solve these vast problems. However, various other revenue-raising options still haven’t been ruled out, like taxing share buybacks, excess profit taxes, capital gains tax and more.

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Where could we see action?

The new government have already implemented a number of ‘quick wins’ to deliver on manifesto commitments, such as removing the ban on new onshore wind and restoring housebuilding targets. These were signalled well in advance. Labour’s silence on some potential tax rises is well known but there are other policy areas where they have said very little or where the details are still vague. With a spending review about to kick off and a Budget due in the Autumn, here are a few areas to keep an eye on.

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Finance and investment. Reeves hinted at reforming the pension system to both deliver greater returns for pensioners and to accelerate investment in British industries, but the exact details of this reform are still unclear. Will pensions be redirected from dirty industries to grow the green economy and capitalise the UK’s publicly owned banks, like the UK Infrastructure Bank, British Business Bank, National Wealth Fund, and others? Will a higher savings rate be mandated through auto-enrollment to ensure decent post-retirement incomes and also free up cash for investment? Or will relying on private money at the expense of public investment risk companies extracting profit from vital public goods? 

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Green industrial strategy. Ed Miliband has already outlined his priorities for the Department for Energy Security and Net Zero, and Great British Energy is set to launch imminently. But will their wider green industrial strategy adopt a more varied mix of ownership models and actively seek equity stakes in British businesses, or will it simply derisk private finance? Similarly, will the Industrial Strategy Council draw its members from a wider subsection of civil society, such as trade unions, and ensure it operates in the public interest, or will it be guided by representatives of international finance like BlackRock, as economist Daniela Gabor has warned?

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Social security. There’s a new team at the DWP, but will this mean thorough reform of the social security system? New ministers have previously supported reforming job centres, enabling Universal Credit claimants to undertake more comprehensive training and study to fill local labour shortages. Will Labour abandon the punitive sanctions system and rethink benefit conditionality? And will they bow to the increasing internal and external pressure to scrap the two child limit and benefit cap? 

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‍Institutional tweaks. Finally (and most wonkily), there are a couple of examples where the devil really is in the detail. Though the Chancellor has reaffirmed support for the independence of the Office for Budget Responsibility (OBR), there are a variety of other pro-investment institutional tweaks that could increase the government’s spending power without directly changing the OBR’s mandate. These include amending their methodology for calculating fiscal multipliers, separating out green investment from OBR forecasts given at fiscal events, or enabling borrowing by public finance institutions’ (like Great British Energy, the National Wealth Fund, British Business Bank and National Infrastructure Bank) to be calculated ‘off-balance sheet’, as is mainstream in international accounting standards.

Good morning from New Economy Brief.

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Polls have dominated this general election, with the persistence of Labour’s mega-lead the campaign’s main story. But why is Labour’s lead so big? And to what extent is economics behind it?

This week, we look at how public opinion on the economy has shaped the election so far and what, if anything, it can tell us about what’s to come in the next Parliament.

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The Truss crossover

It used to be said that the “Conservatives are efficient but cruel” while “Labour are caring but incompetent.” Particularly on the economy, the Conservatives are often seen as a safe pair of hands. But in 2022, that began to change. Throughout that year, the gap between Labour and the Conservatives on the question of “Which political party would be the best at handling the economy?” started to narrow. After the Truss/Kwarteng mini budget of late September 2022, Labour not only overtook the Conservatives on the economy question, but did so dramatically. YouGov’s poll in early October 2022 showed that 32% trusted Labour more with the economy, while only 15% trusted the Conservatives more. This was the first time in years that Labour had taken the lead on this question, and have maintained this lead ever since (although now with a less dramatic gap at 7 percentage points compared to 2022’s 14). If the Conservatives’ unique selling point is competence, and the public don’t believe that they can handle the economy, then their long odds of victory in the general election campaign start to make more sense.

Other public opinion trends since 2010. The voting landscape has changed enormously since the Conservatives first came to power, with some issues far more salient than they were in the early 2010s. According to a YouGov tracker, only 7% said the environment was one of the top issues facing the country in early 2011. A decade later, that figure reached 34%. Another key trend that has no doubt been shaped by austerity is the fall in anti-welfare sentiment. According to the National Centre for Social Research, while the percentage who think unemployment claimants are ‘fiddling in one way or another’ is still high (22%), it is down from 41% in 2004. Also, according to YouGov’s tracker, 50% say that the NHS is one of their top priorities compared to only 31% in 2010.

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Precarity and public services

Economics doesn’t matter to people in the abstract – it matters when it affects their lives. And with a stubborn cost of living crisis and crumbling public services, it’s easy to see why the party that’s been in power for the past 14 years is still struggling to win the argument that their economic plan is working. Sunak’s pledge on the cost of living crisis was to halve inflation. Inflation is now back at the Bank of England’s target rate of 2%, far lower than its 2022 peak of 11.1%, and yet fewer than one in ten people think the crisis is over. The cost of living is usually the second most important issue for voters after the NHS, and when 80% of Britons believe the government has handled the crisis badly, it’s no surprise  that people are turning away from the Conservatives. Precarity is likely to be a huge factor in the outcome of the election, according to the Joseph Rowntree Foundation (JRF). JRF’s latest research finds that 39% of voters feel economically insecure, and that of these 18.5 million-odd people, 34% intend to vote Labour and 10% Conservative. But with Labour likely on the cusp of a majority, how do voters expect the next government to tackle the economy?

Tax is a red herring. One of the Conservatives’ key attack lines is that Labour will put up taxes. And indeed, whether they will or not has been one of journalists’ main questions to the Labour frontbench throughout the campaign. However, recent polling by the Stop the Squeeze campaign and YouGov suggests that this debate misunderstands the public’s priorities. The research, conducted in the final weeks of the campaign, found that Brits are far more worried about the cost of living than about post-election tax rises. Nearly half of those polled (43%) took this position, with only 16% saying they were more worried about tax rises. Likewise, pollster Sir John Curtice highlighted this week that voters are far more worried about the state of public services than they are about tax rises.

Borrowing is no longer the bogeyman. The Conservative-Liberal Democrat coalition came to power in 2010 promising to reduce the government debt/deficit. But at what might be the end of a Conservative-led government, how do the public feel about fiscal policy now? According to pollster Steve Akehurst, voters aren’t instinctively pro-borrowing but they much prefer it to the alternative: under-investment. Akehurst’s research, conducted by YouGov, found that with the exception of social security, voters are happy to see investment in all areas, even if it involves borrowing.

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Great expectations

So, voters are far less bothered about borrowing and taxation than they once were, with public services declining and the cost of living very much on everyone’s mind. But they are also expecting, or even hoping for, more interventionist fiscal policy. Firstly, tax rises now feel like a given, with voters expecting the next government (whether Labour or Conservative!) to put up taxes. Similarly, a new poll by the Invest in Britain campaign shows that only 2% of Labour voters expect the party to cut public investment, with the overwhelming majority (72%) believing it would boost investment when in power. If Labour do win a large majority this week, they will have done so with the expectation of high tax and high spend.

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The bigger picture

While the next government will be keen to keep the public onside around economic policy, we should remember a couple of key lessons. The first is that polling on individual issues doesn’t necessarily lead to political success. Many of the Conservative government’s economic policy decisions have been popular in isolation, but that has not saved the party from the voters’ judgement on their economic record as a whole. Finally, there are many vital economic issues which barely register with the public. For example, issues of global economic justice, such as the impact of climate change on the Global South and the need for loss and damage payments, have not featured in this campaign at all. But it would be a mistake for any government to think that these issues are unimportant. Similarly, if we are to learn anything from the last few years, it is that we cannot predict what economic action a government might need to take. A few years ago, the cost of living crisis barely featured as a phrase in public debate. Now, it is the number two issue for voters. With global instability and the climate crisis likely to cause future shocks, we may not even have heard about the next government’s big issue yet.

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Good morning from New Economy Brief.

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Whichever party emerges victorious in the election next week, the next government’s relationship with the Bank of England (BoE) is going to be very important.

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We are emerging from the first major inflation crisis since the BoE became independent in 1997, and it is reasonable to ask what lessons we can learn from how it responded to this shock and whether its decisions have an outsized impact on the fiscal space and political programme of the next government.

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The last time Labour took power in 1997, then-Chancellor Gordon Brown unexpectedly gave the BoE its independence and ended a decades-old tradition of the government controlling interest rates. This idea did not feature in Labour’s 1997 election manifesto; could Rachel Reeves, a former economist at the BoE, pull another rabbit out of the hat and announce a surprise monetary policy reform?

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This edition of New Economy Brief explores the case for changing the UK’s macroeconomic framework and highlights some forward-thinking proposals for a new monetary policy regime.   

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The economic and political case for monetary policy reform.

Since 2022 when the UK economy suffered a supply-side energy price shock, the path taken by interest rates has been central to political discourse and a key measure of whether the Conservative government’s economic strategy is working. In short, the strategy was to limit the worst effects of higher energy bills through the Energy Price Guarantee and limit as much government spending as politically possible to avoid injecting further inflationary pressure into the economy, in the hope that the BoE’s Monetary Policy Committee would eventually start to cut interest rates before the general election. Inflation has now reached the 2% target, but rates are still at the highest levels seen since 2008 (5.25%), with the Bank once again refusing to cut them last week. 

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The problem with relying on interest rates to limit supply-side inflation. The idea behind increasing interest rates is to raise the cost of borrowing in the economy and so limit spending and investment (for example, through homeowners facing higher mortgage payments and so having less disposable income). This will inevitably reduce economic growth and have a variety of harmful effects on public debt, mortgages and the housing market, international debt repayments, business lending, unemployment and financial stability. Many economists see this as a misguided act of economic self-harm when inflationary pressures come from supply shocks rather than ‘overheated demand’. (And by some accounts this is true most of the time – IMF chief economist Pierre-Olivier Gourinchas and co-authors recently concurred that “the international rise and fall of inflation since 2020 largely reflected the direct and pass-through effects of headline shocks.”)

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Higher inflation will return. Many economists also think higher inflation is the new norm in the anthropocene, given the likelihood of further supply-side shocks driven by climate change and geopolitical instability (e.g. drought, wildfires, poor harvests, trade disruptions and resource wars). If this is true – and there are many reasons to believe it is – then under the UK’s current macroeconomic architecture, the BoE is likely to continue raising interest rates, choking economic growth, and limiting the next government’s borrowing freedom, spending power and, ultimately, political success. So the BoE’s current price stability mandate could become a political problem, and the persistent threat of inflation will probably continue to strengthen the case for the next government reforming it.

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Anti-inflationary policy for an unstable global economy.

“Voters are right to point the finger at governments, who do have a role in ensuring no repeat of the “shockflation” that has rocked economies this decade”, writes the Times’ Mehreen Kahn this week. What else then could governments do to limit supply-side inflation? Isabella Weber, an economist at the University of Massachusetts, proposed that governments should stress-test industries that could unleash inflation spikes, just as they do with too-big-to-fail banks. She identified eight strategically important sectors which drove the second-round effects of inflation after the pandemic and invasion of Ukraine, and argued that a wider range of policy tools is needed to prevent sticky inflation and price gouging.

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The state’s new role in preventing ‘shockflation’. Weber and Jens van ‘t Klooster called on the European Union to embrace anti-inflation measures like price controls and creating price buffer stocks of essentials for human life (e.g. food, housing and utilities), industrial production (energy and chemicals) and commerce (e.g. wholesale trade and transportation) in strategic sectors, to protect against supply shocks. Alongside more monitoring of prices in the economy and more active competition policy to ensure consumers are not at the sharp end of corporate price gouging, this could stop inflation spreading from the initially affected sector into others. (For a case study on how unconventional fiscal policies can limit pass-through inflation – policies like insulating essentials from the rising cost of living with price controls – read our previous explainer on how the Spanish government has responded to their cost of living crisis.)

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Reforming the UK’s monetary policy regime.

The eventual decision on when to cut interest rates, and by how much, will have huge fiscal implications for the next government, mainly by reducing government borrowing costs and freeing up space for more spending without breaching the current fiscal rules. But this isn’t the only decision the Bank will take that will impact the government. Arguably just as significant is the decision on how far to go with the Bank’s Quantitative Tightening (QT) programme of selling off government bonds. QT matters enormously to the Treasury (we covered it in a recent explainer). Potential new Chancellor Rachel Reeves has been keen to emphasise her respect for the BoE’s independence as part of a stable set of macroeconomic institutions, but given how deeply decisions around QT could constrain its freedom to manage the economy, the government will naturally be extremely interested in these decisions, and potentially in reforming the framework within which they are made. 

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What’s the mandate? During the pandemic, the BoE implicitly began monetary financing to create fiscal space to finance pandemic-related support measures, such as furlough and healthcare investment. This alignment between monetary and fiscal policy proved useful in coping with emergency, but it was never formally acknowledged. The next government will have some policy tools available to stop contractionary monetary policy eroding its spending power – perhaps saving way over £100bn. These could include paying less interest on government debt issued as part of quantitative easing and held by commercial banks and slowing down quantitative tightening to prevent losses for the taxpayer. Nevertheless, the BoE may need an updated mandate that lets it coordinate with the next government’s fiscal goals. Different arrangements have been proposed that would respect the principles of central bank independence while also helping monetary and fiscal policy work in tandem, rather than against each other:

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Green credit guidance. Given that raising interest rates is likely to slow the green transition by increasing borrowing costs, this could be the time to revisit credit guidance policies. The BoE can work with other government agencies to restrict borrowing to invest in unsustainable activities (such as fossil fuel extraction and destruction of key ecosystems), while supporting lending for green energy, housing, and infrastructure. The New Economics Foundation’s proposed that the UK could do this by repurposing the BoE’s Term Funding Scheme – which currently provides cheaper credit to businesses and households – to instead encourage banks to lend more for investments in sustainable projects, so that these projects could borrow more cheaply. (Read our previous New Economy Brief for more on Green Credit Guidance)

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Moving beyond 2% inflation targets. Economists Jo Michell and Jan Toporowski argue that the BoE should be given an enhanced financial stability mandate that makes it coordinate more explicitly with the Treasury, “but need not eliminate the independence of the Bank”. They review a variety of proposals for reforming monetary policy (Page 23-29) including replacing the BoE’s inflation targeting with a growth target,  concluding that “the proper regulation of employment and investment in the economy is a matter of policy for Government, not the central bank.”

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‍Monetary and fiscal coordination. Peter Sedgwick of the Official Monetary and Financial Institutions Forum suggests that whoever wins the next general election, “it will be time to review the institutional arrangements for monetary and fiscal policy”. A pamphlet from the Fabian Society has proposed “a new economic policy coordinating committee should be set up to bring together the Treasury, the business department and the Bank of England, alongside the devolved governments and arms-length bodies responsible for climate change, public finance, infrastructure and low pay” to share analysis and coordinate policy to manage the economy more effectively.

Good morning from New Economy Brief. 

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It has been almost 20 years since poverty last fell for a prolonged period, according to the Joseph Rowntree Foundation (JRF), and the incoming government will inherit poverty levels around 50% higher than in the 1970s. 

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Many campaigners have highlighted the main parties’ failure to put forward detailed plans to tackle poverty. Labour in particular – who look likely to form the next government – have come under pressure to reverse their pledge to keep the two-child benefit cap introduced by the Conservatives. 

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This week, we explore what the next Government could do to reduce poverty and what, if anything, a Starmer-led government could learn from the last Labour administration. 

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The state of poverty in the UK.

22% of people in the UK were in poverty in 2021/22, according to the latest figures from JRF’s UK Poverty 2024 report. Children have the highest rates of any age group, with nearly three in ten children (4.2 million) in poverty. Some groups have particularly high rates of poverty, including larger families, families whose childcare responsibilities limit their ability to work, disabled people, informal carers, families not in work, people in rented accommodation and certain ethnic groups. 

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Deep poverty and destitution. Not only is the number of people in poverty rising, but their poverty is also getting deeper. Between 2019/20 and 2021/22, the average person in poverty had an income 29% below the poverty line, compared to 23% between 1994/95 and 1996/97. According to JRF, 9.7 million people live in ‘deep poverty’, with a household income less than half the UK median after housing costs. Of these, 6 million live in ‘very deep poverty’ (with an after-housing-costs income less than 40% of the median). JRF refers to the very deepest poverty as destitution, characterised as those who cannot afford to meet their most basic physical needs. 3.8 million people experienced destitution in 2022, including a million children. 

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The policy landscape. 

Poverty groups like JRF and the Child Poverty Action Group (CPAG) have demanded stronger commitments from parties during the election to tackle the poverty crisis – but what have the different parties proposed, and what is missing? 

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Labour. Labour has committed to a child poverty strategy, which campaigners welcomed. However, there is widespread criticism that the strategy lacks detail, and many question how a Labour government could take serious action on child poverty without abolishing the two-child social security cap. The Institute for Fiscal Studies estimates this limit would harm an extra 670,000 children across the next Parliament. (Read our previous analysis for more on the economic and political case for scrapping the two-child benefit cap.) Labour says other measures from its manifesto will also alleviate poverty, including its homelessness strategy, its plans to protect renters from arbitrary eviction and free breakfast clubs in every primary school. However, many think bigger reforms to Universal Credit are needed, and warn that without more detailed plans, Labour may not be able to “match the scale of the challenge”. 

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Conservatives. JRF notes the Conservative manifesto’s failure to mention destitution, hardship or the cost of living. While plans to scrap no-fault evictions and to end rough sleeping have been welcomed, it is widely accepted that plans to slash social security spending by a further £12 billion (largely through less support for disabled people) could plunge many more people into hardship and destitution. The Conservatives’ line is that work is the best route out of poverty, even though 38% of working-age people who receive benefits are in work. (For more on the Conservatives’ plans, see our analysis from earlier in the election campaign.)

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Other Parties. The Liberal Democrats, Greens and Scottish National Party have committed to abolishing the two-child limit, with the former also promising to set a target to abolish deep poverty within a decade. The Lib Dems and SNP also want to ensure Universal Credit always covers the cost of essentials (this draws on the idea of an Essentials Guarantee championed by JRF and the Trussell Trust.) The Greens, meanwhile, promise a £40 uplift to Universal Credit and legacy benefits, and to “in the long term” to set up a Universal Basic Income system, though there is no timeframe on this, and no costing so it is hard to estimate the impact on poverty. (See our analysis of smaller party manifestos for more policies from these and other parties.) Depending on the makeup of Parliament after the election, this could put additional pressure on the next government to take action on poverty. 

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Will Labour learn from its legacy? 

We obviously won’t know the outcome of the general election until 5th July. But if polls are to be believed, we’ll be seeing a Labour-led government in a couple of weeks’ time. People generally expect Labour governments to tackle poverty, and this has been central to the legacy of several Labour administrations, including the most recent one. New Labour introduced Working Tax Credits, Sure Start and the National Minimum Wage, for example (though the success of its poverty reduction programme is contested). 

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Waiting for growth? This side of the election, at least, Starmer’s Labour party is refusing to budge on issues like the two-child benefit cap, arguing that the fiscal position means many policies they would like to implement are not affordable. As we explained in our analysis of the Labour manifesto, Starmer and Reeves’ plan hinges on growth. They hope growth will bring higher tax receipts, which will in turn allow them to boost social security and introduce more interventionist measures to reduce poverty. The problem for many poverty campaigners, though, is that this approach lacks the urgency needed to lift millions out of poverty and destitution. People expect Labour to fight poverty, but perhaps without bolder measures they will be disappointed. (For more ideas on reforming Universal Credit, check out the New Economics Foundation’s proposal for Social Security for All and Autonomy Institute’s work on basic income.)

Good morning from New Economy Brief.

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As the Conservative vote shows further signs of collapse, the policy positions of smaller parties become more important. A new poll from Opinium finds that 37% of all voters are currently backing one of the smaller parties, compared to Labour’s 40% and the Conservatives’ 23%. 

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Smaller party manifestos won’t be implemented, but they still play an important role in public debate by introducing and promoting new policy ideas. One of these parties may even form the new official opposition if some polls are to be believed.

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Today’s New Economy Brief takes a look at a few economic highlights from the manifestos of the Liberal Democrats, the Green Party, Scottish National Party (SNP), Reform and Plaid Cymru, and identifies some areas of potential challenge to the next government. 

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Liberal Democrats: “For a Fair Deal.”

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The Lib Dems’ manifesto proposes a larger tax-and-spend package than either Labour or the Conservatives, totalling £27bn of additional government spending. The largest portion of this goes to health and social care (including recruiting 8,000 more GPs and bringing the Scottish system of free personal care to England). The spending commitments are funded through higher taxes on banks, reforming capital gains tax, a new tax on aviation, cracking down on tax avoidance and maintaining the current freeze on income tax thresholds until 2028. The Lib Dems are also proposing a 4% tax on share buybacks, which could raise £1.4bn–£2.2bn a year and pay for extending Free School Meals to 900,000 more children.

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Net zero by 2045. The Lib Dems promise to “put tackling climate change at the heart of a new industrial strategy”, and their manifesto calls for public banks to do more to support green investment, as well as re-establishing the Industrial Strategy Council and putting it on a statutory footing. They promise to give the UK Infrastructure Bank (UKIB) “a clearer zero-carbon remit” and expand the British Business Bank (BBB) to “perform a more central role in the economy, to ensure that viable small and medium-sized businesses have access to capital, and enable it to help ‘crowd-in’ private investment, in particular in zero-carbon products and technologies.” The manifesto also includes a strong commitment to “regulate financial services to encourage climate-friendly investments”. They plan to accelerate the deployment of solar and wind power so that 90% of power comes from renewables by 2030, and to provide free insulation and heat pumps for low-income households.

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Reforming Universal Credit. The Lib Dems want to remove the two-child limit on Universal Credit and the benefit cap (currently still supported by the two major parties). These both limit how much income households can claim through social security. They also plan to review annual benefit levels, which anti-poverty campaigners like Joseph Rowntree Foundation and the Trussell Trust say moves towards an ‘essentials guarantee’ to keep benefits  high enough that people can always afford basic necessities like food and energy.

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Corporate governance reform. The Lib Dems want to ensure all large companies have a formal statement of corporate purpose and report on their social and environmental impacts (see the High Pay Centre’s submission to a recent consultation and our previous New Economy Brief for more on corporate governance reform). They also want to promote employee ownership by giving staff in listed companies with more than 250 employees a right to request shares. They also want a new ‘Worker Protection Enforcement Authority’ to enforce the minimum wage, and say they will add 20% to the minimum wage for workers on zero-hours contracts to compensate them for the uncertainty of fluctuating hours. 

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Other interesting policies. On education, the Lib Dems want to bring in a tutoring guarantee for children from low-income families, increase funding for schools and bring back university maintenance grants which were scrapped in favour of loans in 2016. Rejoining the EU single market and a ‘longer term objective’ of rejoining the EU sits at the heart of the Lib Dems’ retail offer. They also want to reduce arms sales to countries with poor human rights records and seize frozen Russian assets in London. (See our previous New Economy Brief for more on the latter.)

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Green Party: “Real Hope, Real Change.”

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The Green Party’s manifesto proposes the largest fiscal package – £70bn of additional spending, with £50bn allocated to health and social care to reduce hospital waiting lists, speed up access to dentists and GPs, and raise junior doctors' pay by 35% to redress the effects of years of below-inflation increases. The remaining £20bn is to tackle the crisis in adult social care. They are also planning to raise annual capital spending by £90bn, £40bn of this earmarked for green investment and £20bn for new NHS buildings and equipment. They have made a “cast-iron guarantee” that any Green MPs will oppose further privatisation of the NHS.

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Taxes. The Greens want to fund their extra spending with extra taxes, including higher National Insurance Contributions and Capital Gains Tax, new carbon taxes and a £15bn wealth tax aimed at billionaires. The last of these has been a debating point so far. The IFS thinks “some of the individual tax measures look sensible” but warns that a wealth tax could be “tough to implement”;  tax expert Arun Advani, by contrast, views this kind of recurring wealth tax as "economically credible". 

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Net zero by 2040. The Greens want to reach net zero by 2040, phase out nuclear power (currently generating ~15% of the UK’s electricity) and massively scale up wind (both onshore and offshore) and solar power. They want an additional £40bn of green investment per year (including insulating homes and public buildings), accompanied by greening the Bank of England’s mandate. Positive Money’s Simon Youel notes this could include the BoE undertaking “green overt monetary financing” as an alternative to quantitative easing, buying zero-interest-bearing perpetual bonds from the Treasury to finance government deficit spending on green projects. The Greens also have an interesting plan to establish "regional mutual banks to drive investment in decarbonisation and local economic sustainability". These would be funded through a 'Co-operative Development Fund,' using resources from the UK Infrastructure Bank (UKIB) supplemented with another £10 billion of public money. 

Other interesting policies. The Greens want to let councils impose rent controls and to ban no-fault evictions in England, following their experience introducing a 3% rent cap in Scotland in coalition with the SNP. They also want to scale up social housing massively (from 30,000 new homes built between 2019 and 2023) by building 150,000 social homes a year and ending Right to Buy. They would rejoin the EU “as soon as the domestic political situation is favourable”. They aim to re-enter the Customs Union first and restore the free movement of people, especially for students. They also plan to nationalise railway, energy and water firms, propose a maximum 10:1 pay gap ratio for public and private companies, and eventually want to “move towards” a four-day week. 

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Scottish National Party: “A Future Made in Scotland.”

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The SNP’s focus is on Scottish independence and devolution of fiscal powers to Scotland. After gaining full authority over taxes, the SNP would impose a windfall tax on companies with excess profits and crack down on tax avoidance and evasion. They also want to scrap the UK government fiscal rules, introduce a Public Sector Net Worth rule to recognise the value of investment in public assets. One of the manifesto’s largest revenue-raisers is creating higher income tax bands in England and Wales, to match Scotland’s current system. This has the dual benefit of raising £16.5bn and applying exclusively to constituencies where the SNP are not standing.

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Just transition. The SNP demand that Westminster devolves new borrowing powers to invest in a just transition. They would allow new oil and gas licences in the North Sea as long as they meet ‘climate compatibility tests’. (Note that many climate scientists argue that no new fossil fuel extraction can happen if we’re to achieve net zero by 2050). They  would also call on the UK government to invest at least £28bn a year in the green economy, and to take equity stakes in future energy projects.

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Other interesting policies. The SNP would scrap the two-child benefit cap (read our analysis here) and legislate for an ‘essentials guarantee’; that would mean social security payments would always be  enough to cover basics like food and utilities. They would also introduce a “Keep the NHS in Public Hands” bill ruling out further privatisation of the NHS.

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Reform: “Our economy needs reform.”

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The top lines of the Reform manifesto are a swathe of tax cuts funded through various of cost-saving policies. Reform want to abolish inheritance tax for estates worth less than £2m, raise the personal tax allowance to £20,000, create an Employee Immigration Tax to levy 20% of National Insurance on foreign workers and change a variety of other business taxes. The money will come largely from cuts to public spending, which Reform argue will not impact services since every government department will becoming 25% more efficient by cutting bureaucracy and negotiating better value procurement deals. Other sources of savings include scrapping net zero (which they say will save the public sector £30bn over the next 25 years – though the OBR has forecast that doing nothing to mitigate climate change will cost the government more than it saves in the long run), raising taxes on renewable energy and stopping paying interest on government debt issued as part of quantitative easing and held by commercial banks to save £35bn a year; read NEF’s paper for more on the latter. Interestingly for a right-wing party led by an avowed Thatcherite, Reform also want to bring 50% of utilities into public ownership, with the other 50% held by pension funds, and propose new regulation to cap standing charges.

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Plaid Cymru: “For fairness, for ambition, for Wales.”

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Plaid Cymru’s manifesto calls for devolution of similar fiscal powers to those Scotland currently enjoys, giving the Senedd the power to set income tax bands independently of Westminster. They want to extend the windfall tax on energy companies, equalise capital gains with income tax and introduce a wealth tax alongside a variety of other revenue raisers. They also want to devolve all powers over energy and control of the Crown Estate to Wales, so the Welsh government can profit from offshore wind projects. Other plans include creating a Welsh national energy company to expand community-owned energy and introducing a social tariff.

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Community Wealth Building. At the heart of Plaid’s economic strategy is community wealth building, a policy package pioneered by the Centre for Local Economic Strategies (CLES) and others to keep more money local areas and use public spending power to promote dense local supply chains and reshape local economic development. They want to reform the Development Bank of Wales so it can take – and profit from – more shares in emerging businesses and infrastructure projects; give the Welsh government the power to develop a community bank; target 75% of Welsh public-sector procurement coming from companies located in Wales; and promote co-operative employee and community ownership models in local growth industries like renewable energy. 

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Other interesting policies. Plaid want to remove all benefit sanctions (see NEF’s case for ending benefit conditionality) and pilot Universal Basic Income (See Autonomy Institute’s work on Welsh UBI trials for more.)

Good morning from New Economy Brief.

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Manifesto launches are often a time for surprises. A chance to grab headlines and get voters talking about bold new policies. But at Labour’s manifesto launch last week, Keir Starmer made it clear that there would be no “rabbit out of the hat”. 

Labour’s ‘Ming vase’ strategy has been well documented: don’t get drawn into debates about the detail and don’t do anything to rock the boat (and the party’s massive polling lead). But a lack of surprises doesn’t necessarily equate to lack of vision. The manifesto’s title is ‘Change’ – but what sort of change does Labour want, and how does it plan to make it happen?

This week, we explore the key arguments and themes of Labour’s manifesto, as well as outlining some of its key challenges.

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Growth, growth, growth.

Economic growth is central to Labour’s manifesto. The document mentions the economy over 200 times, far more than any other issue. Rachel Reeves, the Shadow Chancellor, says the UK’s lack of economic growth is at the root of many of the problems Britons face: stagnant pay, high prices, poor public services and low investment. For Reeves, growth is the magic pill for fixing these ailments without tax rises. She argues that if the UK economy had grown at the OECD average since 2010, there would be “around £55bn in additional tax revenues every year to resource our public services, without the need for tax increases”.

The plan is to be “the party of wealth creation” without breaking “tough spending rules”. For many, this promise seems too good to be true. If the plan is to fix our broken economy once growth is achieved, then where’s the growth coming from?

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Investment.

Labour’s proposed £7.3 billion National Wealth Fund promises to attract £3 of private investment for every £1 of public money. It includes £1.8 billion to upgrade ports and build supply chains across the UK, £1.5 billion for new gigafactories, £2.5 billion to rebuild the steel industry, £1 billion to accelerate the deployment of carbon capture and £500 million to support green hydrogen manufacture. Along with Great British Energy, a new publicly-owned company aimed at boosting investment in home-grown clean energy, the Fund is a survivor of Labour’s £28 billion climate pledge U-turn earlier this year and remains one of the party’s flagship policies. GB Energy also aims to ‘crowd-in’ private investment, and would see the government partnering with private companies to co-invest in new technologies and to scale up existing technologies (for more on this, see our Digest from earlier this month).

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Planning reform.

Keir Starmer has said that the manifesto is a “total rejection” of the idea that “it’s not about how you create wealth, but how you tax it, how you spend it, how you slice the cake”. Instead, he argues that the way we now create wealth is broken, and that there is huge potential to unlock long-term growth if you “transform the nature of the jobs market… transform the infrastructure that supports investment in our economy… reform the planning regime”. In other words, planning reform is central to Labour’s proposals to grow the economy while staying within its strict fiscal rules. These changes would include restoring mandatory housing targets, funding additional planning officers, giving Combined Authorities new planning powers and building on a new class of the “grey belt”  – that is, low-quality “green belt” land.

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Devolution

Further devolution in England is also central to Labour’s growth plan, giving local authorities new powers over transport, adult education and skills, housing and planning, and employment support. All combined authorities and counties with devolution deals will have a "statutory obligation" to develop a "Local Growth Plan".

Is it enough? The Institute for Government (IfG) has said that the plans are a step in the right direction, but that the “the narrow economic focus of devolution means there is little apparent appetite for wider public service devolution” – something many Metro Mayors have called for. The IfG also says that more needs to be done to “complete the job of English devolution” and that there are few plans for devolution outside of England.

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Workers' rights

A further key flank of Labour’s growth plan is its proposed New Deal for Working People. It promises to ban exploitative zero-hours contracts, ensure that the minimum wage is a “genuine living wage”, end fire and rehire, and introduce basic rights on parental leave, sick pay, and protection from unfair dismissal. It would also create a Single Enforcement Body to ensure employment rights are upheld. The plan is not without its controversy, however, with Unite the Union refusing to endorse Labour’s manifesto, based on concerns that it does not go far enough on fire and rehire practices and zero-hours contracts.

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What are the challenges?

As the polls are now indicating a strong likelihood that Labour will form the next government, media scrutiny is ramping up. The question that journalists keep asking is: how will you pay for it? One of the Conservatives’ main messages to voters is that Labour will put up your taxes. But again and again, Labour has ruled out raising taxes from income tax, national insurance and VAT (except on private school fees) to council tax and capital gains. Meanwhile, Starmer has also said there will be “no return to austerity”. But with nearly £142 billion per year needed by 2030 just to maintain public services at their current (already deeply struggling) levels, many are worried that without action on tax or a new approach to fiscal rules, spending cuts will be inevitable. Earlier this month we took a deep dive into possible ways for the next government to raise revenue without taxing ‘working people’; these range from equalising capital gains tax to raising taxes on wealth.

Cost of living and poverty. The cost of living remains a top issue for voters. Meanwhile, destitution is growing, with seven million low-income families going without essentials like food, adequate clothing or hot showers, according to the Joseph Rowntree Foundation (JRF). While Labour has promised a child poverty strategy, JRF has said that “missing details” urgently need filling in, such as how Universal Credit could be used to tackle poverty. And then of course there is Labour’s commitment to maintaining the two-child benefit cap, which has been met with widespread criticism.

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Is this really a ‘change’ manifesto? 

The IPPR’s George Dibb argues that if Labour had released the above policies as manifesto surprises, they would “be being talked about as an attempt to import strategic-state Bidenomics to the UK”. Perhaps the ‘Ming vase’ strategy is masking what is, rhetorically at least, a bold commitment to a new, strategic role for the state and a rejection of trickle-down economics. But with public services and personal finances in such dire straits across the UK, the question remains whether, without some serious changes to fiscal policy, Labour can deliver the change it promises fast enough for people to feel it.

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Good morning from New Economy Brief.

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During the 2022 Conservative Party leadership election, Rishi Sunak said his opponent Liz Truss’ radical tax-cutting plans would "tip millions of people into misery". Less than two years later, tax cuts are front and centre of the Conservatives’ manifesto. 

Launching the manifesto on Tuesday, Sunak promised a “clear plan” and “bold action”. But what’s the detail? This week, we unpack the Conservatives’ manifesto and explore what its key pledges could mean for the economy. Next week, we’ll turn our attention to Labour and smaller party manifestos, so watch this space. 

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It's all about tax.

The Conservatives’ key message is that Labour will put taxes up and the Conservatives will cut them. (We won’t go into that debate now, but do read our election focus on tax from earlier this week). Sunak’s central gamble is £17 billion of tax cuts. This includes: yet another 2p cut to employee National Insurance Contributions (NICs), aiming to halve the main NICs rate to 6% by 2027 (IPPR have a good explanation of who benefits), the well-documented “Triple Lock Plus” (i.e ensuring that the State Pension doesn’t get dragged into the income tax bracket) and a plan to gradually abolish NICs for the self-employed.

As we explained earlier in the week, this focus on tax cuts is very much at odds with the emerging consensus that taxes will have to rise in the next parliament. 

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Other key announcements.‍

Housing. While tax cuts are the cornerstone of the manifesto, another key focus is housing, and particularly home ownership. It includes a new version of the Help to Buy scheme in which first-time buyers could get a government loan worth up to 20% to buy a new-build property, and makes permanent the increase in the stamp duty threshold to £425k. Both of these pledges continue the path of recent Conservative housing policy, which critics say simply boosts demand and pushes up prices. On housing supply, the manifesto also includes a pledge to build 1.6 million homes over the course of the parliament – clearly a bid to ‘one-up’ Labour’s 1.5 million pledge. It is notable that all the places mentioned in the manifesto as sites for new homes are currently safe Labour seats.

For renters, the manifesto promises to bring back the Renters Reform Bill, which was controversially abandoned a few months ago, and pledges to cut capital gains tax for landlords who sell homes to their tenants. 

Climate. As the right of British politics continues to pit the twin struggles of decarbonisation and tackling the cost of living against each other, Rishi Sunak used his manifesto launch speech to reassure voters that the Conservatives will move towards net zero without “unaffordable eco-zealotry”. But what does that mean? One part of it is changing the remit of the Climate Change Committee (CCC), which has already warned that the UK is on track to miss its targets, to give it "an explicit mandate to consider cost to households and UK energy security in its future climate advice". However, climate specialists have said that the CCC already considers such impacts. Climate experts have generally not received the manifesto warmly. Greenpeace UK's policy director, Doug Parr, said it reads “like a car crash for the planet”, while E3G’s Ed Matthew said that the document’s lack of climate ambition “will keep households hooked on high-cost oil and gas.” ‍

Other key pledges include a legal cap on migration, an increase in defence spending to 2.5% of GDP by the end of the parliament, an end to “low quality” degrees and the already divisive national service for 18-year-olds.

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Paying for it.

The Prime Minister has promised to tackle the “unsustainable rise in working-age welfare” – a pledge he hopes will go a long way towards paying for his proposed tax cuts. On top of promises to shrink the civil service and reduce tax avoidance, the Conservatives say their manifesto pledges are funded by a staggering £12 billion worth of cuts to the social security system. Institute for Fiscal Studies Director Paul Johnson said such a cut would be “very tough”, while the Resolution Foundation has argued that recent history shows slashing the welfare budget like this is unachievable. The controversial introduction of Personal Independence Payments (PIP) in the early 2010s, for example, was expected to save £1.4 billion by the end of that parliament. In the end it saved just £100 million. In 2015, the Conservative manifesto also announced £12 billion worth of welfare cuts, but there was a U-turn before any of them were actually delivered. (See more on these examples from the Resolution Foundation here).

Unworkable? One of the reasons that people are sceptical about the pledge to cut social security is that it rests on the assumption that there are many people out of work who could or should be working. In the word’s of the Tuesday’s Guardian editorial, the idea “indulges lazy assumptions about benefits as a ‘lifestyle choice'”. The reality is that many (38%, in fact) of those on working–age benefits are already in employment. It’s therefore hard to see how the get-on-your-bike approach will save the exchequer very much at all. The main reason welfare payments have risen in recent years is the dramatic growth in the number of people on sickness and disability benefits, and this is where most of the savings targeted by the Conservatives are expected to come from. However, as many have argued, this is less a problem with the welfare system and more to do with the state of the NHS and mental health services. Without a plan to fix long waiting lists, the only way to cut these payments would be at the direct expense of some of the most vulnerable people in society.

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Who's it for?

When you’re 20 points behind in the polls, you have to choose whether to pitch a manifesto that’s radical enough to keep your base on-side post-defeat, or one that’s credible enough to be taken seriously. Initial reactions to the Conservative manifesto suggest it might have failed to do either. While many see the manifesto as unfunded, risky and unworkable (“cosplaying Liz Truss” in the words of Rachel Reeves), many more on the right are frustrated that it didn’t go even further. Some have pointed out that the NICs cut will be cancelled out by tax threshold freezes, calling the failure to commit to abolishing inheritance tax “low octane”. Meanwhile others, more worried about the Reform vote, were hoping for an announcement on quitting the ECHR.

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Will it make a difference?

The problem with the manifesto’s biggest giveaway – the 2p cut to NICs – is that they’ve already done it. Twice. Neither occasion seemed to do much to shift public opinion in the Conservatives’ favour. Polling conducted by the Stop the Squeeze campaign found that only 8% of voters said the NICs cut at the beginning of this year made any difference to their finances. It’s unclear why people would respond more favourably this time – perhaps it will be third time lucky.

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Good afternoon from New Economy Brief.

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Tax has been at the centre of the election so far, both for what political parties are proposing, and what they aren’t. Many experts argue that the next government will have to raise taxes to avoid further austerity, collapsing public services, and ultimately losing power in 2029. But both major parties keep ruling out ways to bring in revenue. 

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This week we explore what the parties are saying on tax, and run the rule over a variety of taxes the next government could use, some of them championed by smaller parties. 

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How has tax changed since 2010?

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Since the Conservatives (and Liberal Democrats) took office in 2010, the tax system has undergone many reforms. Over the last 14 years the bottom 40% and top 10% have lost out, while the middle 50% have seen their incomes increase due to tax and benefit changes. The amount the government receives in taxes has risen from just under 37% of GDP in 2010/11 to around 40% in 2023/24 (over £1tn). This is why we often hear that the ‘tax burden’ – tax as a fraction of national income – is at its highest in 70 years. Even so, UK citizens still pay less in taxes on average than those in other advanced economies. 

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The political story on ‘fiscal drag’. Between 2010 and 2019, one of the government’s central tax objectives was taking people out of income tax by raising the level of the personal allowance, but this approach has since been reversed. As Chancellor, Rishi Sunak chose to freeze tax thresholds for six years instead, which pushed more earners into higher tax brackets as inflation increased their nominal income (known as ‘fiscal drag’). Jeremy Hunt has continued this. This has been a big source of the government’s rising tax take, as most tax receipts come from three sources: income tax, National Insurance contributions (NICs) and value-added tax (VAT). More recently the Conservatives’ approach has been to cut headline tax rates (mainly for NICs) while keeping the freeze on thresholds. Neither Labour nor the Conservatives have said they would end this fiscal drag, partly because doing so would be so expensive. The Liberal Democrats say they would end the drag and make raising the personal allowance a priority, but without saying exactly when, while Reform argue for raising the personal allowance to £20,000.

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The GE2024 row over taxes so far. Tax is a highly contentious subject precisely because it has such clear winners and losers. This election is no different. The Conservatives have been promoting a widely disputed line that Labour will increase taxes by £2000 for every person, whilst saying that a Conservative government would reduce taxes – including by eventually abolishing NICs. (Labour have attacked this as an “unfunded” £46bn spending commitment). Reform also propose a £70bn programme of tax cuts, mainly funded by £50bn of public service cuts. It is hard to reconcile the desire for substantial tax cuts with the state of the public finances and public services (see our previous New Economy Brief for an explanation of the fiscal inheritance of the next government). The FT’s Martin Wolf agrees that “[a]n honest political process would start by admitting that there will have to be tax increases if the country is to deliver the public services it has promised.”

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How do parties propose to raise revenue?

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All parties are keen to avoid a ‘tax bombshell’-style attack and both major parties have definitively ruled out increasing the main revenue raisers of income tax, NICs and VAT (except on private school fees). Labour has also ruled out raising the main rate of corporation tax. Many, including the IFS’s Helen Miller, warn that ruling out increasing the biggest sources of revenue is a mistake which whoever wins the next election may come to regret. The question then becomes how to square the circle and bring in revenue when you have promised not to raise taxes on ‘working people’.

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Equalising capital gains tax. Income received from work is taxed much more than income received from wealth, partly because Capital Gains Tax (CGT) is far lower than income tax. Economist Arun Advani has calculated that raising CGT to the same level as income tax could raise £16.7bn a year. This has support from think tanks on the centre-right and some Conservative politicians; the IFS’s Paul Johnson also recently voiced support for the idea. The Liberal Democrats have pledged to reform CGT to raise £5bn for the NHS, whilst Labour’s Rachel Reeves has reportedly been under pressure to consider it from Shadow Ministers. (Keir Starmer also refused to rule out raising CGT this week.)

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Raising taxes on wealth. Wealth inequality has soared to record levels in recent years – economist Ben Tippet calculated that the richest six families in the UK could give every family in the country over £2000 just out of the increase in their wealth since the start of 2022 when the ‘cost of living crisis’ entered political debates. Taxing wealth with a high threshold would mean only a tiny proportion of the richest would pay more, but it could raise a vast amount for the Treasury. Applying a 2% wealth tax on assets over £10 million (paid for by just 0.04% of the population) could raise up to £24bn a year. Plaid Cymru support increasing wealth taxes, and the Green Party have a similar proposal to raise money for the NHS - expect more detail in their manifestos. 

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Taxing share buybacks. Share buybacks – where a company buys its own stock to inflate its value on the stock exchange – have more than quadrupled in the UK since 2015, and dividends to the richest have soared. Taxing these is a good way to persuade firms to redirect profits away from shareholders and into productive investments. IPPR calculated that a modest 4% tax on share buybacks, the same rate proposed by the Liberal Democrats and adopted by US President Biden, could raise about £2bn a year, while a higher ‘emergency’ rate of 25% could raise much more (~£11bn a year). 

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Levying excess profit and windfall taxes. The ‘Energy Profits Levy’ imposed an additional tax of 25% on profits of oil and gas giants following widespread opposition to the idea of them profiteering from a supply shock, largely driven by the Russian invasion of Ukraine. Labour have proposed extending this windfall tax. However, this isn’t the only sector to have enjoyed record unearned profits, and having already imposed this windfall tax would make it easier for the government (or a future Labour one) to tax excess profits taxes in other sectors too. IPPR’s George Dibb argues that this can discourage rent-seeking, suggesting that “the UK’s CMA should launch pre-emptive investigations into the potential for excess profits in the most concentrated sectors of the economy.” For example, Positive Money calculated that annual bank profits are four times higher than in 2020, and that a windfall tax on the four biggest UK banks could raise between £3.5bn and £14bn this year depending on its ambition.

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10 tax reforms to raise £60bn for public services. A new briefing from Tax Justice UK and Patriotic Millionaires outlines more tax-raising options for the next government. Accompanying polling shows that the public and millionaires both want the wealthiest to pay more, and would be more likely to vote for a party that would raise taxes on the wealthiest to invest in public services. Other potential revenue-raisers from their paper are:

• Apply National Insurance to investment income, raising up to £10.2 billion a year.
• Close inheritance tax loopholes to raise £1.4 billion a year. 
• Close the loopholes in the new non-dom scheme to raise up to £1 billion. (Labour’s proposals to reform the non-dom scheme are here.)
• End fossil fuel subsidies for oil and gas companies to raise £2.2 billion a year and close the loophole in the oil and gas windfall tax, costing £2 billion a year. (Labour have proposed a ‘proper’ windfall tax on oil and gas – expect more detail in the manifesto)
• Tax private jets to raise £700 million a year.

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The elephant in the room: council tax

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One last tax that hasn’t been discussed much so far is council tax. The current council tax system, based on 1991 property values, is famously regressive and in need of reform, but political parties have been loath to touch it because it creates so many losers (though the Fairer Share campaign points out it could also create winners, for example in the North). Would a party that won a large majority grasp the nettle?

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Good morning from New Economy Brief.
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In this week’s ITV debate, the host quoted the IFS’s Paul Johnson warning of a ‘conspiracy of silence’ about the state of the public finances after the general election. 

Both Labour and the Conservatives have committed to spending plans that imply massive ‘austerity-era’ spending and investment cuts until 2029, but this has barely featured in the election debates so far.

This New Economy Brief clarifies the fiscal position the next government will inherit, and outlines the options available to avoid further spending cuts.

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We are currently heading for austerity-era cuts. 

The effects of years of austerity on the UK’s capital stock and public services is undeniable. The Institute for Government’s ‘Performance Tracker’ examined nine separate public services in 2023 and concluded that all, with the exception of schools, were performing ‘much worse’ or ‘worse’ than in 2010. The Centre for Progressive Policy (CPP) found that £142 billion per year is needed by 2030 just to maintain public services at their current (already struggling) levels – partly because of increased demand due to an ageing population. Despite this, under the spending envelope which both main parties are using as a baseline, the IFS calculates that unprotected public services, including courts, prisons, further education, local government and housing, would see a further 13% cut in day-to-day spending until 2029 – “broadly in line” with the 2010-2015 austerity era cuts.

But there’s nothing left to cut. The Office for Budget Responsibility (OBR) appeared to cast doubt on the feasibility of the government’s tight post-election spending plans given rising demand for public services and the constrained ability of local authorities to borrow and spend. Likewise the Resolution Foundation dubbed them a ‘fiscal fiction’, noting that "[t]he idea that there is as much scope to cut spending today as there was in 2010, given the deterioration of public services is far-fetched". 

The cuts are politically undeliverable. It is perhaps because no one really believes that these cuts are even possible that no one seems to be talking about them. Yet they are still on paper the plans that any incoming government would inherit. Fixing public services, particularly the NHS, is high on the public's priorities for the incoming government. A government that cuts spending even further is unlikely to be re-elected for another term.


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Something's got to give. 

The Conservatives committed to these cuts so they could spend the ‘fiscal space’ on last-minute pre-election tax cuts and force Labour to choose between accepting the cuts and opening up a dividing line on tax. They hoped Labour might announce tax rises in the run up to the campaign so the Conservatives could run a 1992-style ‘Labour’s tax bombshell’ attack. Labour have responded with a 1997-style ‘prudence for purpose’ tactic to commit to the government’s spending plans to secure market credibility, while trying to avoid any communications traps that suggest they might raise taxes. But given that these cuts are undeliverable, the next government will have to raise taxes after the election to ease funding pressures, and/or change the fiscal framework to enable more borrowing. That is why Labour has found it difficult to shake off attacks over tax rises this week. (We will look in more detail at the debate on tax next week.)

Changing the fiscal framework. Ultimately all this political game playing with fiscal space stems from both major parties trying to game one of the current fiscal rules, which says  debt must be falling as a % of GDP after five years. Reforming these rules is part of a new consensus of establishment organisations, with the National Institute of Economic and Social Research (NIESR), the Institute for Government and the Financial Times’ editorial board, as well as economists ranging from Diane Coyle and Andy Haldane to Jim O’Neill, all calling for a new fiscal framework. Sound fiscal rules would allow a government to invest to fix public services and grow the economy, and therefore improve its ability to service debt. Labour have set out some changes they would make to the fiscal rules, but crucially not to the central debt/GDP rule – the main driver behind these spending choices. Unless Labour’s  position changes in government, or there is a hugely beneficial external development, this conversation over tax is likely to continue.

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Good morning from New Economy Brief.

If we are to heed scientists’ warnings, we have almost run out of time to limit the very worst effects of the climate crisis. The next government’s actions will therefore be critical in determining the UK’s role in the fight against climate catastrophe.

With ‘Carbon Budgets’ (essentially, checkpoints on the UK’s route to Net Zero) due for assessment both this year and in 2029, the next government will have not just a moral obligation but also a legally binding duty to prioritise climate action. You only need to look back a few weeks to the political upheaval in Scotland to know how seriously these pledges are taken.

At the same time, the cost of living crisis is still voters’ top priority, with high energy bills a key worry for households and businesses. While some on the right of British politics view Net Zero as an unnecessary and expensive barrier to raising living standards, others see the two issues as one and the same. Labour’s Great British (GB) Energy, for example, is promoted as a way to “cut energy bills for good”.

There have been very few significant economic policy announcements early in the campaign, with GB Energy one of the few ideas that has sparked real debate. This week, we explore that discussion, including criticisms of the proposal from other parties, and look at how energy and climate change are being framed in this election campaign.

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What is Great British Energy?

Labour first proposed GB Energy in 2022 as a new, publicly owned company that will harness the power of renewable energy "to cut bills, create jobs and deliver energy independence". GB Energy, which would be headquartered in Scotland, aims to build 35GW of onshore wind and 55GW offshore, along with 50GW of solar capacity. The goal is to fully decarbonise the energy grid by 2030. GB Energy is a survivor of Labour’s £28 billion climate pledge U-turn earlier this year and remains one of the party’s flagship policies. Keir Starmer says it will create 650,000 new jobs, and has earmarked £8.3 billion for it (to be spent over the course of the first Parliament), raised through higher windfall taxes on “oil and gas giants”.

When is an energy company not an energy company? GB Energy is described as a “publicly-owned clean power company”, but this does not mean we’ll soon be getting bills with “Great British Energy” stamped on the front. Nor will the company necessarily have exclusive ownership of the solar panels and wind turbines needed to reach Labour’s target. Keir Starmer described GB Energy as an “investment vehicle”, through which public money will be used to trigger private investment in renewables while Shadow Energy Secretary Ed Milband has clarified that GB energy will “own, manage and operate” clean power projects.

Co-investing in new technologies. Labour has three initial priorities for working alongside private partners on GB Energy. The first is to co-invest in new technologies, the hope being that by injecting  public investment into things like floating offshore wind, tidal power and hydrogen, the government will be able to “crowd in” more private investment in these young technologies.

Scale up existing technologies. The second is to accelerate the large-scale roll-out of mature technologies like wind, solar and nuclear. This will involve partnering with existing private sector companies to speed up deployment and coordinate energy megaprojects like nuclear power stations.

Make it local. The third and final initial priority is to scale up municipal and community energy. This involves partnering with energy companies, local authorities and cooperatives to develop small- and medium-scale community energy projects, whose profits will “flow directly back into local communities”. Labour says this third priority will help create a more decentralised and resilient energy system with more local generation and ownership.


Taking it further. Great British Energy is inspired by proposals from Common Wealth. However, those proposals go much further, suggesting that a publicly owned energy company should also generate power itself, using state-owned generating assets such as wind farms. The think tank has also suggested that there could be a public retail arm to keep bills down. Mathew Lawrence, Common Wealth’s Director, has said that by taking such steps and approaching GB Energy with “ambition”, Labour could create a “national institution” akin to the NHS.

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How have other parties reacted?

“Nowhere near enough”. The Green Party, which has criticised Labour’s £28 billion U-turn, has said that committing £8.3 billion over the course of the Parliament looks “tiny” in the face of the climate crisis. The Greens’ climate policies are much more ambitious, aiming to eliminate all emissions in 10 years – a goal over whose feasibility even Friends of the Earth has expressed some scepticism in its analysis of the main parties' climate policies.'.

SNP backlash. It’s unsurprising that Labour wants GB Energy to be headquartered in Scotland, given that energy production is such a hotly contested issue north of the border, and that the transition to renewables depends on buy-in from Scottish oil and gas workers. In the Scottish leaders’ debate on Monday, the North Sea industry was a key point of tension. The SNP has been extremely critical of Labour’s energy plan, arguing that it would cost 100,000 Scottish jobs (dwarfing the figure of 2,000 used in the Conservative Party’s criticisms). This is compounded by Labour’s pledge not to issue new licences for oil and gas projects. The SNP’s Westminster leader Stephen Flynn said that “Starmer's plans would take Scotland's energy wealth and spend it on nuclear projects in England.”

Decarbonise, but do it later. It turns out that Labour and the Conservatives do actually agree on something: decarbonising the energy grid. The difference is that the Conservatives aim to do this by 2035 rather than 2030. However, Friends of the Earth has said that even 2035 is ambitious given the Conservatives’ current aversion to onshore wind. For their part, the Conservatives argue that the GB Energy plan is too expensive and won’t have the impact on bills that Labour claims. The Liberal Democrats want 80% of the UK’s electricity to come from renewables by 2030, but have yet to outline how they’d do this, or when the final 20% could be decarbonised.

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It’s all about security.

Listening to Labour Party comms this week, you’d be forgiven for forgetting that GB Energy has anything to do with climate policy at all. Once again leading with the theme of ‘security’, Starmer has said it would “close the door on Putin”. With climate policies so often presented as a metropolitan elite luxury, focusing on the benefits to living standards and national security resonates much more strongly with those who wouldn’t typically be wooed by green issues. GB Energy does so far seem to be very popular with voters, with a February YouGov poll showing that 66% of voters support the idea of a publicly owned energy company. If Labour do become the government in July, only time will tell if £8.3 billion is enough to deliver the goods.

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Good morning from New Economy Brief.

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The general election campaign is underway and the economy is centre stage, with both major parties offering their own version of ‘economic security’ to voters. 

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Five years ago, Boris Johnson’s Conservative Party was elected to ‘get Brexit done’, level up the country and invest in a series of new hospitals and ‘shovel ready’ infrastructure projects, amongst other things. 

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But after a global pandemic, two major outbreaks of conflict in Eastern Europe and the Middle East, a cost of living crisis and a short-lived experiment with Trussonomics, household finances have been notably unstable since the Conservatives took office.

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It’s no surprise that economic security is so high on voters’ agendas. Today we examine the different ways both major parties are proposing to create a more secure economy and improve the resilience of the voters' personal finances. 

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It’s the economy, stupid! 

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The economy is one of UK voters’ top priorities, and since the cost of living crisis began, perceptions of the Conservatives' economic competence has tanked, with Labour now overtaking them on this crucial metric. The biggest poll movement so far this parliament came in the aftermath of the Truss premiership, when voters began to link the spiralling cost of living to economic mismanagement, a perception that Rishi Sunak has found difficult to shake off.

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Key voters long for economic security. Centre-right think tank Onward identified ‘Workington Man’ as the swing ‘red wall’ voter whose support won the Conservatives the 2019 General Election, noting a “sea change in British politics away from freedom and towards security”. Looking at 2024, Labour Together has identified ‘Stevenage Woman’ as the swing voter Labour needs in order to win the general election, and found that she could be won over with “a politics grounded in providing ‘security’ in the form of secure work, safe streets and a strong nation”. 

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What is economic security?  Graeme Cooke (formerly of the Joseph Rowntree Foundation, now at Labour) explains that the concept of economic security is “rooted in household finances”, how voters interact with income, costs, assets and debt, but also how wider factors such as employment, housing, education and health affect households exposure to risks (“concrete, everyday experiences” such as “a cancelled shift, an unexpected rent hike…childcare falling through…rising borrowing costs”). Given these economic and political realities, it is not hard to see why both major parties have made economic security the central theme of their campaigns so far.  

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And who can deliver it? In his Downing Street address calling the election, Rishi Sunak said that he “came to office above all to restore economic stability” and the Guardian reports that a ‘senior Conservative official’ said “everything in the campaign falls under the ‘security’ banner…that will be mostly about the economy”. Similarly, on Monday, Keir Starmer's first speech of the campaign trail argued “the very foundation of any good government is economic security”.

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The Conservative approach: ‘stick to the plan’.

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The central Conservative argument in this campaign is that the key to restoring economic security is to ‘stick to the plan’ which they argue is working. This is the logic for hooking the launch of the campaign on to the falling headline inflation numbers. 

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What is that plan? In Government, the Conservatives’ strategy to deal with the cost of living crisis centred around the introduction of the Energy Price Guarantee to limit the worst effects of higher energy bills (it should be noted that this decision was taken by Truss rather than Sunak), increasing the minimum wage and uprating benefits in line with inflation. Any remaining ‘fiscal space’ is largely earmarked for tax cuts, (particularly national insurance) which are framed as a policy to support households with the cost of living, whilst arguing that Labour will inevitably raise taxes and cannot be trusted with the public finances. The Conservatives argue that any government spending or higher borrowing will inject inflationary pressure into the economy, so more support is conditional on waiting for inflation to fall. 

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Pitting net zero against the cost of living. Since 2019 the Conservative government’s support for net zero has also appeared to waver. Progress on many targets has stalled despite Johnson’s initial enthusiasm in the early days of the parliament. Last year, Rishi Sunak appeared to champion a new strategy to pit faster action on decarbonisation against action to reduce the cost of living for voters - which ultimately ended in delaying plans to ban new petrol and diesel cars, as well as gas boilers. This strategy was perceived to have succeeded in the Uxbridge by-election, but hasn’t led to any noticeable recovery since then and fared badly in the recent local elections. Nevertheless, it is likely the Conservatives will continue to play climate action and the cost of living off against each other in the campaign. 

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Is it working? Ultimately, a message that the plan is working only lands if people actually feel it. Many voters, however, seem unconvinced and remain financially insecure. The “good news” about headline inflation and ministers insisting that the economy is “turning a corner” is simply not enough to cut through the financial pain that families feel all over the country are feeling. Polling from Stop the Squeeze shows that an overwhelming majority of nearly 90% think there is still a cost of living crisis, despite falling inflation. Furthermore, only 24% of the public think that the government is responsible for falling headline inflation, and less than 30% think tax cuts should be a priority area for action on the cost of living. (See last week’s New Economy Brief for more on this). 

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Labour’s approach: ‘securonomics’.

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Labour will be arguing that, in order to restore stability, the country needs to change both its government and the role of the state. Essentially, they argue that in a more unstable world, there is a need for a more active state to protect the domestic economy from disruptive inflationary forces (e.g. from climate change or geopolitics) and to use industrial policy to create new jobs and investment opportunities. They plan to invest in a green industrial strategy to increase the resilience of supply chains and increase the productive capacity of the economy to deal with energy price shocks, all through the prism of a ‘Mission-driven’ government. (Rachel Reeves provided more detail in A New Business Model for Britain: Building Economic Strength in an Age of Insecurity. Read our previous New Economy Brief for more explainers on how Labour is taking inspiration from green industrial strategy in the US). 

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More resilient and sustainable economy = more resilient personal finances. In contrast to the Conservatives, the Guardian reports that Labour will be doubling down on their approach to climate change as a clear dividing line between them and the Conservatives: “Labour has long sought to show that pursuing net zero is a source of economic growth and will bring down the cost of living, especially for poorer families, through cheaper renewable energy and home insulation.” Polling from GSCC’s Steve Akehurst and IPPR’s Luke Murphy suggests that this message can be popular with voters, especially when framed around energy security and lowering energy bills.

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‍Decarbonisation on the cheap? However, a couple of big questions remain for Labour. The first is how possible this transformation is within their fiscal framework. Labour have suggested they will maintain the government’s current fiscal rule to have public debt falling within five years. This will limit the amount Labour can borrow to achieve its plans. If they win, Rachel Reeves has pledged to tweak the fiscal rules, for example to distinguish between current spending and capital investment, but whilst the overall debt rule is still active, their programme risks lacking the funding required to succeed. The second risk is whether, and how quickly, voters will start to feel the effects. Capital investment might raise the headline growth rate of the economy, but it might take a long time for the public to feel the benefits in their wallets. In the middle of a cost of living crisis, will voters be expecting more immediate support from their next government?

Good evening from New Economy Brief.

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News broke this morning that inflation is now 2.3%. While the government wanted this to be a sign that its “plan is working”, the reaction was less positive. As households continue to face a painful squeeze on living standards, this supposed indicator of sound economic health seems to clash with reality. And we now know that there will be a General Election in July - a vote in which the cost of living crisis is likely to play a major role. 

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If inflation is where it should be, then why is there still a cost of living crisis? And why are corporate profits and the country’s wealthiest people booming while families are going bust? This week, we explore why falling inflation doesn’t represent an end to the cost of living crisis and the solutions available to improve living standards. 

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What actually is inflation?

Inflation figures are released monthly by the Office for National Statistics (ONS) and represent the change in price of a selected “basket of goods” over the previous year, meaning that the price of these goods rose by 2.3% in the 12 months up to April 2024. This is no doubt a smaller change in prices than the increases we’ve seen over recent years (though falling inflation, of course, does not mean falling prices). So what’s the big deal?

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Beyond CPI. ‘Headline inflation’ doesn’t necessarily give us the full picture. The sharp spikes in costs since 2021 mean that food, housing, energy and other essentials continue to eat into budgets far more than they used to. While there are signs that food price inflation might be slowing, for example, food and non-alcoholic drinks prices are still over 30% higher than in 2021. Meanwhile, some estimate that energy bills could be up to 60% higher this year than just before the energy crisis in 2021. 

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Wages. It’s true that wages are starting to rise, but even where they are increasing faster than inflation, there is a lot of catching up to do. According to the Trades Union Congress (TUC), pay packets are still worth less than in 2008 in nearly two thirds of UK local authority areas, making this the longest pay squeeze in over 200 years. Had wages kept growing at pre-financial crisis rates, the average UK worker would now be £200 a week better off. This is a wages crisis that began long before 2021.

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Beyond the statistics. Ultimately, however, people don’t need facts about wages and the price of essentials to know that they’re feeling poorer. This is a crisis that is acutely felt. The “good news” about headline inflation and ministers insisting that the economy is “turning a corner” is simply not enough to cut through the financial pain that families feel all over the country are feeling. A poll conducted by Focaldata on behalf of Stop the Squeeze found that an overwhelming majority of nearly 90% think there is still a cost of living crisis, despite falling inflation. 

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Will things improve? For various reasons, we don’t even know if this lower inflation rate will stick – many expect it could rise again soon. The Bank of England, for instance, is preparing for potential geopolitical crises that could cause oil prices to rise. What’s more, British consumers still haven’t felt some of the drivers of the most recent cost of living crisis. While many homeowners have been squeezed by increased mortgage costs (and as a result, renters whose landlords have passed on costs), many more have been enjoying lower, fixed rates until now. According to the ONS, almost 900,000 UK mortgages are up for renewal in the first three quarters of 2024, so thousands of households could see their outgoings spike over the next few months.

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We’re all in this together?

It’s difficult not to juxtapose the ongoing cost of living crisis with two other recent stories about the nation’s very wealthiest. Firstly, the Sunday Times Rich List, published last week, showed that the average wealth of the ten richest Brits is now £21 billion – up nearly 50% in five years. The top 350 are collectively worth £795 billion – more than Poland’s annual GDP. Secondly, a Unite the Union study of 17,000 companies in the UK last week found that profit margins have “spiralled out of control”, soaring 30% on average since the pandemic. 

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Rebalancing the economy.  From wars to extreme weather, the cost of living crisis has been driven by a number of factors. But as households continue to struggle while headline inflation returns to target, this is clearly an issue that is much stickier than a simple unravelling of a two-year crisis. Many campaigners point to excess profits like those highlighted in Unite’s report as a sign of a profoundly unbalanced economy. Global Justice Now, for example, points to “monopoly power” as the heart of the food crisis . Meanwhile, organisations like Tax Justice UK argue that the extreme wealth exhibited in the Sunday Times Rich List could provide the funds to solve the root causes of the crisis, estimating that a 1-2% tax on assets over £10 million would affect only 20,000 people and could raise up to £22 billion a year. Similarly, the Stop the Squeeze campaign has said that “redressing imbalances in the tax system by taxing wealth fairly… would raise substantial government revenue that could be used to fund cost of living support measures.” 

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‍A hollow victory? As we enter a general election period, the Conservative Party will wish to point to lower inflation as something of a victory, but the millions of households on squeezed budgets are unlikely to be celebrating. As we’ve seen, ending the cost of living crisis is more complicated than cutting headline inflation, and campaigners argue that this is a question of addressing the structural imbalances in the economy that haven’t gone away. The option of wealth taxes is one that will continue to be pushed - especially when taxing even a tiny fraction of the assets of the very wealthiest would provide billions of pounds of revenue that could go a long way to address the root causes of the cost of living crisis.

Good morning from New Economy Brief.

‍There is an economic debate brewing on the right of British politics. After 14 years of government, taking in Brexit, Covid, Truss, the cost of living crisis, and a variety of economic policies and messages, senior figures in the Conservative Party and elsewhere on the right of British politics are wrestling with fundamental questions around what kind of economy they want to create, and how they plan to get there. Whatever the Conservatives’ fate in this year’s general election, this conversation is only going to get louder.

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This week, we explore the latest contribution, a new paper (“A Conservative Economy”) published by centre-right think tank Onward which attempts to put forward a conservative economics for “a fairer and more productive nation”, and makes recommendations that may come to form the next consensus in conservative economics.

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The diagnosis

Onward’s paper, which includes a foreword from Levelling Up Secretary Michael Gove and is co-authored by ex-Theresa May adviser Nick Timothy, diagnoses three major challenges facing the British economy: growth, globalisation and fairness. These “fundamental characteristics” are holding the economy back, the report argues.

‍Exports and production. The paper argues that “weak productive capacity and net exports” are at the heart of Britain’s economic problems. A lack of skills, infrastructure, and investment mean we simply “do not make or do enough goods and services the world wants and needs to buy”. ‍

‍Globalisation and financialisation. Because we don’t make and export enough, the report argues, we rely too much on overseas investment in our housing stock, equities and debt. It says that while “capitalism is the greatest force the world has ever seen for driving up living standards… Financialisation and rent-seeking have enriched overseas investors and provided returns to financial capital, but often at the expense of the real economy.” The result is a “separation of risk and reward” and a vicious circle of underinvestment and economic stagnation.

‍Sovereignty and security. Economic security has become a popular phrase right across the political spectrum over recent years. Just look at Rachel Reeves’ ‘Securonomics’. This centre-right paper is no exception, though its framing leans more towards “sovereignty” than “security”. It argues that the UK spends too much on consuming imported goods and not enough on investing in our own economy's productive capacity. This failure to save and invest makes us especially vulnerable to 'stretched supply chains'. It also identifies several problems that mean the investment that does take place does less good than it should. These include regulations that discourage pension funds from investing in the shares of UK companies, and a "fashion for share buybacks" that syphons companies' profits away from being productively invested and into the pockets of their owners.

‍Workers. The report claims that British workers get an “increasingly unfair” deal, where work is no longer a guarantee of a decent standard of living. It highlights the lack of home ownership among younger people and the fact that people are having fewer children than they would like as negative outcomes of this. Rather than stagnant wages and the erosion of workers’ rights, the report focuses here on migration, arguing that the inflow of people from abroad is a key reason for our low-investment and low-wage economy.

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‍Recommendations

Improving productivity, growth and reindustrialisation. The paper focuses on regulation and targeted investment to boost growth. It calls for corporate governance reform to increase the domestic savings rate and boost private sector investment, as well as tighter controls on overseas ownership of critical infrastructure and utilities. It says the new investment should focus on higher education, with more emphasis on technical training, and on renewable energy technology and infrastructure to boost energy security.

Improving economic security and trade. Industrial policy is key, and should actively support industries with high export potential, the report argues. It also calls for new agencies to direct R&D investment in “high growth-potential industries” as well as to develop regional economies. On supply chains, it calls for “stronger powers to intervene to prevent loss of industrial capacity or speculative acquisition of UK land when the national interest requires it”. 

Creating a better deal for workers and families. Like the report’s diagnoses, its recommendations highlight the need to curb immigration. It also emphasises the role of the family, including a suggestion to reflect the cost of having children in the tax system (such as transferable personal allowances). The report also calls for tax policy to deter overseas ownership and rentierism as well as worker representation in corporate governance.

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Consensus and conflict?

One striking thing about the paper is how much it overlaps with the current centre-left economic policy offering. We should keep capitalism, but regulate it. We should watch out for rentierism and prioritise investment. We should do something about living standards. Of course, many on the left would question a lot of the analysis and solutions – particularly the emphasis on immigration and the family unit, where the Onward paper is more strikingly conservative. But on the role of the state and public investment, this paper may point to a shift in the consensus. Certainly the diagnosis and prospectus have more in common with current Starmerism than with the more strident buccaneering, free-trading, deregulatory vision that Truss and her Pop-Con movement are propagating.

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Contested legacy

How the Right’s economic argument will be settled very much depends on how the general election and its aftermath play out. Having been in power for 14 years with a string of Prime Ministers, all of very different economic persuasions, it’s difficult for Conservatives to come up with something entirely new. Every argument will inevitably be seen as a critique of much of the economic legacy the Conservatives will leave behind if they do lose the election. The options fall broadly into three camps: carry on as before and hope for the best, pivot back to radical Trussonomics or, perhaps, consider a more active role for the state in tackling the challenges of growth, globalisation and fairness, as this paper suggests.

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Good morning from New Economy Brief.

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International Workers’ Day last week was marked by reports that the Labour Party’s plan to bolster workers’ rights risks being watered down due to pressure from business lobby groups. 

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This week’s New Economy Brief places this debate in context by examining the evidence for the wider economic impact of trade unions, including how stronger collective bargaining rights and better working conditions can be good for both workers and businesses, and could help build a stronger UK economy.  

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New deal for workers under threat?

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Rumours circulated in the media last week that Labour could water down their ‘New Deal for Working People’ – a plan to strengthen collective bargaining rights – amidst ‘internal pressure’ to drop the commitment to ban zero hour contracts within their first 100 days of power. Commentators worry that many Labour policies are being watered down because of the leadership’s perceived closeness to business lobbyists and the influence on policy this might give them.

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Labour deny watering down to please business groups. Labour have denied any watering-down, but trade union leaders came out in force – Unite General Secretary Sharon Graham reiterated that delivering the New Deal “in full within the first 100 days of office” is a ‘red line’, and crossing it could mean withdrawing their election funding from Labour. But while the politics of the New Deal, including Labour’s relationship with key trade unions, have been much discussed, the place of this package in Labour’s wider economic policy thinking has received less attention.

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The economic case for stronger trade unions.

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The context for the New Deal is that the UK has “the most restrictive anti-union laws in Europe”, following legislation by previous governments to reduce workers’ power relative to businesses. In seeking to reverse some of these changes, Labour say that workers’ rights are good not just for workers, but also for businesses and the wider economy. They note the “clear consensus between economists, business and trade unions, that fair and decent conditions of work improve productivity, economic opportunity, health and wellbeing.” In a speech to business leaders this week, Shadow Chancellor Rachel Reeves repeated the case for the New Deal and argued that improving workers’ rights through industrial partnership is not only the “right and the fair thing to do, but it’s also good for the economy”. But how? 

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Investment and productivity. 

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The UK is less productive than most advanced economies, which many economists believe is because businesses and the government persistently fail to invest enough in capital and skills. There is a growing economic consensus that this lies at the heart of the UK’s growth stagnation since 2010. 

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Countering short-termist profiteering. In recent years more firms worldwide have been using profits to boost shareholders’ incomes rather than reinvesting in the business or raising wages. In the UK share buybacks have more than quadroupled since 2015 and dividends to the richest have soared. The Social Market Foundation’s Shreya Nanda explains how this leads to lower investment and a “wider cycle of business failure”. Robust evidence from 25 OECD countries shows that trade unions effectively counterbalance this short-termism by pressing companies to use profits to raise wages and investment. 

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More worker representation increases innovation. Firms with workers on their boards are more productive by 2-8% per employee, and there is also evidence that more worker participation in corporate governance increases the rate of capital formation in an economy. These firms are also less likely to cut investment in R&D as workers have a long-term interest in their firm and deep knowledge of its business. (See more evidence suggesting employee directors can reduce underinvestment.)

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Wages and inequality. 

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The UK has some of the worst income inequality in Europe. Real wages have stagnated since the financial crisis, and the OBR thinks it will be 2028 before they finally return to 2008 levels. The TUC’s latest analysis finds that the average worker is £200 a week worse off than they were before the global financial crisis, while the High Pay Centre reports that UK CEOs are paid 118 times as much as the average worker. Income inequality harms economic growth because lower earners spend much more of their income, so less money in their pay packets means  less money flowing around local economies and less demand overall.

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Reducing income inequality. A more equal power relationship between workers and business provides a counterweight that keeps income inequality in check by pushing for higher wages and restraining excessive management pay. Mainstream economists like Larry Summers attribute declining wages as a share of profits to the waning power of trade unions. There is consistent evidence that unions reduce wage and income inequality; one interesting paper from Alexander Guschanski and Özlem Onaran concludes: “Rising inequality is not an inevitable outcome of technological change or globalization. Tackling income inequality requires a restructuring of the institutional framework in which bargaining takes place and a level playing field where the bargaining power of labour is more in balance with that of capital.” 

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Smaller gender pay gaps. Women earn on average around 15% less than men per hour. There are several structural reasons for this – women are over-represented in part-time work, which is less well paid, and the ‘maternity penalty’ restricts their career progression. There is also evidence that women are less likely to engage in individual negotiations over pay. This means institutions that enable collective bargaining, like trade unions, can help reduce wage disparities between men and women; a recent study showed that workers covered by collective bargaining agreements tend to have smaller gender pay gaps.

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Stronger workers’ rights = a stronger economy.

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In short, there is plenty of evidence that trade unions play an important role in creating stronger economies, and will be particularly vital in getting the UK economy out of its low-skill, low-wage, low-productivity and low-growth trap. Of course, there are interesting political aspects to the debate around extending workers’ rights – but we should also take it seriously as an economic argument in its own right. The question for Labour is not just whether diluting these plans is good politics, but also whether doing so would undermine their wider economic objectives. 

Good morning from New Economy Brief.

‍Increasing concern about the economic impacts of climate change is well documented. But when we start to talk about nature, it feels as though we are moving further away from hard economics. It’s rare to hear ecosystems mentioned in the same sentence as GDP, for example. Chancellors don’t talk about biodiversity at the despatch box.

However, an extensive new report led by the Green Finance Institute argues that this needs to change. The paper, which was co-written by a number of leading academics and policy experts, finds that biodiversity loss and environmental degradation pose major risks to the UK economy and financial sector – maybe even as much as climate change. This week’s New Economy Brief explores how much damaging nature could ultimately cost us, and what, if anything, we can do about it.

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How big is the problem?

Nature degradation (in other words, harm to the natural environment) domestically and internationally could do more damage to the UK economy than either the global financial crisis or Covid-19, with losses of up to 12% of GDP. Human drivers like land-use change, pollution, extraction of minerals, abstraction of water and climate change have severely compromised nature across much of the globe. According to the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), half of all natural ecosystems worldwide have declined relative to their earliest estimated states. While this global destruction will affect the UK economy severely, we have the problem in homegrown form, too. 75% of the United Kingdom is covered by at least one “hotspot of natural capital depletion”, and 25% by two or more.‍

‍The risks. Using a Nature-related Risk Inventory (NRRI) (which the authors argue could complement the government’s National Security Risk Assessment (NSRA) and the Climate Change Risk Assessment (CCRA)), the report ranks 29 risks by their likelihood and impact on the economy. Risks range from livestock disease to threats to tourism from nature damage. The four risks seen as both very damaging and as highly likely to happen are: soil health decline (both domestic and international), antimicrobial resistance (AMR), zoonotic disease and reductions in global food security.

‍Chronic vs. shock risks. The dangers identified encompass both chronic, long-term threats and acute event-driven risks or shocks. The report finds that gradual (chronic) year-to-year environmental degradation does as much harm as climate change – perhaps even more. The immediate effects of damaging the natural environment will cost around 3% of GDP in lost growth over the next decade. But degrading the ecosystems around us also makes us more vulnerable to acute climate or health shocks, which could do even more economic harm.

‍Part of the climate crisis. Though the paper aims to highlight the impact of biodiversity loss and nature degradation, it emphasises the inextricable links between these issues and climate change. It argues that the “strong feedback effects” between the two could lead to a 14% loss in GDP in “an extreme scenario of an ecologically-driven health crisis combined with climate change”.

‍Sectoral risks. The report finds that the agriculture, manufacturing and construction industries will be worst affected. The utilities sector is also at risk due to its dependency on surface water for cooling power stations, with any drop in water supplies potentially reducing production and raising energy prices. However, the report also claims that nature degradation will have a “material financial impact on banks and other financial institutions”. It estimates that some banks could see the value of their domestic portfolios fall by as much as 4–5%.

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What does this mean for policy makers?

‍The recommendations of the report are wide-ranging and include improving disclosure of nature-related risks to the UK, building capacity to assess risks in financial firms and incorporating nature within regulatory frameworks, such as new green taxonomies and transition plans. Naturally, there is also a call for government to do more to make sure its spending helps protect and restore nature rather than polluting and degrading it. On one hand, this feels optimistic at a time when politicians of most stripes bind themselves with ‘fiscal rules’ which do not take into account longer term risks such as nature degradation (a subject we have covered extensively in New Economy Brief). On the other, if the threats that our treatment of wild ecosystems poses to the country’s economic health are really so bleak, then we should reconsider what really counts as sustainable fiscal policy.

Good morning from New Economy Brief.

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The unwinding of quantitative easing – a ~£900bn bond-buying programme drawn up after the global financial crisis – could leave the next government footing the bill for more than £110bn of losses made by the Bank of England.

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This week’s New Economy Brief provides a simple explainer of quantitative easing (QE) and tightening (QT), and explores the options available to mitigate huge losses for the taxpayer, following the examples of other central banks across the world to protect the spending power of their Treasuries from mass sale of government bonds.

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What is QE?

Quantitative Easing (QE) was introduced in March 2009, in the depths of the financial crisis, with the original intention of trying to support economic activity by reducing the long term cost of borrowing. By purchasing government bonds from banks and other financial institutions using newly created electronic money, the Bank of England would (it was hoped) give those institutions more incentives to then lend money to the rest of the economy. In practice, this impact on borrowing has been limited, but QE in the UK and elsewhere in the world has encouraged banks and other major financial institutions to buy assets like shares and, especially in Britain, property. As a result, economic activity has only been weakly affected, but property prices have continued to rise, worsening inequality.  

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Transfers from the Bank of England to commercial banks. For QE to work, the BoE’s Asset Purchase Facility (APF) acts as a guaranteed buyer of (mostly) government bonds and has acquired almost £900bn of them since March 2009 when the Asset Purchase Facility, established in January that year, came into operation. In return, the BoE increases the reserve accounts of the commercial banks it buys the bonds from, effectively creating new money. The BoE then has to pay interest on those new reserves to the banks. When interest rates are lower than the returns from the bonds, the BoE makes a profit and transfers this to the Treasury. However, since interest rates have risen in recent years, the BoE is now paying out large sums to commercial banks. Its plan to change this situation could cost the Treasury hundreds of billions. In addition, the BoE can lose money by selling bonds back to the market for less than it originally paid for them, as the House of Commons Treasury Select Committee describes.

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Asset price inflation to stimulate demand? Many think QE did a lot of harm, by inflating the price of assets such as shares and house prices, which fuelled inequality as these are mainly held by the well off and increasing their value does very little for the poorest. Simply giving people money might have stimulated the economy more without these problems; the BoE’s own analysis found that for every £1 of QE, only 8p fed into the real economy. However, QE for now appears to be at an end.

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What is QT?

Quantitative Tightening (QT) is the reversal of the QE process. In order to reduce the size of its balance sheet, mindful of the potential need for future interventions and eventual risks to its own credibility as an institution, the Bank of England is making an unprecedented move – selling all the bonds bought through QE. Earlier this year the House of Commons Treasury Select Committee warned that this is a ‘leap in the dark’ as the BoE doesn’t fully understand QT’s effects, despite having “potentially significant impacts for HM Treasury’s spending power for the next decade”.

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What will this cost the taxpayer? The BoE is selling bonds for less than they paid for them, and indemnity laws mean the Treasury has to cover any losses. Economist Daniela Gabor notes that the BoE’s own forecasts show QT could cost the Treasury around £110bn throughout the 2025-2030 parliament under an ‘optimistic’ scenario, whilst “net costs could reach £230bn by 2033, beyond Labour’s wildest green spending dreams”.

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The speed of QT limits the next government’s spending power. For the first time, the BoE and the Debt Management Office (DMO) will be selling government bonds to the market at the same time. The DMO told the House of Commons Public Accounts Committee that in 2023-24, the net supply of gilts (UK government bonds) was “at a historical high” and that bond markets were struggling to absorb them. Increasing the supply of bonds reduces their price and makes future government borrowing more expensive. (Read our previous bond market explainer for more on this.) This means that as QE ‘unwinds’ over the next few years, government borrowing costs will increase just as more spending is needed to fix public services and decarbonise the economy. 

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What could the government do to mitigate the losses?

Last week, the government responded to the House of Commons Treasury Committee, reiterating the importance of central bank independence and their commitment to agreement that the Treasury would cover any APF losses. Given that the BoE’s loss-making gilt sales represent very bad value for the taxpayer, what can be done to mitigate them? Positive Money argues that “it is unclear what is steering the BoE’s decision to time bond sales in a way which would crystallise such significant losses for the public”, or why it is actively selling gilts now – it paid a lot for them with interest rates were low, and will get much less now they are at record highs amid rising demand for government spending. Other countries have protected their taxpayers from losses made from QE, as explained below.

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Keeping the bonds until they mature. Unlike commercial banks, central banks whose assets lose money don’t need to realise that loss immediately. As Positive Money argues, the US and Canadian central banks are being allowed to hold their QE bonds until they reach maturity, and the UK could do something similar rather than having the BoE sell its bonds at a loss and then pass the bill on to the Treasury as currently planned. Experiences in Switzerland and Sweden have confirmed that central banks still function well even when losses on asset purchases put them into negative equity, with liabilities worth more than assets.

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Bring in tiered reserves. Two BoE former deputy governors, as well as former Prime Minister Gordon Brown (the architect of BoE independence) suggested it should pay banks less interest on their reserve deposits to save the Treasury money, but this suggestion has so far been rejected. The European Central Bank, Swiss National Bank and Bank of Japan have introduced tiered reserve systems so banks get the full rate on just part of their reserves, with lower rates or nothing on the rest. The logic being that commercial banks are currently being rewarded without having done anything meaningful to warrant this reward. The New Economics Foundation estimated in 2022 that this could save the government up to £57bn by 2025.

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Tax bank windfalls. Reducing interest on bank reserves works like an implicit tax on the banking sector and its record profits. Since commercial banks are the main beneficiaries of QT, another option would be explicitly taxing bank windfall profits which could recoup some of these gains and offset QT’s fiscal impact – the Thatcher government did this in 1981 and Spain is considering a similar move. 

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‍Slowing the pace of bond sales. Harriet Baldwin MP, Conservative chair of the Treasury Select Committee has argued that a more gradual approach of QT at a slower pace could spread losses out and reduce their impact over a longer period of time. However, last week, Chancellor Jeremy Hunt has said this would only delay losses, not avoid them, and argued that the APF losses should count towards the government’s fiscal rules. Of course, another benefit of faster QT for the Conservatives is that it will constrain the next government's spending power and limits the ability of Labour to achieve their ‘decade of national renewal’- which has arguably been an implicit political objective for some time now.

Good morning from New Economy Brief.

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Getting stuck behind a tractor is an inconvenience usually reserved for narrow country lanes. But recently it has become a common occurrence in several European cities, with queues of tractors blocking roads in Paris and dozens blaring horns outside the Palace of Westminster. There are many reasons why farmers have been protesting across Europe, from cheap imports to nitrogen regulation (Politico has a handy rundown of the various protests and their causes here). But why are these seemingly separate movements all springing up now? And what do they say about things like supermarket profits and climate change? This week, we attempt to provide answers, and some possible ways to help agriculture and food production cope with an increasingly precarious world.

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Why are farmers protesting?

The issues facing farmers vary from country to country. Belgian farmers, for example, are angry about nitrogen regulations, after a Dutch government crackdown on farm emissions. But there are some common themes. Energy and input prices are incredibly high following two years of higher inflation, extreme weather is becoming more common and retail and agrochemical companies are profiting while farmers get squeezed. The latest UK protests, coordinated by Save British Farming and Fairness for Farmers of Kent, blame cheap and poorly controlled food imports, weak trade deals and new sustainable farming policies.

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‍Is this a green issue? As with most culture war issues, it depends who you ask. Some call the wave of protests a “net zero revolt”. However, analysis by Carbon Brief found that many had limited or no connection to climate change. In fact, environmental groups including Friends of the Earth and Greenpeace have issued a statement in support of farmers’ protests in France, and joined protests, citing the hardships smaller farmers face and the need for a just farming system that compensates for the costs of transition fairly. In the UK, Environmental Land Management farm payments schemes, often simply called “Elms”, have been particularly contentious. The schemes aim to promote sustainable farming, ‘rewilding’ projects and climate change adaptation. However, many farmers and farming groups have simply called for more government support with the transition to Elms, and do not oppose them in principle. Vicki Hird, the Wildlife Trusts’ Strategic Lead on Agriculture, says although Elms have their issues, many problems for farmers lie in the wider food system. Hird calls for “stronger retailer and supply chain regulation (including not ditching the Groceries Code Adjudicator) and new, better routes to market so farmers have a choice of who to sell to”.

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‍The Ukraine grain glut. In the EU at least, farmer protests have even become a foreign policy issue. After Russia invaded Ukraine, the EU removed customs duties and quotas on Ukrainian grain imports and rerouted some shipments blocked by Russia via Poland and Romania. This caused a sudden, large supply of cheap Ukrainian grain that undercut producers across Europe, causing friction between Ukraine and its allies. Last month, the EU agreed fresh curbs on Ukrainian imports following farmer protests.

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Who owns the food market?

‍While the cost of living crisis rumbles on and farmers often get as little as 1% of food profits for their produce, some in the food industry are doing very well indeed. According to a report by Global Justice Now, well over 50% of recent price rises in the UK, US and Australia are related to corporate profit increases. The report reveals the food industry’s increasing concentration over recent decades: “While 25 years ago, ten corporations controlled 40% of the seed market, a series of mega-mergers means that today just four – Bayer, Corteva, Syngenta, and BASF – control more than half. Together, they also control more than 60% of the world’s agrochemical market”. Likewise, just four companies control 70% of the world market in agricultural commodities, including grains, meat, and sugar. According to Oxfam, 62 ‘food billionaires’ were created between 2020 and 2022. Large suppliers, able to exercise market power, can exploit shortages to generate exceptional profits for themselves.

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‍The supermarket problem. Retailers also wield huge power over food producers. According to organic farm and vegetable box company Riverford, 49% of British fruit and veg farmers fear going bust in the next year, with 75% of farmers putting much of the blame on supermarkets. The campaigners say supermarkets change their mind about buying produce (sometimes with up to £25,000 worth already grown) and make them wait up to three months for payment (illegal in the EU). The result is unpredictable income and large-scale waste. Meanwhile, supermarkets still make bumper profits.

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Climate and the future of farming

An increasingly unpredictable climate and regular extreme weather is another huge problem for farmers’ livelihoods . According to the World Economic Forum, soybeans, olive oil, rice, potatoes and cocoa have been hit hardest. Costly energy and extreme weather caused most of the rise in UK food prices over 2022, according to the Energy and Climate Intelligence Unit.

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What are the solutions?

From climate change to monopoly power, farmers’ issues are incredibly complex. On a national level, there is scope to make supermarkets treat farmers better. Riverford’s Get Fair About Farming campaign calls on them to accept five principles: buy what they have committed to buy, pay on time, commit to long-term relationships, agree on fair specifications (such as size and shape of vegetables), and pay what they agreed. Central government could make this happen by changing the Grocery Supply Code, as a petition recently debated in Parliament suggested. The new Basic Income for Farmers campaign is proposing that farmers receive a basic income to insure them against extreme weather shocks. More locally, people are increasingly taking the food system into their own hands and bypassing the supply chain by growing their own food. Movements like Right to Grow want to make this easier. It wants councils to let communities grow produce on “unloved public land” and to provide free, accessible maps showing all suitable places. The idea is gaining traction – Hull passed the UK’s first “right to grow” motion last year. The problems facing farmers intersect with some of the biggest issues of our time: the climate crisis, broken markets, inequality, the cost of living crisis, trade agreements – even war. These can’t be solved overnight, but at least on a local level, there may be some small reasons to be cheerful.

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Good morning from New Economy Brief.

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Since the COVID-19 pandemic, much of the global South has been immersed in a debt crisis like nothing seen since the 1990s.

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This week we discuss how this crisis happened, the gaps in international frameworks for debt relief, the role of private finance in trapping countries in debt, and a unique opportunity for a UK law to help them escape the debt trap. 

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Why are countries in debt crisis? 

54 nations spend so much on debt payments that they can’t meet development goals, according to Debt Justice. While the crisis has many long-term causes, two important factors are the changing ownership of sovereign debt and the rising cost of borrowing.  

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The rise of private lenders. Following the 2008 financial crash, interest rates fell in the West and lenders increasingly targeted lower-income countries where they could charge much higher interest. Typical rates from private lenders to lower-income countries between 2008 and 2021 were 5-11% – western governments could borrow at 0-2%. Faced with huge development needs and with rich countries failing to honour aid and climate commitments, many governments had to take expensive loans from international capital markets. The share of developing country debt held by private creditors rocketed from 46% in 2010 to 61% in 2021.

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The increased cost of borrowing. Although much sovereign debt is at fixed interest rates, the cost of borrowing has increased in recent years, so new loans are much costlier. This is particularly bad for countries with worse credit ratings – many already spend more on debt repayments than on education, health and responding to the climate crisis. Debt payments by lower-income governments are now at their highest in 25 years, and those with weaker credit ratings face must pay nine times more to borrow than higher-rated ones.

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Structural causes of the debt trap. 

But the roots of the crisis go back much further. Debtor nations like Ghana are stuck in a cycle of indebtedness and dependence on international creditors. This stems from the economic subordination of African economies since colonial times, which stifles development beyond reliance on commodity exports. 

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‘Structural adjustment’ and debt conditionality in Ghana. For example, In 2023, Ghana's government entered another IMF debt-restructuring programme, its 17th since independence in 1957. Isaac Abotebuno Akolgo explains that these have disrupted Ghana's economic transformation, promoted financial liberalisation and deindustrialisation, and destroyed whatever developmental state capabilities and expertise had existed. Conditions attached to debt make it harder for countries to break out of inherited dependency, and increase fiscal sustainability and self-sufficiency.

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Global tax and trade rules are rigged. Developing countries suffer from high tax avoidance and evasion due to a weak international regime and a network of tax havens (the UK is one off this system’s worst enablers). Tax Justice Network estimated that lower-income countries lost $47 billion to tax havens last year – around half their average public health budget. According to War on Want, trade rules are also rigged to help richer nations extract more labour and resources from the Global South. All this hinders developing states from raising enough taxes to service debt. 

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The ‘common framework’ isn’t working. 

In 2020 the G20 created a ‘Common Framework’ to provide a way for struggling countries to seek debt relief. This has largely been a failure because many nations with unsustainable debt are not eligible, and countries that do qualify must agree to an IMF programme with austerity conditions attached. Andrew Fischer and Servaas Storm explain that the “continued adherence to neoliberal ideology” ensures “the punitive subordination of developing countries in debt distress, through crisis responses, to the… US-centred international financial system”. This risks repeating the mistakes of the 1982 debt crisis and the “lost decades to development that followed”.

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Making private lenders give debt relief. The ‘common framework’ also lacks any mechanism to ensure private lenders take part in debt relief. Private creditors are therefore less likely to agree to lower debt costs than public lenders, allowing bond investors to make huge gains from developing countries. Economist Joseph Stiglitz and the former Argentine and Colombian finance ministers explain that “countries are squeezed so hard for payment that they do not restore debt sustainability, see no economic recovery, and default again after a few years.” They want a new law to incentivise private creditors to cooperate and deter litigation against debt relief requests – something now being considered by New York legislators. 

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London’s unique role. The UK is in a rare position to address the crisis, because 90% of lower-income country debts to private lenders are overseen by UK law. Debt Justice proposes a law to force creditors to cancel unfair debt and agree to be treated like government creditors. Legal changes have international support from figures like IMF head Kristalina Georgieva, and could lower borrowing costs for debtor countries since a more equitable and predictable framework makes debts likelier to be repaid. They could also help unblock debt relief negotiations with China, which has become a very significant lender in recent years but needs reassurance that Western private creditors will take part in debt relief. (See Debt Justice’s campaign for more.)

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Time for a new debt cancellation campaign. 

In the 1990s and early 2000s, millions around the world demanded action on debt. This led to $130 billion of debt being cancelled by multilateral and government lenders for 37 countries. The UK then enacted the Debt Relief (Developing Countries) Act 2010 to ensure private lenders also gave debt relief, on the same terms as official lenders. 

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Preventing future crises. However, because governments of the 1990s resisted addressing the other causes of debt dependency, the problem was never truly solved. Unless we also  reform institutions like the IMF and World Bank, global tax and trade rules, commodity dependence and other drivers of injustice, many countries may never escape the debt trap.

Good morning from New Economy Brief.

‍The government has promised to extend childcare provision to eligible children under three, with the roll-out beginning this week. But how will these additional hours actually be delivered? Is this a “pledge without a plan”?

This week’s New Economy Brief explores what is at the heart of the childcare row, and how childcare fits into the bigger economic policy picture.

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A paper promise?

Back in March 2023, the government promised parents that they would oversee a large expansion of free childcare, providing additional free hours for children not covered by the existing 30 free hours policy (which only covers eligible 3 and 4 year olds). Phase one of the expansion started on Monday with additional free hours for eligible 2 year olds. But, while there is a general consensus that additional childcare support is needed, the expansion has triggered a huge row about whether, under current plans, it can actually be realised in practice. Labour have accused the government of having “a pledge without a plan” and campaigners have warned that many will miss out. What’s going on?

A sector in crisis?  The backdrop to the roll-out is a childcare sector which is incredibly stretched. As we set out previously, there are huge issues with workforce recruitment and retention, many smaller nurseries have closed or are closing, and the cost of childcare for parents is eye-wateringly high. It is worth noting that women make up the majority of the childcare workforce, and that endemic low pay in the sector entrenches gender pay divides.

'Free' hours. In this context, you’d be forgiven for thinking that providing more free hours would be unambiguously good. But the issue, as the Women’s Budget Group points out, is that the government funding for those ‘free’ hours simply isn’t sufficient to cover the costs of provision. This forces providers to cross-subsidise those hours from other parents. The new entitlements are expected to lead to a surge in demand that providers are unable to service. While larger providers (often owned by large investment funds) are able todo this and absorb the costs, smaller ones often can’t or have already closed. Research from the Early Education and Childcare Coalition estimates that close to 50,000 new staff could be needed this year and again next year, and that only 17% of nursery managers planned to expand the number of places they offer. The result is that many parents will end up with government-issued codes that entitle them to free childcare, but no local nursery with available places.

A market mess. In a new report, JRF’s Abby Jitendra argues that the whole subsidies issue simply masks a childcare market that isn’t working. She argues that lax regulation has led to a market characterised by gaps in provision, variable quality, profiteering, and where local authorities lack information to properly manage local childcare markets. JRF recommends a new ‘social licensing model’ where increased public funding is conditional on meeting higher standards of provision.

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Childcare and the economy.

Childcare is obviously hugely important for families, but there is also a much bigger economic context to this debate which is worth unpacking. Along with healthcare and education, social care and childcare can be regarded as part of the social infrastructure which sustains an advanced economy. Often overlooked by mainstream economics and policymakers, spending on social infrastructure tends to generate higher employment than investment in physical infrastructure. A prime example of this is investment in childcare to enable more unpaid carers - predominantly women - to return to work.

Missing potential. According to the Centre for Progressive Policy, the UK economy is missing out on £27bn a year in economic output due to childcare being inaccessible and unaffordable. Unpaid care is overwhelmingly undertaken by women, which leads to a reduced workforce, lower employment and economic activity, a smaller tax base and skills shortages. 1.5 million mothers would increase their working hours if they had access to suitable childcare, generating between £27bn and £38bn in gross value added (GVA) every year, nearly 1% of UK GDP.

Paying for itself? The Women’s Budget Group calculates that to provide 30 hours of free childcare for all children aged 6 months to 4.5 years, would require additional spending of £10.4bn a year and create approximately 310,000 new jobs. It would increase revenue from income tax, indirect taxes and reduced spending on social security which would make the additional spending requirement fall from £10.4bn to £3bn. This means that about 70% of the gross annual spending would be recouped simply from increased employment and tax revenue.

Mind the gaps. Insufficient childcare also underpins the gender pay and employment gaps which continue to hold back the UK economy. If women had the same level of participation in the labour market as men, the average local economy would generate, and additional £1.68bn of GVA per year, equivalent to £88.7bn for Wales, Scotland and England, nearly the same as the contribution of the financial sector in the UK. Completely closing gender employment gaps between all local authorities would increase the UK’s economic output by £23bn (1% of GDP).

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Good morning from New Economy Brief.

There are many policy questions about the green transition, but one of the most pressing is – who is actually going to do it?

We’re always hearing about how many jobs the shift to net zero will create. But when it comes to making the green transition happen on the ground – retrofitting 9 million homes with heat pumps and insulation, building infrastructure for electric vehicles nationwide and making the countless other changes on the ground that are needed, it seems to be taking its time.

There’s huge demand to make houses more energy efficient, for instance, but schemes like the Green Homes Grant have run up against a shortage of skilled people to do the work.

Decarbonisation takes new skills, and the UK is in a training and education crisis. This week’s New Economy Brief explores the roots of the ‘green skills gap’ and outlines some potential solutions.

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What is the green skills gap? 

In the UK, most workers lack the skills required for emerging green jobs, especially outside London, with the lowest average skill levels found in the North and Midlands. The New Economics Foundation (NEF) estimates that the average worker needs around nine weeks of additional intensive full-time training to access green jobs (with significant regional variation), whilst fewer adults have been participating in education and training over the past decade. Closing this gap by 2030 would mean restoring adult learning participation rates to those of 2001/2002 under Blair's Labour government, albeit focusing on different kinds of training.  

Why is this important? Urgent action is needed to ensure a fair transition in skills, given the imperative to rapidly decarbonize the economy, rising living costs, pandemic recovery, Brexit uncertainties, and automation. At most risk of being left behind in this transition are workers in low-skilled, low-paid, and precarious jobs, as well as those in carbon-intense industries. There is also a clear interaction with migration policy. If the UK needs certain skills, and we can’t or won’t train UK workers in those skills, then businesses will seek them from abroad. Finally, Chris Dillow also makes the point that reallocating labour takes time; “We can't therefore merely flick a switch and move tens of thousands of workers quickly from retailing to healthcare, construction or the green economy.” This matters because labour shortages could not just delay net zero, but also make it far more expensive. 

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So what is driving the skills gap? 

The UK faces skill shortages and low productivity because both the government and the private sector have slashed investment in developing skills. Austerity resulted in cuts to adult education spending, while employer investment in skills dropped by 19% between 2011 and 2022, especially in larger businesses, in the raw materials and service sectors. The job market has gotten more insecure since 2010, so businesses have less incentive to skill up workers they think may be gone before long. A study from the Prince's Trust also found that the cost of living was “threatening the aspirations of an entire generation” as rising prices force more people to accept any work rather than gain new skills. The low wages many apprenticeships offer add further risk for people pursuing opportunities to learn new skills mid-career.

Need for a more active state. The skills gap is another unfortunate consequence of a lack of clear industrial strategy. Compared to global competitors, the UK falls short in supporting large-scale upskilling, particularly in providing financial assistance to workers and incentives for businesses to provide training despite frequent job turnover. More than 40 organisations and businesses wrote to the UK government at COP28 demanding bolder action to address the deepening green skills deficit.

More carrots, less sticks. The conditions attached to claiming Universal Credit also hinder claimants from retraining. Back in 2022 the DWP’s ‘Way to Work’ campaign aimed to fill mounting post-pandemic job vacancies by giving claimants just four weeks to find a job in their preferred industry, compared to three months before. After that, if they turn down job offers from any sector, they risk having their benefit payments cut. This has made it harder for workers to undertake meaningful training, forcing people to accept work they aren't suited for, in industries they know nothing about. Studies have shown that businesses dislike these types of benefit conditionality, which means they “receiv[e] large numbers of unsuitable and unfiltered job applications, with associated negative resource impacts”. This doesn’t just waste employers’ time; it also makes it harder for candidates to secure employment. (As an aside, a 2016 report from the National Audit Office found no evidence that benefit sanctions do anything to help claimants find a job.)

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Enter the National Skilling Wage.

A new NEF proposal aims to de-risk skills investment for both businesses and workers by creating a National Skilling Wage to boost productivity and “provide workers and businesses with the financial stability, and confidence, to commit to (re)training.” This would reforms the government’s support for upskilling in two core ways:

Switching state support from corporation tax relief to a payroll tax credit. The National Skilling Wage would give all employers a flat-rate payment for every hour a worker spends on an approved training course. The idea is similar to the ‘human capital tax credit’ proposed by the Resolution Foundation, but employers would be paid via payroll taxes instead of corporation tax as it is now. Currently, corporation tax relief on training doesn’t target specific areas for upskilling, and is available only to businesses that make a profit; it favours large businesses training already highly skilled workers, and isn't up to the job of closing the green skills gap. NEF’s solution would increase state support for training and allow key skills-shortage courses to be targeted with additional incentives at key skills-shortage courses. It would also give businesses more reason to upskill lower-paid workers, and could support all employers irrespective of their profitability (including charities and other not-for-profit organisations).

Reforming student finance into a Personal Learning Account. Student maintenance loans are too low to attract mid-career workers as the cost of living rises, especially for those with financial and caring responsibilities. A Personal Learning Account model, providing a simple drawdown facility throughout a learner’s career should mean more people can take advantage. But importantly, NEF argue that the account should pay at least the real living wage for the time spent learning. (Read their paper for more about their proposed reforms, including various funding options.)

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Coordination is the key. 

Closing the green skills gap shouldn’t be an impossible policy problem. We have a rough idea of the skills we’ll need in future, we know which high-carbon industries will probably lose workers in the coming years, and we know how to train people. (Autonomy’s ASPECTT database is a good way to track the long-term trends in the UK’s skills composition to see how the skills we have now measure up against what we need for the green transition.) But bringing all these things together requires a proper industrial strategy. The government’s own Green Jobs Taskforce made this point when it recommended the creation of a national body bringing unions, businesses and government together to plan the workforce transition – a long-standing trade union demand. This suggestion was ignored in the Net Zero Strategy, but without this kind of institutional architecture, it’s hard to see how the skills gap can be closed and we can achieve a rapid, just transition.

Good morning from New Economy Brief. 

As we explored back in January, the outlook for local authority finances is pretty dire. Many are going bankrupt, and services are being squeezed as a result. With central government looking unlikely to give councils a boost any time soon, the situation often feels hopeless. 

But is it? Abundance, a new organisation launched this month, might have the answer. Public-Common Partnerships, its first major report suggests, “can reduce the public sector´s vulnerability to the pressures of private economic power and to the 4-year political-electoral cycle”. The report asks what the UK could learn from European “new municipalism” and how this could affect the “fight for democratic renewal and a just transition”.

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The model.

‍Public-Common Partnerships (PCPs, sometimes called public-civic or public-community partnerships) are, in Abundance’s words, “a way for organized communities, working in partnership with relevant public bodies, to gain ownership and control over the assets and resources (buildings, enterprises, farms) which impact their lives”. As outlined in Common Wealth’s seminal report on PCPs back in 2019, this means co-ownership between a state authority and a “Commoners Association”, who would steer the project alongside a third group made up of others with an interest in it, such as trade unions and relevant experts. Beyond this framework of co-ownership, Common Wealth thinks PCPs could take many different forms and should “emerge as an overlapping patchwork of institutions that respond to the peculiarities of the asset concerned”. In other words, PCPs are not a one-size-fits-all approach.

Democracy. PCPs are a response to the privatisation and marketisation of utilities and resources, but they rely far more heavily on direct community involvement and democracy than outright state ownership. As the Centre for Local Economic Strategies (CLES) states, a PCP’s goal is not for local authorities or institutions to “‘own more land’, but instead to ensure that the land they do own is run by and for the people”.

The shadow of PPPs. If PCPs sound a little familiar, but not quite, you might be thinking of public-private partnerships, or PPPs. In many ways, PCPs have arisen in response to the problems these partnerships between government and the private sector caused. According to Common Wealth, PPPs have led to a massive transfer of public wealth to private companies and their owners – a transfer that is still underway, with payments set to exceed £199 billion by the 2040s. 

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Case studies.

‍Abundance’s report draws heavily on international examples, particularly those of Barcelona and Naples. Can Batlló, a 13,000 square metre former industrial complex in La Bordeta, Barcelona, is home to 30 community initiatives including bars, a community garden, sports facilities and a publishing house. It employs around 400 people and is used by more than 50,000 people. The projects are linked by a coordination committee and a weekly general assembly open to anyone from the neighbourhood. In Naples, a 16th-century building known as L’Asilo is run by democratic citizens’ assemblies, a governance model now officially recognised by Naples City Council. You can read more about both projects in Abundance’s report. 

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The impact.

‍For Abundance, the case for PCPs is more urgent than ever. With the advent of Bidenomics and the need for much greater state intervention to tackle the dual crises of low growth and climate catastrophe, the politics of state-led investment will only become more salient. But while this is generally debated at a national level, Abundance argues that local investment decisions will become increasingly politicised, too. It warns of a “technocratically managed green transition” dominated by PPPs, in which public wealth is transferred to private companies and by extension to the very richest. Also, in the context of cash-strapped councils being urged to rapidly sell off assets, PCPs could be a much needed intervention to avoid wealth extraction from communities. 

How would they happen? It is difficult to predict PCPs’ future in the UK, given that they are usually established organically in response to community need and are reliant on the will of local government and local community. Often, PCPs arise from years’ long struggles against private investment in the local area. Examples in the UK include the Wards Corner Community Plan, an ongoing proposal for the community-led and community-owned refurbishment of an indoor market in Tottenham. Following a 20-year local battle against the demolition of Wards Corner to build unaffordable luxury flats and chain stores, the private developer has now backed out of the project with the local authority, Haringey Council, stating their commitment to a community-led future for Wards Corner. See more UK case studies here.

Good morning from New Economy Brief.

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Greedflation and corporate profiteering is high on the agenda for the next US presidential election campaign. Incumbent Joe Biden put it front and centre in last week’s State of the Union address, and this week the administration’s outlined how the government will “lower costs for the American people” in their final budget, targeting healthcare and childcare prices, housing and rents, expensive energy and water, education costs and student debt.

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There is similar evidence on the contribution of corporate profiteering to UK inflation as similar as in the US, but why is it less salient on our political agenda? This week’s New Economy Brief rounds up the evidence on ‘greedflation’ in the US and UK and asks why the inflation debate is so different on each side of the Atlantic.

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President Biden puts ‘greedflation’ at the centre of his re-election campaign.

Ahead of last week’s State of the Union Address, the White House released a fact sheet explaining how the Biden Administration is taking action to address corporate price gouging. President Biden is making tackling ‘greedflation’ a central part of his re-election campaign, taking aim at the Republicans for having “no plan to lower costs for Americans” and charging them instead with “proposed giveaways to the wealthy, big corporations, and Big Pharma that will increase the cost of prescription drugs, utility bills, health insurance premiums, and student loan payments for millions.”

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How the US has handled inflation is a crucial part of the election debate. These attacks are of course part of the political debate in the run-up to the US election in November, but they are also a central part of new economic discourse on how to tackle inflation. The US debate on how to accomplish a ‘soft landing’ from high inflation can be crudely simplified as an argument between those who think inflation was driven by supply-side shocks (supply bottlenecks following the Covid-19 pandemic and the energy and food price shocks following recent wars) and those who think it was driven by excess demand stimulus (government spending on pandemic income support and green industrial strategy, such as the Inflation Reduction Act).

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Bucking the orthodoxy. When the Biden administration chose to pursue a large fiscal stimulus and target green growth as its central economic policy, it is fair to say that not everyone was impressed. Commentators on the right and from the economic mainstream argued that this programme would result in persistently high inflation, cause sky-rocketing interest-rates which would cost jobs and damage economic growth, and would make a ‘soft landing’ (where inflation falls without triggering widespread unemployment or a recession) impossible. Former Treasury Secretary Larry Summers described Biden’s economic policy as “the least responsible macroeconomic policy we have had in the last 40 years” and predicted mass unemployment. However, these warnings were wide of the mark. In fact, the US economy has been one of the global success stories during the recovery from the pandemic, with relatively high growth, low unemployment, and inflation falling back – making a soft landing look within reach. As economist Paul Krugman argues, “it’s starting to look as if Biden got it more or less right”.

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The alternative explanation. The Biden administration’s story throughout the period of high inflation has been that prices were rising higher than they needed to because of price gouging by companies. This was given a theoretical framework by Isabella Weber’s “sellers’ inflation” theory and has been backed by research such as a report by The Groundwork Collaborative which found that corporate profits have driven more than half of the inflation seen in the US. Politically, this lets the Biden Administration shift the blame for inflation away from its own spending programmes and onto profiteering corporations, as well as enabling them to frame policies to combat corporate power and implement green industrial strategy as anti-inflationary.

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Stopping price-gouging as an anti-inflationary policy. Now, Biden is taking aim at US corporations for ‘shrink-flation’; where businesses reduce the size of their products but keep charging the same price. Last month Senator Bobby Casey introduced a bill, the Shrinkflation Prevention Act, to “protect American families from greedflation by banning grossly excessive price increases and crack down on corporate price gouging”. The Act classifies shrinkflation as unfair or deceptive, and authorises the Federal Trade Commission (FTC) and state attorneys general to pursue civil actions against corporations who engage in it. (Since 2021 the FTC has been headed by Lina Khan - read our previous New Economy Brief on how US competition policy has evolved to focus on curtailing the power of monopolies to set higher prices since her appointment.)

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There is evidence of ‘greedflation’ in the UK. 

But this debate about inflation and ‘greedflation’ is not limited to the US. The IMF has warned that rising corporate profits drove almost half the increase in EU inflation between 2021 and 2023, but is profiteering also fueling inflation in the UK? The answer seems to be yes. Andrea Coscelli, chief executive of the Competition and Markets Authority (CMA) has warned that corporate concentration in UK markets is driving up prices for lower-income households. The Bank of England found that companies that protected their margins by increasing prices, passing on higher costs to their customers, accounted for around 75% of UK inflation at the end of 2022. More recent research by IPPR and Common Wealth found that UK inflation has been higher than elsewhere due to the monopoly power of energy companies and food and commodities giants to set higher prices: “some stock market-listed firms not only protected their margins but also increased them, not only passing inflation on but further amplifying it.” If we are also suffering from ‘greedflation’, what solutions are available?

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Stress-testing inflationary sectors. A recent paper by authors including Isabella Weber, an economist at the University of Massachusetts, proposed that governments should stress test industries that can unleash inflation spikes, just as they do with too-big-to-fail banks. They identified eight strategically important sectors which drove the second round effects of inflation after the pandemic and invasion of Ukraine, and argued that a wider set of policy tools is needed to prevent price gouging and sticky inflation.

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Excess profits = windfall tax? IPPR’s Carys Roberts proposed the government should levy excess profit taxes on other sectors of the economy which have made windfalls (beyond oil and gas) and use the money to support households and build more resilient supply chains for key commodities, helping tackle external causes of inflation. This could reduce inflationary pressure by discouraging profiteering, as other research by IPPR and Common Wealth has observed. The former’s George Dibb proposed exploring excess profit taxes to discourage rent-seeking, and suggested that “the UK’s CMA should launch pre-emptive investigations into the potential for excess profits in the most concentrated sectors of the economy.” Former IMF Chief Economist Olivier Blanchard explained how the state can fight inflation without resorting to harmful monetary policy, for instance by subsidising the cost of energy using money raised with excess profit taxes). Positive Money calculated that annual bank profits are four times higher than they were in 2020 and a windfall tax on UK banks could raise between £3.5bn - £14bn this year depending upon its ambition.

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The leap across the Atlantic.

Given the outsized influence of American culture and politics in the UK, the differences between the national debates on inflation are striking. The US economic success in combining falling inflation with good growth and job creation has barely registered in British economic discussions, and the focus on ‘greedflation’ and taxing the profits of corporations and wealthy individuals in Biden’s State of the Union address are well beyond anything heard from the mainstream parties in the UK. This is not for lack of evidence. In fact, the Bank of England Monetary Policy Committee member Catherine Mann recently made a speech arguing that one reason why inflation has fallen so slowly is that the spending habits of the wealthiest are effectively insulated from the impact of higher interest rates. Yet, this has not sparked a national debate on the taxation of wealth.

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Political debate vs economic evidence. A lot of this points to the poorer quality of debate in the UK media and politics compared to the US, where civil society is much better funded and more able to ensure commentators and politicians are more informed by valuable analysis and campaignable information. Perhaps partly as a result of the volatile politics around Liz Truss’ premiership, the UK debate has been characterised by its parochialism and deference to established thinking about inflation. As President Biden continues to put this issue at the heart of his reelection bid, it will be interesting to see if any of his State of the Union themes are picked up by UK parties. 

Good morning from New Economy Brief. 

So, that’s it. The last fiscal event before the general election (probably…). Given that this week saw the Conservatives’ estimated vote share slump to a record low, all eyes were on Jeremy Hunt to see what rabbits he might pull from his red box in a bid to claw back support. But given that the Government’s major announcement – a 2p cut to National Insurance Contributions (NICs) – was already widely briefed ahead of the Budget, the Chancellor’s statement to the house was broadly in keeping with expectations. 

The result is what the Chancellor calls a “Budget for Long-Term Growth”, and others less favourably describe as a “cut and run” Budget. In other words, cut tax rates now and hope for electoral success, then run, leaving future administrations with less money for public services. This week, we explore the detail, politics and implications of the Spring Budget.

Cut taxes, gain votes? The Chancellor’s big policy, the “worst-kept fiscal secret in Westminster”, was to cut NICs from 10% to 8% from April, on top of another 2p cut that was announced in the Autumn Statement and introduced at the start of this year. But this might not be the big vote winner the government is hoping for. According to polling by Stop the Squeeze, less than 8% of voters have even noticed any difference in their finances from of January’s NICs cut, and clearly it did not lead to a turnaround in the polls for the Conservatives. Will it be different this time? Probably not. According to the New Economics Foundation, the richest households will gain 12 times more from this latest NICs cut than those on the lowest incomes. Furthermore, households in London and the south-east stand to gain far more than those in other regions, with Londoners likely to gain over £400 more annually than those in the north-east – not great for winning back that Red Wall. A snap poll by Savanta finds that 74% think the Budget isn’t enough to help them with the rising cost of living. Ouch.

• Paying for it. The cost of the cut will be partially offset by the abolition of the ‘non-dom’ tax status and other tax increases. The first of these (originally a Labour policy), will generate an estimated £2.7 billion annually by making UK residents who have their permanent “domicile” abroad start to pay UK tax on overseas income or investment gains. Also rising are taxes on vapes (from 2026), tobacco and non-economy class flights. Tax breaks for owners of holiday lettings will be scrapped and the windfall levy on oil and gas producers will be extended another year to 2029.
• What else? Other policies worth mentioning are an increase to the threshold at which child benefit is tapered from £50,000 to £60,000 and the introduction of a British ISA where individuals can save an additional £5,000, invested only in UK companies, on top of the existing £20,000 ISA allowance. 
• Support for those on the lowest incomes. Poverty campaigners have welcomed certain measures in the Budget such as the abolition of the £90 Debt Relief Order fee and a six month extension of the household support fund. But there was no mention of bringing back the cost of living payments that ended last month. And many argue that the Budget did little for those on the lowest incomes given that the main spending pledge of a NICs cut disproportionately benefits the wealthiest. 

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Gaming the rules. The run-up to the Budget was dominated by speculation about how much ‘headroom’ the government would have within its fiscal rules and whether the Chancellor would launch another raid on future public spending to fund tax cuts. The reality is that the government ended up meeting their fiscal rules by a slender margin of just £8.9bn, with the Office for Budget Responsibility (OBR) repeatedly warning that this number depends on the government raising taxes such as fuel duty, which they have so far been reluctant to do.

• The big squeeze. But the OBR reserves its sternest warnings for the government's plans on future public spending. While Hunt did not revisit future public spending totals, the OBR points out that his plans imply real-terms cuts of between 2.3% and 3.6% for unprotected departments (depending on whether the government fulfils its stated ambitions on defence spending). Given that “performance indicators for public services continue to show signs of strain”, the OBR warns that “delivering a 2.3 per cent a year real terms fall in day-to-day spending would present challenges.” Which is about as close as they can come to saying the plans are unrealistic. IPPR’s George Dibb also flags that the government has pencilled in a further large drop in public investment.
• More with less. The government’s answer is that public spending can be made more efficient if there are productivity gains in the public sector – it promises a small pot of money for IT improvements which it claims will deliver huge long-term savings in the NHS. But it is not the NHS budget which is set to be cut under future spending scenarios, so it is unclear how these productivity gains could let other departments deliver the same services with less money.
• A leap in the dark. It is important to emphasise, as we did for the last fiscal event, just how completely the government's tax cuts depend on squeezing spending later. These cuts are the foundation of the whole government economic narrative. It is even more extraordinary, then, that the government has confirmed that there will not be another spending review before the election. This means we will get no more detail on these spending plans and what they might mean for services, and leaves departments (whose budgets expire in March next year) unable to plan for the future.‍
• Rule breakers? One achievement of this fiscal strategy has been to unite wonks across the political spectrum in condemnation of the UK’s tax and spend regime. While there is certainly still disagreement on the ideal policy mix, it is now extremely difficult to find anyone who will defend the current set of fiscal rules. Which makes it even more extraordinary that they continue to fundamentally shape economic policy-making.

A surprising direction? There may not have been any policy ‘rabbits’ in the Budget, but the Chancellor’s speech did contain a number of surprising arguments which are worth exploring (even if they weren’t necessarily backed up with policy). First the Chancellor explicitly made the case that short-term public capital investment could deliver long-term fiscal benefits (in the context of the NHS productivity plan). This is a departure from the government’s revealed preference for cutting public investment. Perhaps more interesting was his argument that the unequal taxation of work and investment income is “unfair”. This is what tax campaigners have been arguing for many years in calling for changes  like bringing capital gains tax into line with income tax. The Chancellor may have used this argument to justify a NICs cut, but it may open the door for others to propose more revenue raisers by increasing taxes on ‘unearned’ income.

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‍What’s next? Jeremy Hunt ended his budget speech by floating an ‘ambition’ to abolish NICs entirely, perhaps foreshadowing any further fiscal statement we might get before the election or even the Conservative manifesto. But given that doing this would cost around £46bn (more than twice as much as Labour’s original Green Prosperity Plan, which the government described as unaffordable Hunt himself labelled a “splurge” that would “push up inflation, push up interest rates, and make mortgages more expensive”), it seems likely to remain an ‘ambition’ rather than a concrete policy pledge. As the election’s timing is still uncertain, we are still in the dark about whether there is another fiscal event to look forward to before we get there. As for Labour, the government’s theft of their non-dom policy will necessitate some thinking about how to replace the revenue. Ultimately, the Budget does nothing to dispel the impression that the real questions about UK economic policy are on hold until after the election, and that little of what the Chancellor has announced will affect either the economy or the polls. As the FT’s Robert Shrimsley put it, this is “an expensive way to not shift the political dial”.

Good morning from New Economy Brief.

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Sir Robert Stheeman, outgoing head of the UK Debt Management Office has warned that financial investors in government bonds markets might increasingly act to restrain fiscal policy, citing the bond market crisis following Liz Truss and Kwasi Kwarteng’s ‘mini-budget’ in September 2022. 

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The role of the debt markets and so-called ‘bond vigilantes’ has returned to prominence following the mini-budget. But what are bond vigilantes? And when should (and shouldn’t) policymakers worry about them in relation to government borrowing? This week’s New Economy Brief explores the relationship between bond markets and fiscal policy, and examines what actually happened in financial markets in late 2022.

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Misunderstanding the ‘mini-budget’.

Since bond markets reacted badly to the Truss-Kwarteng ‘mini-budget’ in September 2022,  there has been a lot of political commentary about the risks of government borrowing. But what actually caused the bond market crisis is still hotly debated, and how we understand it has important political implications. Simon Wren-Lewis puts it best when he says the media often misunderstands financial markets and treats them like “a vengeful god: a powerful but mysterious entity that has the potential to create havoc, and that therefore has to be treated with great respect and offered the occasional sacrifice, like less help insulating homes.” Let's get into it. 

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What is the bond market?

The bond market is a financial market for government debt. When government borrowing rises, the government’s Debt Management Office issues bonds to sell to financial institutions, such as pension funds, in order to finance that debt. Institutions who lend the government money then hold a UK government bond (or ‘gilts’), which allows them to receive interest payments when the government services its debt. These are essentially tradable IOUs from the government, and many investors in UK government bonds are pension funds looking for steady returns on their investment over a long period. 

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When does the value of bonds change? Bonds are worth more money when the interest rate that they pay out (known as their coupon) is higher than the interest rate on other financial instruments, such as the interest rate on central bank reserves. A bond’s 'yield’ is the rate of return investors receive on their capital (the bond coupon divided by the price of the bond), and the sum of these coupon costs is effectively the government's cost of borrowing. A lot of bonds pay very low interest rates that have been fixed over a number of years - much like a fixed rate mortgage - though many are also tied to the rate of inflation (‘index-linked gilts’). 

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The role of bond traders. So when traders buy or sell bonds, they are effectively making bets on how interest rates will change over the coming years, just like a prospective house buyer does when they decide between a fixed or variable rate mortgage. Movements in the bond market primarily represent changes in traders’ expectations of how interest rates will change in future. When interest rates are widely expected to fall, bond prices will tend to rise; when they are expected to rise, the opposite happens.

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How the bond market reacts to government policy.

If bond traders believe government policy might lead to inflation and an increase in interest rates, they will sell UK debt and look for higher-yielding investments elsewhere. As unwanted gilts flood the market, their values fall and their yields rise – so when the government needs to borrow again (either by issuing new bonds or refinancing existing bonds as they mature), it must pay more to do so to attract buyers of the debt. This activity is what people mean by ‘bond vigilantes’: traders expect inflation and higher interest rates will hurt bondholders in future, so they demand more compensation for running those risks – the so-called ‘risk premium’ – and in the process drive up government borrowing costs.

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This is what happened during the mini-budget. After winning the Conservative Party’s leadership contest, Liz Truss and Kwasi Kwarteng announced a surprise fiscal event including an additional £45bn per year in tax cuts, funded entirely by borrowing, at a time when the Bank of England was already raising rates to combat inflation. The government bypassed the requirement for the Office for Budget Responsibility to assess how these plans would affect inflation and received criticism from the IMF about their impact. The Bank of England (BoE) announced that it stood ready to raise interest rates in order to bring down inflation and calm financial markets, but the Truss administration criticised the BoE’s independence. This reinforced the loss of confidence in the policy package, compounding the damage by increasing uncertainty about the future path of interest rates. 

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The BoE’s intervention to save pension funds. UK pension funds immediately felt one of the mini-budget’s knock-on effects. Many funds invest in government bonds, but some also borrow money to buy more bonds and gain extra returns. When government bond values fell, those who had lent this money demanded extra capital as security on the debt. This forced the pension funds to sell bonds to find the money to meet these demands, which drove down the value of bonds even further – this was known as the Liability-Driven Investment (LDI) crisis. The BoE was eventually forced to intervene to stabilise the market (serving as the ‘debt buyer of last resort’) by buying £65bn of government bonds to support their price. (For a helpful explanation of this, watch former bond trader Gary Stevenson’s appearance on Novara Media after the mini-budget.)

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Clarifying the causes of the bond market crisis.

Financial markets reacted badly to all this, which sent government bond values and the pound both plummeting. But there is a debate about exactly what drove bond vigilantes to sell. You often hear that it was increased government borrowing which sparked the crisis, as if traders thought the mini-budget put the UK on track to default on its debt, but this explanation misunderstands how the markets price government debt. 

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The level of public debt is not correlated with higher bond yields. Looking at long term historical data, BoE Deputy Governor of Monetary Policy Ben Broadbent argued that, while a country's fiscal position does matter and can affect its creditworthiness, it doesn't always directly influence bond yields and borrowing costs. Just like for individuals or companies, if lenders worry that a government might not be able to repay its debts (default risk), they will demand a higher interest rate on  new loans to compensate them for running that risk. But governments that increase their borrowing don't always have to pay more to do so. The data suggests that changes in public debt levels aren't the main factor influencing bond yields. Other factors such as expectations about the future path of interest rates and inflation, are more important.

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Bond traders did not sell because of concerns about UK debt sustainability. Many investors use the work of credit rating agencies to help them understand the risk that governments will default on their debt. Finance Watch explains that when analysing the likelihood that a country will fail to pay its debts, the agencies look mainly at strong institutions and national wealth, as well as at measures of debt affordability like how much of the government’s revenue is spent on interest payments. But the size of the country’s debt stock, as expressed in its debt-to-GDP ratio, has “no correlation” with its creditworthiness. For instance, Japan has a high credit rating despite a 250% debt-to-GDP ratio. What the funds are used for matters; new borrowing that is productively invested will affect a nation’s credit very differently from debt to finance economic mismanagement. The fact that the UK maintained its double-A rating throughout the mini-budget episode is further evidence that the bond market ‘panic’ wasn’t a reaction to higher public borrowing. 

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It is not about the size of borrowing; it’s how you use it. IPPR’s Carsten Jung and Carys Roberts concur that “market turmoil was mostly caused by surpassing the short-term inflation constraint” and they “do not think that the market reaction was mainly due to long-term debt sustainability considerations”. This doesn’t mean investors don’t care about debt sustainability, but they do require a credible overall fiscal framework and a strategy to deliver it. The shock repricing of bonds after the mini-budget was due to elevated inflation expectations and doubts about the Truss administration’s growth claims. Contrast this to the bond market’s calm reaction to the much larger borrowing required by the US Inflation Reduction Act, which created jobs and growth, boosted productivity and helped control inflation.

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Learning from mistakes. 

So although the bond-market meltdown has often been blamed on too much government borrowing, our analysis shows this explanation is far too simple. Bond investors themselves have warned that interpreting the crisis this way would mean we learn the wrong lessons from it. 

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What are the right lessons? One is that the government can borrow to fund public investment without spooking the bond market – as long as it emphasises that this won’t cause inflation. LSE’s Dimitri Zenghelis and Anna Valero concede that the mini-budget showed that policymakers “have reason to beware the bond market". But they stress the “clear distinction between a programme of unfunded tax cuts (to the order of £45 billion) and the phasing in of an investment programme that can plausibly boost the supply side of the economy”. Simon Wren-Lewis also explains why “the Truss crisis has no relevance to a future Labour government wanting to increase public investment.” Truss and Kwarteng made a mistake big enough to go down in political history. But in the long term, getting the bond market’s reaction so wrong that we starve the UK of desperately needed investment would be an even bigger error. 

Good morning from New Economy Brief.

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With the Budget on 6th March fast approaching, this week’s New Economy Brief looks at the economic and political backdrop, unpacks the idea of ‘fiscal headroom’, and explains how the narrative that the economy has ‘turned the corner’ is built on plans for huge public sector cuts.

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Here we go again. 

It’s Budget season again and if it feels like we were here quite recently, that’s because we were. When Chancellor Jeremy Hunt poses with his red box on 6th March, it will have been just 15 short weeks since he delivered his Autumn Statement in November. These short gaps are one of the reasons many people argue that the UK should return to a single major fiscal event per year, something that Shadow Chancellor Rachel Reeves has promised as part of her Fiscal Lock. The reason previous Chancellors have not adopted such a policy is that two fiscal events a year means two opportunities to dominate the news cycle for a few weeks and force everyone to write about the government’s economic agenda. And as we are no exception, let’s dive straight in.

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Time is running out. The central fact about this Budget is its political context. It is widely seen as the government’s last chance to do anything that voters might actually notice ahead of a general election, which is still expected around November. There may turn out to be another fiscal event later in the year on the eve of the election (yes, that would be three in about 9 months) but it would be too close to polling day to have any real effect. 

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Déjà vu. This need for short-term political solutions is one of the reasons that the Chancellor is rumoured to be turning once more to the button marked ‘tax cuts’. However, the other salient piece of political context is that the government already made some reasonably chunky tax cuts in November, and they don’t seem to have narrowed the gap in the polls at all. This is at least partly because those cuts came in the context of overall tax rises through the process known as fiscal drag (where tax thresholds are frozen in cash terms, so people gradually pay more), which meant many people won’t be paying less tax at all. Though it could also be because the public would prefer more spending on public services.

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Once more for luck. Despite this lack of obvious political impact, speculation is rife that the Chancellor will return with more cuts to National Insurance Contributions or to income tax in the Budget (along with the annual ritual freezing of fuel duty). One thing he is less likely to do is permanently unfreeze the tax thresholds and end the fiscal drag, partly because it is less dramatic than cutting the headline rate, and partly because it would be much more expensive, possibly even expensive enough to breach his fiscal headroom. Which brings us to…

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Restricted headroom. 

The issue of available ‘fiscal headroom’ has been unusually prominent in the lead up to the last few fiscal events. Given that it is often misunderstood, it is worth unpacking. Fiscal headroom is simply the amount the Chancellor can spend without breaching his fiscal rules, and in particular the rule which is most at risk of being breached, which is that the debt/GDP ratio should be falling at the end of a rolling five-year period. In the run up to a Budget, the Office for Budgetary Responsibility (OBR) provides regular updates about the size of this headroom in order to inform the Chancellor’s policy-making process. These numbers (or a heavily spun version of them) inevitably find their way into the press, leading to a kind of running commentary on the available headroom and what this means for the Budget’s contents. This is often presented as the OBR ‘handing the Chancellor a war chest’ or ‘slashing the Chancellor’s room for manoeuvre’. 

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There are few obvious issues with this. One is that the amount of headroom bears no real relation to how much money the Chancellor could spend at the Budget. The fiscal rule is quite arbitrary; the Chancellor could change it (and often has). Another problem is that the OBR projections for the debt/GDP ratio in five years time are highly uncertain, and small changes in the path of inflation or GDP growth could mean that the numbers are out by tens of billions of pounds either way. As Sam Freedman notes, it is “genuinely crazy” that a highly uncertain projection of whether the debt/GDP ratio falls slightly between 2028 to 2029 is the key determinant of government policy in February 2024.

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Go forth and multiply. Another key issue with breathless headroom commentary is that of course, the decisions taken in the Budget should themselves affect the debt/GDP ratio, and therefore the headroom available. ‘Should’ is an important word here. The OBR has faced criticism over whether it is too pessimistic about the impact of policies on GDP growth. Broadly speaking, many on the right (including former Prime Minister Liz Truss) believe that the OBR underestimates the growth that tax cuts will generate, while others make the case that its negativity about the benefits of investment has pressured governments to cut public investment in recent years. NEF's Lydia Prieg proposes changes that the OBR should make to its forecasting methodology to enable more green investment: extend the time horizon of forecasts to properly account for the benefits of investing in climate policies, education and skills, and explore what sorts of investments would have stronger positive economic impacts per pound spent as IMF evidence has shown green investments to have higher multiplier effects than carbon intensive equivalents.

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So, what is the headroom? However, the government seems determined to stick with the idea, so it is worth exploring what is driving the changes in fiscal headroom ahead of the Budget. In broad terms analysts expect fiscal headroom to rise this time around for three main reasons. The first is that inflation is now expected to fall slightly faster than it was in November. This in turn lowers interest payments on index-linked government debt, creating a little more room. Second, perhaps counterintuitively given the UK has just entered a recession, the general expectation is for a slightly more optimistic growth forecast, which again creates a tiny bit of room. Finally, the rolling debt target will have been pushed back a few months longer, which in turn helps the target to be met.

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Don’t mention the cuts. But to focus on any of these causes as the reason there is additional headroom would be to miss the much bigger point, which is that the headroom only exists at all because of the real-terms spending cuts the government has pencilled in for the post-election years. These cuts, affecting both day-to-day spending and investment, are widely thought to be completely unrealistic, which is why the whole exercise has been dubbed a ‘fiscal fiction’. They are on the scale of the cuts seen after 2010, but this time with a public sector which is already struggling to maintain basic services. The Chancellor’s refusal to spell out where the axe will fall has meant there has been far less scrutiny of these plans than there should have been, allowing the spread of the narrative that tax cuts are ‘affordable’ because the economy has ‘turned the corner’. But this view is completely at odds with reality. High interest rates, low growth, and low investment mean the government is either going to have to raise taxes, cut spending, or accept higher debt. Talk of headroom and tax cuts cannot disguise this reality for much longer.

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State of the debate. A recent FT story suggested that the Chancellor may be planning to increase the scale of the spending cuts planned for after 2025 to make more room for tax cuts in this Budget. The idea here would be to put Labour in an even more difficult position; back the tax cuts and (in the absence of other significant revenue raisers) you effectively endorse the spending cuts, but oppose the cuts and you give the government the dividing line on tax which they want so badly. Previously it had been expected that Labour would choose to back the tax cuts as long as they were targeted at ‘working people’, but recent comments from Shadow Chancellor Rachel Reeves suggest that might not be the case. Reeves argued that public services need an “immediate injection” of cash and said “I will never make any commitments either around spending increases or tax cuts without being able to say where the money is going to come from”. Could this signal a new willingness from Labour to contest the tax cuts and argue instead for public service spending? If so, the polling suggests it could be a popular move.

Good morning from New Economy Brief,

Last week, the Labour Party took what has been described as the “mother of all U-turns”, and scrapped its flagship policy of spending £28 billion per year on green investment. The Green Prosperity Plan (GPP) has been seen by many as Keir Starmer’s flagship policy, the UK’s answer to the US’ Inflation Reduction Act and a potential antidote to stagnant growth. But as the scheme takes a massive financial hit, we explore why Labour has made this decision and whether the climbdown will be the vote-winner the party hopes it will be.

What was the policy and how has it changed? Back in September 2021, Labour’s Shadow Chancellor, Rachel Reeves, pledged to become the first “green chancellor”, investing £28 billion per year in green projects for the rest of the decade. However, in June 2023, citing a poor economic backdrop and high interest rates following the Truss and Kwarteng mini-budget, Reeves announced that Labour would delay the plans, sparking questions about how committed the party was to the policy. Following months of rumoured internal squabbles and pressure leading up to this year’s general election campaign, Labour finally ditched the £28 billion figure completely. The pledge has now dropped to £4.7 billion per year (that’s less over the course of the first parliament than their original pledge was over just a year). The new £4.7 billion figure is new money and is in addition to the £10 billion the government has already committed to for green projects. Labour has said that half of the new money would come from an increase in its plans for an oil and gas windfall tax (from 75% to 78%), and the other half from borrowing. 

• What’s left? Elements of the GPP have remained relatively unscathed, with a one-off £8.3 billion remaining for the creation of a state owned energy company (GB energy) and £7.3 billion for a national wealth fund to create green jobs. However, the Warm Homes Plan, which previously made up £6 billion per year of the original £28 billion, has been significantly reduced to £1.3 billion. As a result, the initial aim of retrofitting 19 million homes over five years has been reduced to a goal of five million. Much of the original £28bn figure was unallocated, so cutting it has not impacted on previously announced policies. 
• The impact. According to E3G, while insulating five million homes by 2030 would be an improvement on today’s “sluggish rates”, it may still not be enough to meet fuel poverty and heat decarbonation targets. Experts and campaigners are concerned that the rowback on retrofitting will prolong the cost of living crisis for vulnerable households. Mike Childs, the head of policy at Friends of the Earth, said Labour had “turned its back on the people who most urgently need these essential upgrades – the many millions of low-income households suffering from living in poorly insulated homes”. According to E3G, households living in the least efficient homes will pay around £916 more per year on energy bills, while the New Economics Foundation estimates that 1 in 4 pounds spent on heating is wasted.
• Does any of this matter? While the reaction to the u-turn has dominated the news, it is worth noting that the spending pledges made by an opposition party in the year before an election are only a rough guide to what will actually happen. As former SPAD Giles Wilkes points out: “Between now and 2028-9 there are about 10 new OBR forecasts, the planning and delivery of several trillion pounds of spending, many COPs and far more that can’t be predicted. No one in opposition can in good faith promise anything that far out”.

The fiscal context. That said, the economics behind this u-turn are worth unpicking. Keen to present itself as the party of fiscal responsibility ahead of this year’s general election, Labour cites a poor economic outlook and the high cost of borrowing as reasons for the climbdown. The party has also attacked the Chancellor for using up the ‘headroom’ against his fiscal rules, leaving Labour with less room for manoeuvre. Indeed, Starmer said that it was due to the Chancellor’s plans to “‘max out’ the country’s credit card” that Labour couldn’t commit to the £28 billion (a metaphor deemed “dangerous” in the 2022 BBC impartiality review on fiscal policy). 

• Choices and consequences: While it is certainly true that borrowing costs have risen since 2021, this argument from Labour obscures the extent to which their own choices have driven this reversal. Firstly, the Chancellor cannot ‘use up’ the headroom for Labour with tax cuts unless Labour promises to match those tax cuts. This is a choice, not an inevitability. Secondly, committing to a 5 year debt target as a fiscal rule (which Labour appear to have done, though they have not set out their fiscal rules in detail) is a choice. It is perfectly normal and reasonable to adopt different fiscal rules, especially given that the government has changed theirs so frequently.
• Gaming the rules The role of the 5 year debt target - the most significant fiscal rule - bears more scrutiny here. Under this rule, the government’s debt to GDP ratio must be falling in the 5th year of the forecast period. There are many criticisms of this rule and its primacy in determining fiscal credibility. One is that the rule can be easily gamed in two ways. As this government is proving, as long as the ratio is lower in the 5th year than it is in the the 4th year then the rule is met, regardless of how much debt is accrued in the meantime (this is the subject of Chief Secretary to the Treasury Laura Trott’s recent car crash interview with Evan Davies). In addition, the rules can be effectively gamed by pencilling in unrealistic future spending plans- again this is what this government has been accused of doing.
• Entrenched short-termism? But the fact that it can be gamed is not the only criticism of this fiscal rule. For these purposes the key points about this rule are that it does not distinguish between investment and day-to-day spending and that it has a 5 year time horizon. This means that any benefits of government spending that accrue after this horizon will not count against this rule. Given that most government investment has a longer pay-off time, the rule effectively discourages investment spending, even on projects which would improve fiscal sustainability over the longer term (as the policies in the Green Prosperity Plan almost certainly would). As Oxford economist Simon Wren Lewis argues “the falling debt to GDP fiscal rule could reasonably be called the ‘reduce public investment’ rule”. Arguably this u-turn proves Wren Lewis’ point.
• Rules of the game. Labour’s fiscal rules have long been a rhetorical prop for the party but this saga is one of the first instances in which their consequences have been evident. In the lead up to the u-turn Keir Starmer’s usual response when pressed about the figure was that it would be “subject to fiscal rules”. This is to some extent a tautology; by their very existence fiscal rules imply that all policies are subject to them. However, once this had been set out, it is unclear from an economic policy standpoint why a further reduction of the number was necessary. If the policy is subject to the fiscal rules, then by definition Labour would only spend as much on the policy as was consistent with their debt target. If the fiscal rules are the guarantors of fiscal rectitude, then why was a further retreat necessary?

Reducing the target. The answer is the politics. Received wisdom would tell us that voters are wary of government borrowing and large government debt. And given that 2024 is an election year, this has no doubt been a huge factor in Labour’s decision. The temptation to remove the big £28bn number and reduce the target for the Conservatives to attack appears to have won out (although, as the Financial Times’ Stephen Bush points out, they will still have the ‘problem’ of defending borrowing, and it is not clear that the public will react differently to £11bn of borrowing then they would to £28bn). 

A smart political choice? But is defending borrowing a problem? According to new research conducted by polling expert Steve Akehurst with YouGov and the Economic Change Unit, public opinion on the issues of borrowing and investment is more nuanced than many people suggest. While voters do retain some scepticism about government borrowing, Akehurst argues that it is clear that the balance of priorities has shifted in favour of increasing spending on the NHS, renewable energy production, transport infrastructure and housing infrastructure, even if it involves borrowing. The polling also showed that voters would overwhelmingly prefer to vote for a party that “increased government investment in the economy to stimulate economic growth, even if it meant government debt rising in the short term”, rather than a party “that reduced government debt in the short term, even if it meant less investment in the economy in the short term”. Voters may not love the idea of borrowing (and credit card metaphors certainly won’t help that case) but in the face of cold, poorly-insulated homes, poor growth and growing climate anxiety, could it be that Labour have picked the wrong battle?

Good morning from New Economy Brief. 

The idea that the UK has a corruption problem is growing. And it isn’t hard to see why. 

Since the start of the pandemic, a string of procurement gaffes, outsourcing failures, and allegations of cronyism in relationships between public officials and private contractors has led to increased scrutiny of the relationship between the government and the private sector. 

The start of this year has seen further revelations about the Post Office scandal alongside allegations of “industrial-scale corruption” and questions about the value for money of land being sold off and redeveloped in the Tees Valley freeport. This week the Covid Inquiry will hear more evidence on procurement deals given to companies with relationships to government ministers through the infamous ‘VIP lane’, already ruled illegal by the High Court. 

This week’s New Economy Brief takes a deeper look at the roots of these scandals and asks whether eroded public sector capacity and a lack of regulation is creating the conditions for dodgy procurement deals, bribery, and fraud.

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UK falls to record low corruption rankings. Quantifying corruption is no easy business, precisely because so much of it happens in secret. Transparency International ranks countries by perceived corruption in their public services by asking impartial experts and business leaders what they think about (mis)management of public funds, the corrupting influence of political donors and bribery in the award of procurement contracts. In 2022 the UK dropped to 18th in the world due to concerns around possible corruption in how PPE contracts were awarded during the pandemic. The most recent report showed the UK falling to an all-time low, ranking joint 20th with Seychelles, a tax haven. This is the furthest any Western European country has fallen in recent years. It is worth pointing out that TI’s index focuses on domestic graft, and not on the corruption the countries are complicit in beyond their shores, where arguably the UK would fare even worse.

• Recent high-profile scandals. It isn’t hard to see why perceptions of corruption are growing. The New Statesman’s timely piece The Rotten State outlines an illustrative list of cronyistic relationships amongst government ministers, such as the Future Fund, established in 2020 by the then chancellor, Rishi Sunak, at a cost of £1.1bn to support British start-ups. The piece states that the taxpayer has lost more than £300m on the Future Fund, which invested £2m in businesses linked to Sunak’s multi-millionaire wife, Akshata Murty, and an African resources business with a stake owned by the Cabinet Office minister John Glen. It also mentions the Foreign Secretary, David Cameron, who appointed Michelle Mone (now mired in a PPE procurement scandal) to the House of Lords in 2015 and, when out of office, lobbied the government on behalf of Lex Greensill, whose now defunct Greensill Capital's activities are "a matter of interest" for the Serious Fraud Office as part of a wider investigation launched in 2021 into Gupta Family Group Alliance (which denies any wrongdoing).
• Why corruption matters. A poll last September found that 53% of the UK public think the government is institutionally corrupt. Declining faith in politics does not bode well for democracy, nor for the government’s ability to solve the grand challenges that society will face in the coming years. And corruption has economic as well as political consequences. The National Crime Agency estimates that economic crime – covering corruption, bribery, money laundering and fraud – cost the UK economy around £290bn a year, equivalent to 14.5% of GDP. (Read our previous Digest on Economic Crime for more on this.) In a recent poll released by the UK Anti-Corruption Coalition, politicians were the group that the public associated most closely with economic crime, ahead of oligarchs and kleptocrats.
• Where is the anti-corruption strategy? A new anti-corruption strategy is expected early this year. The last one ended in December 2022 and we haven’t had an Anti-Corruption Champion since the previous incumbent – John Penrose, husband of the £29bn test-and-trace programme’s boss Dido Harding – resigned in mid-2022. Early the next year, the government’s Integrated Review Refresh said the new strategy would outline how they will act to “close down London as a centre for corrupt elites to launder money and enhance their reputations” and scale up law enforcement “to detect, investigate and prosecute corruption both domestically and internationally”. But Spotlight on Corruption’s Susan Hawley argues that “the absence of any ambitious actions to tackle the risks of potential corruption at the highest levels of government now looks alarmingly complacent in light of recent scandals.” 

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The different faces of corruption. Corruption in the UK comes in many guises, and it is impossible to cover all of them here. For example author Nicholas Shaxson explained how the City of London has become the ‘money laundering capital of the world’, and Transparency International has detailed how UK businesses and institutions ‘help corrupt individuals and regimes launder their money and reputations’. There are also straightforward political corruption scandals like ‘Cash for Honours’. But most of the recent scandals have involved the relationship between the public and private sectors through procurement processes, and it is on this that we will focus this week.

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What is procurement? Procurement of goods such as PPE has been in the spotlight this week through the Covid-19 Inquiry, but it is a huge and often under-scrutinised source of  state expenditure. The government spends £300bn a year procuring goods and services from the private sector, around a third of all its spending. Procurement is a growing solution to gaps in public service provision, capacity and expertise – but many see it as a growing opportunity to turn taxpayer money into private profit. 

• Wasting public money. The National Audit Office’s report last year concluded that the government does not have an estimate for levels of corruption or “a good understanding of the extent of corruption” in public spending. Another report from Spotlight on Corruption estimated that public sector fraud costs the taxpayer £21bn a year. Corruption in procurement costs local government some £876m a year - more than any other kind of fraud (See our recent explainer on the wave of local government bankruptcies.)
• Loopholes in the Procurement Bill. In June 2023, Spotlight on Corruption warned that the government failed to back amendments in the Procurement Bill which could have strengthened the UK’s ability to tackle fraud and corruption in public contracts. Read their explanation of the various loopholes that allow private sector suppliers to continue receiving public money even if they’ve been found guilty of offences like ‘failure to prevent bribery’ or even fraud.
• Outsourcing and profiteering from the state. Economic geographer Brett Christophers and others have argued that major outsourcing companies are best understood as specialists in winning long-term government contracts, rather than in actually delivering services. They can then extract value from possessing these contracts without providing commensurate social value, just as owners of other scarce assets do. (See Christophers on the British economy’s turn towards rent extraction and Christine Berry’s review of Christophers’ book Rentier Capitalism.) The Institute for Government found that last year roughly a fifth of UK government procurement spending went to so-called strategic suppliers – companies that receive more than £100m from government contracts.

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Draining the swamp. Following the Carillion scandal, the Auditor General claimed that “there are lots of areas where the government does not have the capacity to do anything else but outsource”. Similarly Cabinet Office minister Lord Agnew has argued that an “unacceptable” reliance on management consultants had “infantilised” the civil service at great cost to the public purse. One way to lose less money to fraudulent procurement, then, is to rebuild the public sector’s capacity to deliver services itself. An under-reported effect of recent public sector austerity is that it has often hollowed out the public sector’s capacity to award and scrutinise contracts, with teams of civil servants often forced to negotiate against  far better staffed (and paid) private sector counterparts. Beefing up these departments may not be a guaranteed vote winner, but it would be hugely beneficial in cutting down opportunities for waste and corruption. It would also help tackle concerns about the ‘revolving door’ movement of people between public and the private sectors.

• Rebuilding public sector capacity. UCL Professor Mariana Mazzucato has written extensively on the state as a creator of value – undermining the rationale for outsourcing and privatisation – and the need to strengthen the public sector so it can tackle societal “grand challenges”. The Institute for Government claims that bringing public services back into government hands “can improve quality, increase reliability, and save money” and lays out guidelines for when and how this insourcing should happen.
• Progressive procurement. The Centre for Local Economic Strategies (CLES) proposes improving services through a combination of insourcing and a system of “social licensing” – criteria that companies would have to meet before being allowed to provide public services. CLES’ guide to community wealth building explains how progressive procurement uses the power of local government spending to reshape local economies and achieve policy goals like nurturing dense local supply chains and creating more and better jobs.  ‍
• Stronger regulation. A lack of transparency in public-private sector dealings creates the conditions for corruption; corruption researcher Lucas Amin has written for openDemocracy on the need to change transparency law so that public-private contracts can receive proper external scrutiny. Transparency International have a range of recommendations to reverse the UK’s decline in the international corruption rankings; they include placing ethics watchdogs on a statutory footing, capping political donations and reducing campaign spending limits. Doing this “would go a long way in ensuring that decisions are taken for the good of the public, and not just those with the deepest pockets.”

Good morning from New Economy Brief. 

Last week, the Bank of England (BoE) responded to a consultation it launched with the Treasury on the possible introduction of a digital version of the pound, or ‘Britcoin’ as it is sometimes known. 

But what is a central bank digital currency (CBDC), and does the UK really need one? As the debate rumbles on, this week we explore the possible risks and benefits of a digital pound.

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Central bank digital currencies. The consultation was launched in response to the risk that unregulated digital currencies pose to the financial system. A CBDC would mean households and companies could hold digital money directly with the BoE. Currently, only commercial banks create digital money, while physical cash and coins are created by the BoE. The idea is that a CBDC would be immune to runs like those seen in commercial banks. UCL’s Josh Ryan-Collins wrote a helpful explainer on CBDCs back in 2021, before the BoE launched its latest consultation.

• Is the UK unusual in considering a CBDC? In short, no. The Bahamas, Jamaica and Nigeria have already introduced digital currencies, while over 100 central banks (among them Brazil, China, the eurozone and India) are exploring the possibility of introducing them. 

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The debate. In examining a possible digital pound, the House of Lords Economic Affairs Committee concluded that there is “no convincing case for why the UK needs a central bank digital currency (CBDC)”. The committee also identified a “risk of private money creation”. Positive Money’s Simon Youel has criticised the committee’s conclusion, arguing that it did not consider the views of a balanced range of witnesses, with too much weight given to those who'd lose out from “democratising the money and payments system”. He also argued that a CBDC could actually help solve the problem of private money creation (for example, money created by large tech companies), instead providing “universal access to a secure, digital form of public money”. 

• Universal basic income and CBDCs. One benefit of CBDCs is that they could be the key to unlocking Universal Basic Income (UBI), argued Frances Coppola, the author of The Case for People’s Quantitative Easing. As the CBDC would be a ‘stablecoin’ pegged to the country’s official currency, it could be used to pay a UBI directly into citizens’ ‘digital wallets’, she said. This could then be transferred to a personal bank account or used to pay for goods and services directly. Coppola suggested that the central bank could adjust UBI payments up or down to manage inflation. 

A missed opportunity for financial inclusion? Even among supporters of CBDCs, concerns have been raised that if designed incorrectly, a digital pound could risk perpetuating existing problems with the monetary system. During last year’s consultation, several civil society leaders and academics raised concerns that the debate was being dominated by “financial services and tech firms who have vested interests in certain designs of a digital pound”, and was failing to use this opportunity to democratise the money supply. One problem they raised was that many of the proposals being discussed envisage a 'platform' model in which the central bank would hold digital pounds in a ledger, and people would need to use private-sector payments services to get at their money. Campaigners warned that these companies would need to make such a service pay for itself somehow, whether by charging users directly or selling their data. Introducing a CBDC without giving people a free way to access their digital pounds "reinforcing existing barriers to an inclusive payments system", with citizens unable to afford to use the CBDC or being forced to accept having their personal data monetised as the price of doing so.

• A possible solution. The 34 leaders and academics who signed a joint statement on the issue suggested including a free ‘public option’ which would offer “genuinely inclusive access to the digital pound which does not rely on personal data collection or the charging of fees to generate revenue”. They argued that this could be funded through seigniorage - the 'profit' made whenever new money is created - or via "a levy on financial services and payment providers", noting that this could include big tech firms, and that it's essentially how we already pay to give people free access to cash.

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Privacy. Another cause for hesitation on digital pounds is the risk to citizens’ privacy. Some more conspiratorial voices are concerned that the very idea of CBDCs is driven by the state’s desire to monitor and control the public. But conspiracy theorists aren’t the only ones worrying. Last year, the House of Commons Treasury committee urged both the Bank and the Treasury to proceed “with caution” while designing a digital pound over concerns about personal privacy. However, Positive Money has pointed out that the state “does not need a CBDC to monitor the transactions of its citizens – banks already share data with security agencies upon request”. It says the privacy of any CBDC depends on whether “high standards of data protection are enforced across the public and private sectors” more generally. In its statement after the recent consultation ended, the BoE said that privacy would be a “core design feature” of a digital pound. 

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What happens next? The Bank of England has said it is “too early to decide” whether to introduce a digital pound, and that much more preparatory work is needed before the government can consider putting a proposal before Parliament. So while we won't be spending Britcoins in the supermarket any time soon, it's clear that the debate will continue as governments across the globe consider creating digital versions of their currencies.

Good morning from New Economy Brief.

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2024 started with businesses optimistic about the UK's economic recovery and hopes that inflation was under control. But last week's figures showed inflation actually rose slightly and economists are warning that the crisis in the Red Sea could ‘shatter hopes of global economic recovery’. 

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This bout of inflation was triggered by Russia’s invasion of Ukraine, and the recovery from it has always been vulnerable to events. UK Prime Minister Rishi Sunak recently warned the world is “the most unstable it has been in decades” as part of his justification for airstrikes on Houthi targets in Yemen, and others say we are entering a new era of geopolitical instability and that macroeconomic models still haven’t caught up to this new reality.

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This week’s New Economy Brief looks at what happens to economic modelling and monetary policy institutions in a world where geopolitics and climate change create new challenges and regular supply shocks. Or in other words, how should policy adapt to a new world of permanent instability and higher inflation? 

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Hopes of recovery? Last week The Times reported a renewed sense of optimism in the UK’s economic recovery after over a year of record inflation and stagnant growth, with financial markets expecting interest rates to fall from a 15-year high of 5.25%. Some are even predicting inflation to drop back to the BoE’s 2% target by April. However, the latest figures showed inflation rose slightly to 4% rather than falling as expected. Financial markets now expect this to move down to 2% later in Spring.

• A longer-term outlook on inflation. Debates about whether or not the economy will have a “softer landing” from high rates of inflation are perhaps too focused on the short term. Often, the debate assumes that the global economy is stable and returns to ‘equilibrium’ after localised supply shocks have a chance to move through the system and markets restabilise. But many experts believe we are entering a new period of instability and will regularly face fresh bouts of higher inflation. 

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Geopolitical instability and supply shocks. Experts at Brookings argue that “geopolitical tensions have become the single most important risk confronting the global economy” in 2024, with wars in “two regions critical to the world’s food and energy supply”. Conflict in the Red Sea has already led to supply shortages and trade frictions in the Suez Canal, which accounts for 30% of global shipping container traffic. These developments again show that inflation can arise from unpredictable external events over which institutions like the BoE have little control. Can our institutions respond to this new inflationary environment? 

• Climate change and inflation. Evidence from the Climate Change Committee shows that the UK economy is “already experiencing disruption to domestic supply chains from floods, droughts, high temperatures and other extreme weather”, with nearly half of respondents to a recent survey from the Business Continuity Institute saying their supply chains had been disrupted by extreme weather. James Meadway’s recent substack explains how "The simultaneous foul-up of the Panama Canal, hit by drought, and the Suez Canal, targeted for hijackings linked to Israel’s assault on Gaza, neatly encapsulates the polycrisis and its impacts and costs". (Read Chatham House’s 2021 Climate Change Risk Assessment for an overview of the ‘cascading systemic risks’ climate change poses for the global economy, in the form of trade disruption, mass migration and more.)
• War and global trade frictions. Part of Rishi Sunak’s justification for the recent military intervention in the Red Sea was explicitly economic, arguing that “It is also about economic security, because of the impact of the Red Sea attacks on the prices people pay at home. We have already seen that in the impact on oil prices of the Russian invasion of Ukraine.” Rising geopolitical tensions are leading some governments to adopt more interventionist approaches to secure supplies of energy and critical commodities. US President Biden's National Security Advisor Jake Sullivan warned that “Clean-energy supply chains are at risk of being weaponized in the same way as oil in the 1970s, or natural gas in Europe in 2022.” The Biden Administration has attempted to overcome partisan dividing lines over climate action by framing green industrial policy as an “essential element of United States… national security”. (Laurie Laybourn and Joseph Evans’ paper in IPPR’s Progressive Review explains how the CHIPS Act, IRA and other pioneering pieces of US climate policy fuse productivist economics with decarbonisation and geopolitical strategy.)

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UK institutions haven’t adapted to new instabilities. The Bank of England is mandated to increase interest rates and constrain economic activity when inflation is higher than its 2% target. The question of when and how to act largely turns on your view of whether the inflation is ‘transitory’ or ‘persistent’- i.e. is high inflation just a temporary shock that will resolve itself, or is it so embedded within the economy that more determined action is needed? Much of the economic debate over how to respond to inflation has focused on this question, with (very crudely) Team Persistent arguing for higher rate rises to crush core inflation, while Team Transitory called for price caps and other strategies to contain the impact of high energy prices and stop it spreading to other areas of the economy. 

• Modelling shocks. It matters a lot how we model these external shocks. Geopolitical instability and climate-induced disruption to the economy both drive inflation up by restricting trade and reducing the supply of goods. Conventional economic models view these events as temporary external shocks which will eventually tend back towards an ‘equilibrium’, under the assumption of efficient, stable markets that allocate resources efficiently. 
• But what if the shocks are not one-off events at all? James Meadway covers this in a recent substack on Inflation and the Anthropocene, and asks a poignant question: “In a world subject to repeated, consistent shocks, deriving from the same source, what use is a model that can only say they are “external” deviations from the economy’s growth path?” His answer is to suggest we are entering a period of consistent external shocks, and that economic models need to adapt accordingly.

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Rising UK interest rates won’t solve global problems. And yet, the BoE’s price stability mandate encourages it to increase interest rates whenever inflation rises over 2%. Increasing interest rates makes borrowing more expensive, limiting both public and private investment. As explained above, across the world, many countries are accelerating investments in industrial policy to ease supply bottlenecks, but conventional monetary policy is pulling in the opposite direction.

• Green investment suffers in particular. Higher interest rates is especially harmful for investment in the green transition – the exact kind needed to wean the economy off the supply chains most threatened by geopolitical instability. Projects such as offshore wind farms save money in the longer term, but they  often have high upfront capital costs. This has put new construction under increasing strain as borrowing has become more expensive. The irony of this is that the Bank’s aim of price stability is being further hindered by its own blunt tool of monetary tightening. Green investment can make the UK economy less vulnerable to future bouts of ‘fossilflation’ - inflation that was primarily caused by sudden increases in fossil fuel prices – e.g. by financing more building retrofits and clean energy projects. (See our previous explainer on how green credit guidance – offering a lower interest rate for green investments – can help.)
• But: “inflation is a sign that more investment is needed”. IPPR’s Carsten Jung argues that the Bank of England increased interest rates too much because they put “too little focus on supply side mechanisms & too much attention on wage earners.” Economists at German insurer Allianz concluded that 55% of the disinflation seen in the US can be attributed to the healing of supply chains, with just 20% stemming from monetary tightening and the way it constrained demand. Alex Williams from Employ America writes in IPPR’s latest Progressive Review that adopting a ‘macroprudential fiscal policy’ approach to inflation – essentially using industrial strategy to ease supply bottlenecks – provides “a critical alternative to interest-rate hikes as the main tool by which inflation can be reduced”. This approach conceives of inflation as a signal to invest more in sectors suffering from supply shortages, rather than a sign that people need to be made poorer by tightening monetary policy. (Read other articles in this edition for more on how the UK can learn from US green industrial policy.)

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Anti-inflationary policy for an unstable global economy. Christine Lagarde, President of the European Central Bank, argued in a speech at last year’s Jackson Hole Economic Symposium on Policymaking in an age of shifts and breaks that “we will have to establish new frameworks geared towards robust policymaking under uncertainty”. If instability is now the norm, perhaps it is time to rethink our monetary policy institutions and how economies respond to bouts of inflation and supply-shocks?

• Reviewing central bank independence. Some experts think central bank independence should be reviewed to help macroeconomic institutions work together to achieve multiple policy goals, rather than against each other. Peter Sedgwick of the Official Monetary and Financial Institutions Forum suggests that, whoever wins the next general election, “it will be time to review the institutional arrangements for monetary and fiscal policy.” He offers various suggestions for reforming how the Treasury and BoE cooperate “even if this alters the Bank’s operational independence”, with the aim of  ensuring that “the burden of reducing inflation, when necessary, does not fall disproportionately on those of working age with mortgages.” ‍
• Fiscal and monetary coordination. A recent pamphlet from the Fabian Society proposed that “a new economic policy coordinating committee should be set up to bring together the Treasury, the business department and the Bank of England, alongside the devolved governments and arms-length bodies responsible for climate change, public finance, infrastructure and low pay” to share analysis and coordinate policy to reach several goals. Its authors argue that both public spending policies (such as the energy price cap) and tax changes (such as cutting VAT) should be used to reduce the pain that inflation inflicts on lower income households.

Good morning from New Economy Brief.

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Over a decade of austerity has put a serious squeeze on local authority budgets, with increasing numbers declaring themselves bankrupt. Meanwhile, the government wants to make it easier for councils to sell off assets - a tempting prospect for cash-strapped authorities.  

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This week’s New Economy Brief explores the dire state of local authority finances, explains how mass asset sales could lead to the increased extraction of wealth from local communities, and suggests better alternatives for repairing local economies.

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The scale of the problem.

‍In 2018, Northamptonshire Council declared itself bankrupt, becoming the first council to do so since the London Borough of Hackney in 1998. Since then, a wave of local authorities have been forced to issue a Section 114 notice (which effectively freezes spending), including Nottingham, Birmingham, Croydon, Thurrock, Slough, Woking, and Northumberland (the New Statesman has even set up a tracker). Croydon council has effectively declared bankruptcy three times in two years. According to the Local Government Association, almost one in five council leaders and Chief Executives say bankruptcy is “very or fairly likely”. 

Why do councils go bankrupt? While there are some instances of financial mismanagement and other issues (for example, Birmingham’s historic pay inequality claim and Woking’s risky investments), poor council finances are more often than not the simple result of shrinking budgets and rising service costs. Local government has arguably been one of the biggest victims of central government austerity policies over the last 13 years. The Local Government section of what was then the Department for Communities and Local Government suffered the deepest cuts of any department between 2010 and 2015, losing over half of its funding during this period. According to the Institute for Government, local government core funding fell 40% in real terms between 2009/10 and 2019/20, from £46.5bn to £28.0bn (2023/24 prices).

Impact. Councils are operating on a shoestring, but the statutory services they must deliver are becoming increasingly expensive. An ageing and increasingly unwell population puts pressure on the cost of social services, while the shortage of social housing is forcing councils to spend huge portions of their budgets on temporary accommodation. Children’s services are at breaking point. This leaves very little cash for ‘discretionary spending’ on things like libraries and leisure centres. Sarah Longlands, Chief Executive of the Centre for Local Economic Strategies (CLES), has said that “the systematic defunding and devaluing of local government is… one of the reasons why there are growing levels of poverty, hardship and destitution, creating huge vulnerability in places across the UK, generating significant pressure in the NHS and in social care and undermining the potential of local economies.” 

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A fire sale of council assets.

‍After years of austerity and squeezed budgets, local authorities now have little wiggle room to make cuts to save their finances, and there is not much room to raise council tax on struggling residents either. This means that increasingly councils are being left with no choice but to sell off assets to plug the gaps in their finances. This is often referred to as a ‘Capitalisation Direction’, in which central government effectively gives councils permission to use their capital funds. Earlier this month, Bloomberg reported that Ministers are “quietly working on a major loosening of budget rules for local councils”, essentially making it much easier to sell off assets to fund frontline services. 

An unsustainable solution? CLES argues that a “fire sale of council assets would only be a sticking plaster for the disastrous state of their finances” and would “open the floodgates for private sector wealth extraction”. UK in a Changing Europe’s Jack Shaw explains the shortcomings of the government’s proposals and argues “the government’s failure to make additional investment available for authorities means they may have no other option but to sell assets, even if it’s not in their long-term interests”.

The outsourcing spiral. To plug the gaps left by asset sales, local government is much more likely to outsource services to private companies. The overreliance on the private sector to deliver core public services and develop strategy over recent decades has eroded public sector capacity, which in turn encourages further outsourcing. And as we have seen with the recent Post Office scandal, outsourcing can lead to some pretty costly mistakes. On the other hand, the Institute for Government claims that insourcing public services “can improve quality, increase reliability, and save money” and lays out guidelines for when and how public services should be brought back into government hands. 

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Repairing local economies and local government finances.

‍With the lack of central government funding underpinning poor council finances, an obvious solution is for the government to boost local authority funding. London Councils - the collective of London local authorities - says the Government should “use the forthcoming provisional Local Government Finance Settlement to provide councils with sufficient resources to set balanced budgets next year without having to make drastic cuts to services”. Similarly, CLES has called on the next government to commit to delivering a five-year settlement within its first year. 

Community Wealth Building. While one might hope that central government will boost funding in the future, recent years have shown that it can take it away just as quickly. One way that local government can gain more independence from central government is to use the power of the local state to create a more vibrant local economy where wealth flows within the community rather than being extracted from it, ultimately increasing council revenue and ability to reinvest in the area. In a recent report, ‘This Must Be the Place’, CLES describes community wealth building as “where the wealth that exists, and is created, flows to the people and communities who need this the most, rather than trickling out to those who can best help themselves”. It argues that some areas have managed to “break the mould” of selling off assets to bolster finances. Instead they have maintained control over local land and assets, ensuring these are used in a way that maximises local wealth, not that of private companies. By prioritising the local economy’s needs, procuring locally and protecting services from wasteful and expensive outsourcing, councils can build community wealth and, subsequently, their own income streams.‍

Fiscal devolution. A number of experts have also been calling for greater fiscal devolution for local authorities – that is, giving them more power over taxes and spending, according to the Centre for Progressive Policy’s explainer. The Fabian Society calls for a devolved economic development budget and limited powers to raise levies and charges to fund new projects, in order to counter an overly centralised funding system controlled by Westminster.

Happy New Year from New Economy Brief.

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The year has picked up where 2023 left off in UK politics, with endless speculation and debate around possible future tax cuts ahead of the general election. But beyond this debate, some significant tax changes are being made that go largely unnoticed in mainstream UK political discourse, but could mean big changes for tax policy across the world. These are the efforts to crack down on ‘profit shifting’ by large muti-national companies, which lets them report profits in countries with lower corporation tax rates than the ones they predominantly operate in, and so pay as little tax as possible.

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Since the start of 2024, there is a new global minimum corporate tax rate of 15%. This week, New Economy Brief explores how this tax came about, its possible effects, and its limitations. We also ask what more could be done to ensure global companies pay their fair share of tax.

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The global minimum corporation tax. 

On January 1st 2024, a ‘critical mass’ of developed countries introduced a global minimum corporate tax rate of 15%. This follows three years of negotiations at the OECD to close loopholes in the international tax system, and many years more of campaigning from civil society groups to combat profit shifting through global tax havens. The first wave of jurisdictions implementing the new minimum tax in January includes the EU and UK, along with several countries widely regarded as enablers of global tax abuse, such as Ireland, Luxembourg, the Netherlands, Switzerland and Barbados.

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What is profit shifting? Over the past thirty years, there has been a race to the bottom in corporation tax rates around the world, undermining countries’ ability to raise revenue. Every year, governments lose nearly a third of a trillion dollars in corporate tax revenue to tax havens, as companies channel their earnings through countries with minimal levels of tax.  For instance, Tax Justice UK have set out how Amazon’s main UK division pays no corporation tax in the UK, despite making hundreds of millions of pounds in profits, because it declares its revenue in Luxembourg with a lower tax rate. The UK is closely associated with this practice, as four of the top ten leading tax havens are in our overseas territories. Tax Justice Network calculated that the world loses the equivalent of a nurse’s yearly salary to a tax haven every second.

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The rich world’s solution to curtail tax havens. 

Through negotiations at the OECD, nearly 140 countries representing over 90% of the global corporate tax base agreed to a deal with two ‘pillars’: (1) allowing countries to tax multinationals based on their sales in that country, and not on their registered profits, which can easily be shifted to lower tax jurisdictions; and (2) an effective global minimum corporation tax of 15% for multinational companies with turnover higher than €750m. This means multinationals paying less tax than this in a particular country would face a “top up” tax in their home country, reducing the incentive and ability to shift profits to a tax haven. 

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Predicted effects. The OECD estimates it will increase annual tax revenues by 9%, or $220bn worldwide. The EU Commissioner for the Economy, Paolo Gentiloni said 2024 will herald the end of a race to the bottom in corporate tax rates, but other tax experts such as PwC US’s Will Morris say it could encourage more competition between governments to offer generous subsidies, tax breaks and credits to attract businesses to their countries, like those seen in the US Inflation Reduction Act. 

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The influence of tax havens and corporate lobbyists.

The Biden administration propelled the negotiations earlier on, advocating for a higher minimum of 21%. Alliance Sud’s Dominik Gross explains how low tax jurisdictions such as Switzerland, Ireland and Luxembourg “actively negotiated” the minimum rate down to 15%. (Research by Demos found that tax directors at large businesses with UK operations supported 21%.) The EU Tax Observatory calculates that a watered-down rate of 15% “generates significantly less revenue than originally hoped for…only half of what could have been generated with stricter rules”. 

A bad deal for the global south. The FT’s Emma Agyemang reports that “preliminary analysis suggests participating countries that host significant low-taxed corporate profits will be the early winners” as they raise more tax from the multinationals that are still registered there. Remember that the OECD is a club representing the world's richest economies, so any global tax rules it designs are likely to be skewed in their interest. Many countries in the global south haven’t signed up to the deal. For instance, Africa’s biggest economy, Nigeria, would lose revenue under the OECD plan as the requirement for multinationals to have annual revenues higher than €750m means it wouldn’t apply to many taxable entities in its economy. 

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Towards a more inclusive global corporate tax framework. 

If there are limitations to the rules agreed at the OECD, what is the alternative? At the end of 2023, more than 120 mostly developing countries won a historic vote at the United Nations to set up a tax convention with legally binding outcomes, despite opposition from richer countries and a “last-minute attempt by the UK to defang the UN resolution”. Tax Justice Network says that hosting global tax negotiations at the OECD risks too much influence from tax havens and corporate lobbyists, and argues that deciding international tax rules at the UN instead would ensure more transparency, global representation and consideration of UN principles of equality, gender and environment.

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A plan with teeth? Sol Picciotto, a global leader in international tax law, outlines Tax Justice Network’s proposal for a Minimum Effective Tax Rate (METR) for multinationals that would bring in more total tax income from multinational companies in total, particularly benefiting countries with per capita GDP below $40,000. The METR aims to assess corporates’ real presence in each country by looking at factors like number of employees, physical assets and sales; it includes  a higher minimum corporate rate – “no lower than the US proposal of 21% and preferably 25% or higher” – and applies to all multinationals, “subject only to a low threshold of perhaps €50m to exclude small and medium enterprises.” The METR proposal is far more equitable for developing countries and unlike the OECD plan, it would avoid rewarding some of the most extreme corporate tax havens such as Bermuda and the British Virgin and Cayman Islands.

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‍The UK angle. Although the UK has taken an active part in these negotiations, the debate around global tax levels has still not left a strong impression on domestic political discussion, which remains focused on the overall level of taxation. Nevertheless, moves to prevent profit-shifting and create a more level playing field on corporate taxation could materially affect debates on strategies to encourage business investment, the UK’s response to ‘Bidenomics’, and how to finance public services – especially if this new global minimum catalyses more international tax cooperation.

Good morning from New Economy Brief.

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Nearly 200 nations have agreed a text that ‘calls on’ every country to transition away from fossil fuels at COP28, but what does this actually mean and how does it affect the UK?

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This week’s New Economy Brief looks at the outcome of the COP28 negotiations and how they might affect domestic UK climate policy and politics through and after the next general election. 

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The final agreement. 

Delegates from around the world have been in Dubai over the last couple of weeks seeking to secure new commitments on tackling climate change. While various blocks of countries fought over the wording of the final text, the Conference of the Parties (COP) settled on an agreement that “calls on” national governments to “contribute to global efforts, in a nationally determined manner, taking into account the Paris Agreement and their different national circumstances, pathways and approaches”, which includes the hotly contested phrase: “transitioning away from fossil fuels in a just, orderly and equitable manner”. Much of the debate at COP28 focused on this wording, and on whether the conference would declare the end of the fossil fuel era.

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Battling over semantics. The text is not legally binding and the agreement merely ‘calls on’ governments, which is the UN’s legal jargon for an ‘invitation’ or ‘request’ - as Carbon Brief’s Leo Hickman explains, this is “the *weakest* of all the various terms used for such exhortations”. The original text included a stronger wording implying a complete phase-out of fossil fuels by 2050, which was pushed for by ‘high ambition’ parties such as smaller island states and progressive European governments. But this was opposed by countries whose income depends heavily on fossil fuel sales, such as Saudi Arabia, Russia and Iraq. The final agreed text is a compromise, and the BBC’s Sameer Hashmi explains that “transitioning away” from fossil fuels was acceptable to objecting parties as it gives them “a fair bit of flexibility on how to achieve the end objective without being tied to any firm commitments”.

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Why phasing out fossil fuels is still controversial. It isn’t just petrostates who object to the concept of phasing out fossil fuels. Although much media commentary focused on the opposition from major oil producers, developing countries like Uganda and Bolivia object to the idea because they say they need the money from selling fossil fuels to eradicate poverty in their economies. They argue that developed countries got rich by burning fossil fuels, creating the climate crisis in the process, so developing countries must get the chance to industrialise as well as funds from richer nations to help decarbonise their energy systems. 

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Who is going to pay for the energy transition?

Getting nearly 200 countries to agree to ‘transition away’ from fossil fuels is one thing, but finding a way to pay for the transformation of the global energy system is quite another. Developing countries urged that any agreement should be contingent on developed countries providing climate finance to help poorer nations with the energy transition, but developed countries have so far failed to honour their promises of $100bn a year in climate finance to the developing world - a target widely seen as an ‘acid test’ for whether richer countries are serious about tackling climate change.  

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Who should transition first? Developing countries also argue that developed countries should move away from fossil fuels first (hence the inclusion of “just, orderly and equitable manner”). Civil Society Equity Review suggests that for fossil fuels to be phased out equitably and justly, “wealthy countries must provide significant amounts of climate finance and international phase-out support to the transition in poorer, [fossil fuel] dependent countries”, because these countries have both the most ability to pay, and the greatest responsibility for historic emissions. The report also explains why richer nations like Canada, the US, Norway, Australia and the UK must end fossil fuel extraction by the very early 2030s “to leave highly-dependent, poorer countries with enough carbon budget to phase out extraction in a reasonably just manner”. Without financial support from the developed world, there is a risk that a rapid transition away from fossil fuels would mean more poverty, debt and economic crises in the developing world. (Power Shift Africa’s Mohamed Adow provided suggestions for a final text that recognises poorer nations’ need to develop sustainably.)

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Loss and Damage fund. In UN climate negotiations 'loss and damage' is the term for the principle that rich countries should compensate poor ones for the climate costs their historical emissions have caused. For many countries in the global South this is central to climate justice. Developed countries have always resisted it; they fear it is the slippery slope to being held liable in international courts for trillions of dollars in damages. This year a permanent Loss and Damage Fund was established to provide financial transfers, but Climate Action Network (CAN) UK argues that accountability is lacking. For instance, the UK immediately pledged up to £60m to the fund, but CAN says this is mostly just existing commitments from the Overseas Development Aid and climate finance budgets. Over $700m has been pledged to the loss and damage fund so far, but this is less than 0.2% of the losses developing countries are facing every year.

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What does this mean for the UK’s transition to net zero?

Under the Paris Agreement, every five years the COP negotiations include a ‘global stocktake’ which reviews the progress that has been made to inform the next round of ‘Nationally Determined Contributions’ (NDCs). COP28 was the first to do this, and future negotiations should set out stronger emissions targets for each country from late 2024. The UK’s current NDC commits the government to reduce emissions by at least 68% by 2030 from 1990 levels. However, there are no international legal mechanisms to ensure countries meet their NDCs. (And even if they did meet the targets they already committed to, the International Energy Agency calculates that they will only get us 30% of the way to keeping warming below 1.5C.)

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Domestic legal targets under the Climate Change Act. Domestically, however, the Climate Change Act of 2008 legally binds the UK government to carbon budgets that limit our greenhouse gas emissions during each five-year period. This includes a target to get at least three quarters of the way to net zero within the next 13 years. Following a successful case against the government by ClientEarth, Friends of the Earth and the Good Law Project, the High Court recently declared the government’s climate plans unlawful for lacking detail. Further, the Climate Change Committee’s recent progress report concluded that around half of the UK’s emissions reduction targets are at risk of being missed by 2030, or have insufficient plans to meet them. So a stricter NDC in 2024/25 might not cause trouble with international law for the UK government, but it would increase domestic political pressure for more ambitious climate action.

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Climate politics and the next general election.

COP28 sent a signal to the world that the phase out of fossil fuels is ‘inevitable’, in the words of UN Secretary-General Antonio Guterres. In this context, the Conservative government’s support for new oil and gas licences looks increasingly out of step with the international consensus. Remember: staying within the global carbon budget of 1.5C of warming requires no new fossil fuel exploration. This also poses a challenge for Labour. Though the Opposition have committed to decarbonising the energy system by 2030 through their Green Prosperity Plan, and stated they oppose any new oil and gas developments, they have not pledged to cancel the most recent round of oil and gas licences in the North Sea; including the controversial Rosebank oilfield. Uplift has calculated that the emissions from this development alone would exceed the share of the UK’s carbon budgets that should come from oil and gas production, from 2028 onwards. (Also, see Common Wealth’s recent explainer of who owns petroleum licences in the North Sea.)

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Protectionism vs climate finance? Given that providing climate finance for developing countries is essential to retain international coordination in the fight against climate change, the protectionist turn in UK politics is a problem. Rising populism is making it harder for politicians to pledge to send taxpayer money abroad when there are so many other priorities in fixing the domestic economy. (Labour’s Lisa Nandy clarified that restoring the UK’s development aid budget isn’t a ‘day-one’ priority if they win the next general election.) 

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Restoring the UK’s international climate leadership role. In this context, the original architect of the Paris Agreement, economist Laurence Tubiana, was using COP28 to propose a new international tax on fossil fuel polluters to fund climate adaptation. Annual fossil fuel subsidies amount to $7tn a year, funding oil and gas industry profits of $4tn, while developing countries need around $300bn a year to adapt to the most damaging aspects of climate change. Making big polluters and not taxpayers provide climate finance could help overcome political obstacles in richer nations. Whoever wins the next election, the question of how the UK can play a meaningful role in global decarbonisation will remain a live one.

Good morning from New Economy Brief. 

We’re about to see the largest reduction in living standards since records began. That was the verdict of the Office for Budget Responsibility (OBR) following the Chancellor’s Autumn Statement last month (see our take on it here). Jeremy Hunt may think this is unfair, having increased the minimum wage to £11.44 per hour, technically an above-inflation rise, but real weekly average wages are still expected to remain below 2008 levels until 2028. Meanwhile, years of social security cuts have reduced the incomes of the poorest fifth of the population by just under £3,000 since 2010. This isn’t a case of fixing a recent cost of living crisis, but years and years of stagnation and cuts. Living standards haven’t been collapsing for two years, but for 20.

So what’s going on here? And what can be done about it? A new report by the Resolution Foundation and the Centre for Economic Performance, Ending Stagnation, outlines a new economic strategy for Britain. It highlights, among other things, the economic impact of high inequality and falling living standards, and the policies solutions available. 

This week, we explore how far UK living standards have fallen and the options available to raise them.

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The long cost of living crisis. The invasion of Ukraine marked the start of what we now call the cost of living crisis, with shocks in international markets – particularly energy – causing prices to skyrocket. However, it is widely accepted that this crisis wasn’t the beginning of the issue – simply another layer on top of the UK’s already serious living standards problem. Small increases in real wages over recent months, and the latest boost to the minimum wage, come after years of real-terms cuts to public sector pay and stagnant wages across the economy. Meanwhile, the recent uprating of working-age benefits in line with September’s inflation rate fails to make up for the decade in which benefits usually lagged behind inflation. According to the Resolution Foundation, almost 9 million younger Brits have never worked in an economy with sustained rising average wages. Falling living standards, for some sections of the population, have become the norm. 

• How does Britain compare to its peers? The Resolution Foundation argues that when it comes to living standards, it is “simply no longer true” that the UK is on a par with countries like France and Germany. Middle-income Brits are now 20 per cent poorer than their peers in Germany and 9 per cent poorer than those in France. For low-income households, that gap is now around 27 per cent. 
• A toxic combination. Politicians of all stripes are keen to demonstrate how they would tackle what is seen as the key economic issue of modern Britain: growth - or the lack of it, to be precise. But for the authors of this report, the problem of low growth comes hand in hand with high inequality. They argue that these twin challenges, each a substantial issue in its own right, together form a “toxic combination”. Slow growth becomes even more dangerous when so many of us lack financial resilience. 

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What does a strategy for living standards look like? The Resolution Foundation and Centre for Economic Performance argue that we must be “as hard-headed about lower inequality as higher growth”. They suggest a two-pronged approach: putting “good work” at the heart of any economic strategy, “not a hoped-for byproduct of it”, and making sure that “choices on tax and benefits ensure rewards and sacrifices are equitably shared”. 

• Good work. So what does ‘good work’ mean, exactly? It seems almost too obvious to mention, but one sure way of improving living standards is to increase the amount of money that people earn. The report calls for the minimum wage to reach 73 per cent of median pay (£14 on current forecasts) by 2029. It also calls for sectoral ‘Good Work Agreements’ to set minimum standards and ways of working. 
• Not just work. As we saw with this year’s Autumn Statement, raising the minimum wage alone is not enough to improve living standards. After years of social security cuts, our benefits system is now woefully inadequate. According to the Joseph Rowntree Foundation, nearly three-quarters of those in destitution are receiving social security payments of some kind. As the Ending Stagnation report notes, benefits have failed to keep pace with prices in 10 of the past 15 years. Its solution? To increase benefits in line with wages, not prices. It argues that this will reconnect the incomes of poorer households with those of the rest of the population, and that evidence from New Zealand and Germany shows that concerns that this will reduce incentives to work are “overdone”. 
• Housing. With housing such a huge squeeze on budgets, the report calls for higher housing supply, higher standards in the private rented sector and greater housing benefit support. It argues that relinking housing support to rent levels will “lean against inequality and facilitate mobility”.‍
• “Better, not just higher, taxes”. The paper argues that while taxes are up, their “quality” is not. It suggests that taxes fall “disproportionately on employees” and that wealth must “take more of the strain”. This could include council tax reforms as well as more effective inheritance tax with fewer loopholes to make it harder for the “well advised to abuse”.

Growth may be the topic of the day in Westminster, but none of the major parties will be able to achieve it without a proper strategy for living standards. The average UK family no longer enjoys the same quality of life as in comparable countries, with an increasing number unable to afford the very basics. This is a severe crisis, but it is not a new one. The living standards crisis has been brewing for decades, long before the double-digit inflation figures of recent months. Given this, the government’s current cost of living strategy – focusing purely on trying to reduce inflation – is misguided. Hitting the 2% inflation target will not end a decade-long stagnation in living standards. But this report is a reminder that policy debates too often confuse cause and effect. Higher wages, decent social security, strong public services, affordable housing and a fairer tax system are not just products we can hope for from a healthier economy – they are the vital ingredients to create it.

Good morning from New Economy Brief.

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Though it is not the only way to measure economic success, increasing GDP growth remains a priority for most political parties. Debates on how to pull the ‘growth lever’ appear in the news every week and economists argue perpetually over how to fill the UK’s productivity and investment gap.

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The latest attempt is ‘full expensing’, recently foregrounded by Chancellor Jeremy Hunt as he made the tax break on investment permanent in last week’s Autumn Statement. This week’s New Economy Brief explores the evidence on full expensing and asks if it is really the best way to boost investment, productivity and growth. 

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Pulling the growth lever. 

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Investment is the fuel that makes economies grow. Both public and private investment are vital to achieving economic growth, because improving physical equipment like machinery or intangible assets like software or skills helps businesses and the government produce goods and services more efficiently, which adds productive capacity to the economy. As it is National Productivity Week in the UK, we look at the Conservative government’s latest attempt to increase private sector investment - by making ‘full expensing’ permanent. 

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The UK’s poor investment record. Firstly, it’s worth pointing out just how poor UK productivity performance has been in recent years. London School of Economics’ Anna Valero and John van Reenen explain that productivity has stagnated since 2008: “Labour productivity (GDP per hour worked) is 24 per cent lower than it would have been had it grown at its pre-financial crisis rate…and this has been the main driver of real wage stagnation over the last 15 years.“ They also note that “since 2008 amongst a set of advanced economies, only Greece had a lower investment rate than Britain”. IPPR also highlights that the UK consistently ranks lowest in the G7 for private sector investment as a percentage of GDP and among the worst of the 37 OECD countries. So by focusing on this issue in the Autumn Statement, the government was certainly highlighting a real and serious problem. 

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What is ‘full expensing’? 

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Chancellor Hunt announced a temporary introduction of ‘full expensing’ in the Spring Budget. This means larger businesses can deduct the full cost of investment in plant and machinery from their corporation tax bills, so for every pound a company invests (in certain types of assets), its taxes are cut by up to 25p. (There is already a £1m investment allowance, so this policy will do very little to increase SME investment). Hunt then decided to make this tax break permanent in last week’s Autumn Statement. As the Spectator’s Kate Andrews notes, making full expensing permanent (“the largest business tax cut in modern British history”) is a big win for free-market think tanks such as the CPS, ASI and IEA, who have “been pushing this for years.” It is also worth mentioning that full expensing has advocates beyond this group, and that Labour had not only been calling for it as a permanent measure recently, but had even been attacked for doing so by the government.

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Will it increase investment? The Office for Budget Responsibility (OBR) predicts that making full expensing permanent will add just £14bn over five years to private sector investment, while reducing tax receipts by £30bn. That is, in the short term it will cost the government more than twice as much in lost receipts as it will stimulate in private investment. 

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Taxes aren’t the barrier. One explanation could be that high taxes are not the main barrier to business investment. Baroness Minouche Shafik, former President and Vice Chancellor of LSE, summarised “hundreds of investor surveys” about businesses willingness to invest in a country. These consistently showed macroeconomic and political stability, high quality infrastructure and skills as the top priorities of businesses, but “low taxes and enterprise zones were always near the bottom”. Defenders of full expensing would argue that the policy’s full impact will take much longer to appear, stretching beyond the five year ‘scorecard’ window examined by the OBR, so assessing its benefits only over that period is short-sighted. These points have some merit.

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The evidence from the ‘super-deduction’. This is not the first time the government has tried to use tax breaks to spur business investment recently. Back in 2021, then-Chancellor Rishi Sunak implemented a ‘super-deduction’ tax cut, allowing businesses to deduct 130% of the cost of “main rate” assets – more than the equipment’s total cost – from their taxable profits. But the OBR concluded that the two-year super-deduction experiment “does not seem to have significantly boosted overall business investment” either. And campaign groups like TaxWatch warned that the tax break would mainly benefit large corporations that would have made those investments anyway, wiping out the tax bills of a company like Amazon.

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Instability and fiscal rules. Business groups keep saying that a stable policy environment is essential for patient investment. It is hard not to conclude that the government’s hokey-cokey approach to business taxes in recent years (a temporary super-deduction, then temporary full-expensing, followed a few months later by permanent full-expensing) is somewhat suboptimal. Bear in mind that among the reasons for this policy churn have been the government’s attempts to keep within its own fiscal rules. This led to a series of temporary policy offers because their effects had ended by the fifth year of the forecast period and so did not count against the fiscal rules. Their main effects were to reward businesses for investment decisions they had already made, or encourage them to move money around between years to maximise their tax savings. Even those who think the policy has ended up in the right place can hardly argue that we got there by a sensible route.  

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Is this a responsible use of taxpayer money? The end result is a policy which targets a real problem, probably will have some impact on it, but does so in an inefficient way. Given that it was one of the most expensive choices in how the Chancellor used his (much criticised) fiscal headroom, perhaps there are other ways to stimulate business investment which offer more value for money. 

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Alternative ways to increase investment.

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Aside from the arguments discussed above, one of the central criticisms of full expensing is that even when it does spur investment, it is indiscriminate and does not direct investment into key strategic areas. Future Economy Scotland’s Laurie Macfarlane argues that if the government is going to spend £30bn on a tax giveaway to businesses in the hope that they use this to invest, one might question whether it would be better value for money to invest that directly instead. This would guarantee investment, which could directly target strategic priorities and deliver higher multipliers (look out for an explainer on this coming soon in New Economy Brief).

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Crowding in. IPPR’s George Dibb adds that the government’s scattergun approach “goes against an emerging international consensus that the state can "crowd in" private sector investment, with targeted, directional, market-shaping public investments” (See their paper Making markets in practice.) But the government’s plans mean public sector capital spending is set to fall from 3.6% of GDP this year to 3.1% in 2028-29, and it will cut public service spending by ~16.7% over the next five years. Essentially the government is asking businesses to invest, while cutting its own investment in the economy.

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Learning from the US: Conditionality is key. Lots of investment, particularly in the green economy, is being lost to the US due to the scale and competitiveness of the tax breaks it offers. But the US approach has a key difference from the UK’s full expensing regime. US businesses only receive tax breaks if their investments in the green economy use ‘local content requirements’ - i.e. where goods are assembled or materials sourced domestically. This increases the multiplier effect on domestic job creation, and helps reshore its supply chains. Companies must also commit to new jobs being well-paying, unionised roles with benefits such as access to affordable childcare. In short, the incentives in the US are much more targeted than the blanket, economy-wide tax breaks used in full expensing, and they use the government’s power to intentionally shape the markets they intervene in and help coordinate investment decisions towards transformational priorities.

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Corporate governance. Another way to increase business investment in the UK could be to reform that way investment decisions are made in the first place. It has long been argued that the ‘fiduciary duty’ on companies to prioritise shareholder returns at all costs leads to short-termism among UK businesses. Many argue that reforms to increase the power of workers and other stakeholders could lead to a more balanced system of decision making which favours longer term investment. A new paper from Demos and B-Lab UK argues that such reforms could increase capital investment by UK businesses by £86bn per year - without costing the Treasury a penny. (See Common Wealth’s Commoning the Company for more on this.)

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A policy without a strategy?

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As we have already seen, increasing investment in the UK economy is a worthy goal, and a necessary one if the country is to escape the kind of economic stagnation that forecasters predict in the near term. But doing this requires more than just one policy intervention, it needs holistic strategy which is currently lacking. The government hasn’t only jumped from policy to policy on full expensing; it still seems confused about what kind of policy environment is necessary to achieve its aims. 

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The phantom industrial strategy? Last week the Chancellor decried ‘subsidies’ while government ministers objected to the very idea of an industrial strategy as ‘picking winners’. Kemi Badenoch, Secretary of State for Business and Trade outlined the government’s critique in the foreword to the new Advanced Manufacturing Plan: “I have been clear throughout that the UK will not be drawn into a distortive subsidy battle. For those of us who believe in the power of the market, the key to unlocking continued growth in our manufacturing industry is capital investment from the private sector, which sustains jobs and growth for the UK. No business secretary can pick winners, but Government can help companies succeed by removing obstacles in their way and focus on improving the business environment to ensure the sector is competitive.” And yet this Plan commits £4.5bn in direct public investment for specific sectors, and trumpets the prediction that  every £1 of public money spent will crowd in £5 of private investment. Not only does this sound suspiciously like industrial policy; it is also significantly more efficient in generating private investment than full expensing is likely to be. 

‍Ideological stubbornness. As the FT’s Helen Thomas notes, a proper industrial strategy is “the crucial thing missing from the vaunted UK business investment bonanza …Government should be specific about what it wants to target and create regulation to support its goal”. As part of such a strategy, you could imagine a form of full-expensing being a useful tool to stimulate private investment, which would complement direct public investment. Yet in isolation, the move towards full expensing looks very like a return to a narrow and outmoded ideological approach based on the mantra that the ‘market knows best’ and the ‘state shouldn’t pick winners’ (consult this Times editorial to see this argument in action). If this is the government’s only real plan to reverse more than a decade of stagnant investment, the prospects for success do not look promising.

Good morning from New Economy Brief.

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The Chancellor delivered his Autumn Statement yesterday, claiming that the government’s economic plan is working and the UK economy has turned the corner. However, with growth forecasts revised down, inflation revised up, and public services facing swinging cuts in coming years, critics have accused the government of gaming their fiscal rules with implausible plans.

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The Statement’s centrepiece was a package of personal and business tax cuts, which the government claim will reward work and improve investment. What Chancellor Hunt didn’t mention is that these will ultimately mean public spending cuts of a similar pace to those seen in the Cameron/Osborne years, all pencilled in until after the general election and widely thought to be politically undeliverable. 

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This week’s New Economy Brief unpacks the big stories from the Autumn Statement.

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‘Headroom’ and political choices. 

Media coverage in the week before the Statement was dominated by speculation about how the government might choose to spend their ‘headroom’. This is a measure of how much leeway the government has to cut taxes or increase spending without breaching its chosen fiscal rules. (Reminder: the government’s fiscal rule is to have national debt as a percentage of GDP fall at the end of a rolling five-year period.) Where this headroom comes from, and how the government has used it, is in many ways the central story of the fiscal event.

Explaining the source of ‘headroom’. The Office for Budgetary Responsibility (OBR), the official, independent forecaster for the government’s spending plans, explain that an extra £27bn of ‘headroom’ has opened up as higher-than-expected inflation has increased the nominal value of tax receipts. (This happens through a concept known as ‘fiscal drag’ – as nominal incomes rise while tax band thresholds stay the same, the result is big increases in the tax take.) At the same time it has eroded the real value of departmental spending - this is forecast to be £19bn lower by 2027/28 than it was in March. 

What did the government choose to ‘spend’ this ‘headroom’ on? Mostly on two big tax cuts – a 2p reduction in National Insurance Contributions and making ‘full expensing’ (a tax break for businesses that invest in certain types of capital) permanent. This left them with £13bn of headroom remaining against the fiscal rule at the end of the forecast period - slightly up from the £6.5bn in March, but still lower than average. 

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‘Austerity by stealth’ to pay for tax cuts.

But is this really a case of the government cashing in on economic good news? Buried in the OBR’s Economic and Fiscal Outlook is what may be the defining story of the upcoming general election: the scale of predicted cuts to public services, and how these cuts are paying for pre-election giveaways. (For an explainer on the effects of inflation on public spending, read NEF’s Austerity by stealth.)

‘Fiscal illusions’. The Resolution Foundation warn that any forecast of the amount of ‘headroom’ assumes “implausibly low departmental spending”, meaning that “any extra policy space will be a ‘fiscal illusion’”. Inflation is now expected to remain higher in the UK, and for longer, than previously forecast. This is eroding the real spending power of government departments and putting more pressure on public services as costs rise because of higher-than-anticipated pay awards. Consequently, the government’s planned spending cuts, baked in for after the election, are coming under fire for being even more politically undeliverable. Even the OBR note that “the outlook for departmental spending is therefore a significant and growing risk” to the accuracy of their forecasts…which is about as they come to saying that they don’t believe these cuts will happen. 

Cuts on a similar scale to Osborne-era Austerity. The Resolution Foundation note that the spending power of unprotected departments will take a 16% cut over the next five years, “which would mean austerity-level cuts being implemented at a similar pace to those overseen by George Osborne in the early 2010s.” (Reminder: 335,000 excess deaths were attributable to austerity between 2012-19.) The Institute for Government warn that “after a decade of budgetary constraint, there is no more meaningful fat to trim in public services”, and argues that the Chancellor "has abdicated his responsibility for public service performance." Alongside day-to-day spending, the Chancellor also announced a new long-term cash freeze on public sector investment, which the Institute for Fiscal Studies’ (IFS) Paul Johnson explains “is not good for growth…We already have public sector investment well below that in most comparable countries.”

These cuts have consequences. The Centre for Progressive Policy calculated that public services will need an additional £142bn in spending by 2030 just to maintain services at their current (already struggling) levels. As Sam Freedman notes, it is "important to remember when commentators talk about "headroom" this week re autumn statement that "headroom" is predicted on assuming that the state will not fix this or any other of our numerous social problems", such as growing hospital waiting lists and school roofs falling in. (Read Rafael Behr’s helpful explanation that the real objective of these cuts is to lay a trap for Labour.)

So what’s really going on? The government would like this Autumn Statement to be a story of an improving economy making space for feel-good tax cuts. But it is hard to make this case looking at the OBR’s numbers. As the IFS say: “the public finances haven’t meaningfully improved”. Or as Giles Wilkes puts it: “The government is financially benefiting from a real terms cut to departmental spending, and is using £20bn for tax cuts”. The main story of this statement is pre-election tax cuts paid for by post-election spending cuts.

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The great squeeze on living standards

Going from the macro to the micro, the other main story of the Autumn Statement is what is happening to living standards. Again, the Chancellor was keen to paint a picture of rising incomes, especially for those in work. The combination of stricter benefit conditionality for sick and disabled claimants with increases to benefits, the national living wage and state pension enable the government to frame their choices as in the interests of “working people”. But again the OBR tell a different story, noting that “living standards, as measured by real household disposable income (RHDI) per person, are forecast to be 3½ per cent lower in 2024-25 than their pre-pandemic level…it still represents the largest reduction in real living standards since ONS records began in the 1950s.” 

Why don’t the tax cuts make people better off? The New Economics Foundation’s Jeevun Sandher calculates that, while reducing National Insurance Contributions (NICs) by 2p may give the average worker around £400 a year, freezing tax thresholds costs the workers more – over £650 a year more on average, as more of their income becomes taxable. IPPR calculates that the gains disproportionately flow to higher income households. The irony of cutting real departmental spending to fund a cut in NICs is that increasing them in the first place was framed as a ‘health and social care levy’ to pay for increased demand on the NHS and social care after the pandemic, though this rise was ultimately reversed by Liz Truss and now cut even further by Sunak and Hunt.

What about wages? The government decided to increase the minimum wage to £11.44 per hour, but despite this real weekly average wages are expected to remain below 2008 levels until 2028 (two years later than the OBR expected back in March), representing 20 years of stagnant wages. 

Uprating honoured. Elsewhere the Chancellor trumpeted his decision to uprate social security in line with September’s inflation, unfreeze housing benefit, and honour the state pension triple lock. While these were announced as a package of ‘cost of living’ measures, they were close to the minimum of what the government could be expected to do. The TUC’s Alex Collinson points out that the real incomes from benefits are still £35 a month lower than before the Conservatives came into power.

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Politics trumps economics?

Many commentators note that the government have been ‘saving up’ fiscal headroom to spend it on a pre-election tax cut and win over voters. This fiscal event was clearly constructed with next year’s election in mind, frontloading the good news and pushing the difficult decisions into the next parliament. But if this was the rumoured pre-election tax cut, it is hard to escape the conclusion that it is rather underwhelming. 

A map to a May election? The accelerated introduction of the 2p National Insurance cut sparked speculation in Westminster that the Statement was a roadmap to an early general election next year. However, the chances that voters will feel significantly better off in the near term are remote. The government’s upbeat rhetoric seems out of kilter with the mood of the nation. Polling from Stop the Squeeze reveals that most of the public don’t expect their finances to improve any time soon, and that voters give the government little credit for falling inflation. Meanwhile polling for Tax Justice UK shows the public prioritise public service spending over tax cuts, and the latest British Social Attitudes survey shows only 8% of people support lower taxes and spending on public services. And, as the Resolution Foundation’s Torsten Bell notes, real household incomes will be falling in an election year. 

‍Fiscal fantasy land. What this Autumn Statement also told us is that both major parties will likely go into the next election committed to a set of spending plans that imply eye-watering public service cuts. Labour’s determination not to expose themselves to accusations that they are planning more borrowing or tax rises makes it difficult for them to attack these plans, raising the prospect that the next election will be fought with barely a reference to the issue that will dominate the next parliament – how to save public services from collapse.

Good morning from New Economy Brief.

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Public opinion on economic policy drives so much of our political debate - but that debate is often based on very little information. Polling sometimes gives us glimpses of what the public think about particular economic policy questions, but rarely lifts the lid on their beliefs on the economy as a whole. 

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This week New Economy Brief explores a recent study that tests how public opinion changes when people are given more information, and asks what conclusions we can draw about broader public opinion and media debates on the economy.

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Public attitudes on economics and the cost of living.

Public opinion on the economy is elusive but fundamentally important, because more than any other issue it drives voting behaviour. Levels of economic literacy are low in the UK, and the media debate on economics has been criticised as inaccurate and misleading, while the public’s preferences (as represented in polling) are often confusing and contradictory. 

But what would happen if there was more time to explain the arguments and debate the economy with non-’experts’? A new report from Kings College London, the Citizens’ Economic Council on the Cost of Living (CEC), does just that. It explores people’s opinions on fiscal policy and solutions to the cost of living crisis when exposing them to different arguments, giving them accurate, reliable information and the time to deliberate. Most participants indicated that “their views had changed considerably” when given these resources.

Deliberative policy making. Citizens’ assemblies or juries are becoming more common around the world. As trust in politicians and economic ‘experts’ declines, these processes attempt to rebuild participation in the policymaking process. Permanent examples exist in Paris, London, Belgium, Scotland and Ireland.

Important in times of crises. These processes have high public support and provide useful focus group evidence for gauging public understanding, which is particularly important in times of crises when bold thinking is needed. But public support and confidence are vital, particularly where large interventions can benefit or harm particular groups relative to others. This report provided participants with presentations from experts on important issues such as spending, tax, public investment, debt and fiscal rules, and gave them the time to deliberate the distributional consequences of different responses to the cost of living crisis.

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Cost of living responses.

‍Several of the report’s findings relate to this subject. They provide qualitative evidence for similar findings about voters’ priorities by the Stop the Squeeze campaign, and claims by pollsters like John Curtice that the public is becoming more supportive of income support for working age people.

‍Support should prioritise the poorest. Participants “consistently emphasised” the need to prioritise the most vulnerable households with spending to support people through crises. They favoured a policy package that offered more help through the benefits system, even if this meant reducing support for energy bills across all households.

Tax excess profits. The participants supported imposing windfall taxes on companies making substantial profits from high energy prices. However, when considering excess profit taxes in a broader context, they were more cautious, wanting to ensure that taxes did not discourage private investment and that smaller businesses faced lower effective tax rates than larger ones.

Make the wealthy pay a fairer share. The participants preferred more progressive  taxes and focused more on raising revenue from the wealthiest, including through wealth taxes, than on sharing the burden more evenly among all citizens. They wanted work to be rewarded as far as possible, and supported increasing the personal tax allowance for people on low incomes.

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Longer term thinking for fiscal reform.

The findings also support more quantitative evidence on the changing attitudes of the public towards state intervention, exhibiting tolerance towards higher levels of spending and government debt. The participants gave interesting responses for what counts as productive uses of borrowing.

Preparation for the ‘next crisis’. There was a “strong and widely shared sense” that the government should be capable of thinking and planning “far beyond the electoral cycle” to improve future resilience. Participants were particularly focused on themes arguably similar to Labour’s ‘securonomics’ or US Treasury Secretary Janet Yellen’s ‘modern supply-side economics’: “investing directly in the economy to build resilience – both at a household and national level – against future crises and shocks, whether in energy markets, financial markets, national security, or elsewhere.”

Debt and deficit reduction targets should not stifle public investment. Following discussions and the presentation of evidence on the economics of public deficits, participants became more accepting of the idea of public investment funded through debt. They endorsed investment in areas such as housebuilding, green initiatives, business loans, transportation improvements, and retraining, particularly when these initiatives aimed to benefit UK regions and communities with lower economic productivity and opportunity. While acknowledging various factors in setting public investment levels, participants ultimately considered fiscal constraints, such as deficit and debt targets, to be less crucial than they had been led to believe by politicians and media coverage.

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Wider lessons.

“Economic policy is often seen as too complex for non-specialists, but the CEC demonstrated that, when given high quality information, realistic scenarios and time to discuss and ask questions, citizens can provide unique insights and advice on difficult economic policy issues.” Beyond the idea of using citizen's juries more widely, what can this work tell us about public opinion on economic policy? Plainly it is not possible to give all citizens the kind of detailed contextual information that the people in this study got, but that does not mean there is nothing we can learn from it. 

Economic debates in the media. One lesson is how important the media are in setting economic policy debates in context. The report concludes: “Media organisations should make efforts to improve coverage by making better use of economics specialists, including a wider range of economic perspectives, and contextualising facts and figures better.” These findings support key conclusions of the BBC’s Impartiality Review on fiscal policy, which argued that BBC coverage should give airtime to a more diverse range of economic perspectives. For instance, the public might change its views on how to pay for measures to tackle the cost of living crisis if given a range of options that included wealth taxes. Likewise, if reporting around Budgets or Autumn Statements made it clear that fiscal rules are self-defined political choices rather than hard economic limits, the public might start to think about government spending, investment, borrowing and debt differently. If the BBC and other media organisations were to hold true to these standards, perhaps we would see a significant shift in public attitudes on key economic policy questions.

Activating latent preferences. The second conclusion is on the substance. It is clear that the public have latent views on issues such as tax and spending that are considerably more progressive than the current debate implies. This is hugely significant. Those looking to argue for these policies, be they campaigners, think tankers, or politicians, should be seeking ways to activate those latent preferences, rather than using language that narrows the debate and reinforces the current dominant framings (check out the Framing the Economy project for more on “how to win the case for a better system”).

Good morning from New Economy Brief.

There are now just two weeks to go until Jeremy Hunt’s Autumn Statement. Proponents of tax cuts are urging the Chancellor to rethink his position (he ruled them out last month), pointing to a £15 billion increase in government revenue, stemming from unexpectedly high tax receipts due to inflation. But the Resolution Foundation calls this a “fiscal illusion”, with higher borrowing costs reducing ‘fiscal headroom’ and inflation eating into government spending power.

But while the Chancellor may be considering what he can’t afford to do, many point at what he can’t afford not to do. And we’re not talking about tax cuts. A recent report by the Centre for Progressive Policy (CPP) found that a whopping £142 billion is needed by 2030 just to maintain public services at their current (already struggling) levels. Similarly, a growing number of academics, politicians and civil society organisations want Hunt to use this fiscal event to “invest in the lifeblood of our society”. The We Are the Economy campaign calls for more public investment to “improve our lives, reboot our economy, and help us meet our legally obligated climate targets.” 

So, what are the Chancellor’s options? This week’s New Economy Brief explores the urgent need for higher public spending and the argument that this should be seen as an economic necessity, not an added bonus.

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The fiscal reality. In the Autumn Statement, Hunt will likely tell us that despite (literally) crumbling public services and “simply not acceptable” poverty levels (the UN’s words, not ours), the government has very little wiggle room to spend until we see more growth. But there is a reality here that politicians are not admitting, argues the CPP’s latest report. It says that “turning the tide on our long-run economic stagnation will require considerable levels of public investment, paired with bold, ambitious reform of our public services”. In other words, more spending (much more spending), is the cure, not less. The report finds that a £142 billion annual spending increase by 2030 - 1.56% more per year in real terms - is needed just for public services to stand still. This increase will be driven primarily by rising health, social care and social security costs. It does not account for “the capital injection required to remedy over a decade of under-investment” which would be needed to promote growth, move towards a preventative health system and give us any chance of making the necessary transition to net zero. And the CPP is not alone in calling for higher investment. The Institute for Government has warned of a ‘doom loop’ of underinvestment in public services, while the newly launched We Are the Economy campaign warns that the government “can’t afford not to invest in the collective services that will generate more value than they cost, keep us well, and our planet habitable”.

• What extra spend is needed? So, if the government were to get serious about not only maintaining public services but actually meeting the challenges of fair growth and net zero, what kinds of figures would we be looking at? The CPP has put forward a package of priority policy measures costing an additional £96 billion, or £19 billion per year, on top of the £142 billion it says is needed to simply stand still. This includes £7.7 billion per year on green industrial policy, an annual £5.5 billion for early years services and education to support disadvantaged children and prevent worsening outcomes; £3.9 billion per year on affordable childcare; £1 billion a year on reducing child poverty by removing the two-child limit on Universal Credit and child tax credit, and £0.9 billion per year on tackling poor health and rising inactivity in the labour market by restoring the public health grant to its 2015/16 peak. 

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How to pay for it. The CPP paints a stark picture, and will no doubt get the usual response - how do we pay for it? Projected tax rises will not be enough to stand still, let alone to invest in green industry, reduce poverty or to transition to public services that stop problems before they happen rather than just reacting once things have already gone wrong. Those urging the Chancellor to cut taxes won’t like the CPP’s prediction that the overall tax take will need to rise from 36.5% of GDP today to 38.8% in 2030 in order to bring down the budget deficit from 5.4% of GDP to a “healthier” 2.8% of GDP. Interestingly, however, the public aren’t so worried about this. In fact, members of the public that formed the CPP’s ‘Citizens’ Jury’ expressed support for raising revenues through higher taxation on wealth. Most of the jury called for a ‘millionaires’ tax’ (i.e. a net wealth tax) while the second most popular option was raising capital gains tax to match income tax. 

• Fiscal rules. Another blockage to the government increasing spending is its self-imposed fiscal rules. The CPP found that these are unpopular and that the Citizens’ Jury wanted a more pragmatic and flexible approach to fiscal policy. Jury members also overwhelmingly backed the devolution of spending and taxation to local government, with 84% saying they supported the idea in principle.

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Confronting reality. While the “will they, won’t they?” debate around tax cuts rumbles on, there are more fundamental fiscal questions for the Chancellor - and his successors - to consider. The scale of the repair job needed on UK public services is the dirty secret of current UK politics. The Labour Party, with its mission-oriented approach, at least seems aware of the challenge, but while it wills the ends (Get the NHS back on its feet is Mission number 3), it has been much vaguer about the means. As things stand, both parties look set to fight the general election committed to a set of spending projections that imply further steep real-terms cuts to public spending. It has been widely noted that these cuts are likely to be politically undeliverable for either party, but their existence as a political fiction obscures the debate about alternatives. 

• Public services. Whoever is in power after the general election will have to face up to the urgent need to invest in public services. As the climate crisis intensifies, poverty levels rise and public services are left to fire-fight, the price of not investing will grow even clearer. As the We Are the Economy campaign argues, investing in public services strengthens the economy. Failure to invest, on the other hand, exposes us not just to poor performance, but crises: “crumbling schools, NHS computers that don’t turn on, and not enough prison cells to house prisoners”. All of these crises lead to inefficiency, unnecessary costs and an economy that is trapped in a doom loop, unable to reach its full potential.

Good morning from New Economy Brief.

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Campaigners are warning that the UK’s latest trade deal (the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP) could mean the government can be sued for billions of pounds by corporations whose profits might be threatened by policies including actions to improve public health or move faster on mitigating climate change. 

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Read on for an explanation of how the Investor-State Dispute Settlements system could threaten UK sovereignty.

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Investor-State Dispute Settlement and the UK’s trade deals.

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Global Justice Now has brought together over 30 organisations and 50 experts from the UK and Canada to call for excluding Investor State Dispute Settlement (ISDS) provisions from the UK’s latest trade deal, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP, sometimes referred to as the ‘Pacific Trade Deal’). They warned both the Canadian and UK governments that failing to do this could cost billions in taxpayer money through legal cases from private corporations.

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What is the CPTPP? The UK agreed to accede to the CPTPP - a ‘free trade alliance’ encompassing 11 countries such as Japan, Canada, Australia, Malaysia and Singapore - in July 2023. Liz Truss (then Trade Secretary) hailed the UK’s original application to join the free trade bloc as a growth measure that will boost exports to member countries, and as a ‘pivot away’ from trade with the EU. But the government’s own analysis found that it may only add 0.08% to UK GDP “in the long run”, and the Trade Justice Movement warns that the agreement brings “significant risks” to the UK government’s domestic priorities. 

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What is ISDS? Joining the CPTPP involves accepting a system of international arbitration allowing companies from signatory countries that are investing in another to argue that new laws or regulations could damage their expected profits or investment potential, and seek compensation in a binding (and often secret) arbitration tribunal. (Watch Common Wealth’s video explainer on ISDS). But accepting ISDS is not a mandatory part of joining the CPTPP - New Zealand opted out of the system through bilateral agreements with trading partners. The signatories to the letter to Prime Ministers Rishi Sunak and Justin Trudeau last week are calling for similar ‘side-letter’ agreements between the governments of UK and Canada, due to “particularly aggressive users of ISDS” from “notoriously litigious Canadian firms”. 

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Why is this important?

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Campaigners argue that ISDS effectively elevates the rights of corporations above a country's democratic right to decide its own laws. In particular, they argue that ISDS will make it more difficult for a country to enact policies in the public interest, such as public health and climate policies. Acquiescing to such a system, some could argue, would betray the Leave campaign’s promise to ‘take back control’ of UK trade policy after Brexit.  

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How ISDS threatens sovereignty. Corporations have used ISDS over a thousands times in recent years to sue governments around the world for billions of pounds. One example is a tobacco company based in Switzerland suing the Uruguayan government for implementing anti-smoking legislation. More recently, a group of cryptocurrency billionaires who bought an island in Honduras to found a ‘libertarian paradise’ in a ZEDE - zones where companies have autonomy from the countries regulations such as workers rights and tax law - are suing the Honduran government for nearly $11bn (2/3rds of their national budget for 2023) for a democratic decision to abolish ZEDEs, due to fears by some that they would become a ‘vector for corruption’. 

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The Energy Charter Treaty. Perhaps most importantly, ISDS often stops countries taking greater action on climate change - particularly governments wanting to wean their economies off fossil fuels. The most (in)famous case is the Energy Charter Treaty (ECT), which allows energy companies to sue governments for changes in energy policy that might cost them money, including policies that support renewables. A Canadian firm brought the largest ever fossil fuel litigation under the ECT against the US government, after President Biden cancelled the Keystone XL oil pipeline. Eleven countries are now leaving the ECT, including Germany, France, Poland and the Netherlands, and President Joe Biden has said he will not include ISDS in any future trade deals. According to Global Justice Now, the UK could be exposed to up to £9.4bn in legal claims from fossil fuel companies over its climate policy and is currently “reviewing its membership” of the ECT.

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Relevance for UK politics. 

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The IPCC has warned that ISDS can cause ‘regulatory chill’ which deters necessary legislation for fear of being sued. When all parties are committed to decarbonising the UK’s energy system in one form or another, failing to exclude ISDS from the UK’s trade deals could make the long road to net zero even harder, not to mention more expensive for the taxpayer. Global Justice Now’s Cleodie Rickard suggests that Labour’s refusal to commit to revoking the current government’s new oil and gas licences is because Keir Starmer fears that legal obligations under the ECT could mean the taxpayer ends up footing the bill. Or if Labour wanted to abolish ‘freeports’, could the government end up getting sued like Honduras did? 

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The evolving global trade regime. The purported benefits of new trade deals featured heavily in the debate around Brexit, but the irony for the UK is that it is pursuing these deals at a time when major trading blocs of the world seem to be moving away from the ‘Washington Consensus’ that has governed globalisation. The UK’s approach looks out of step with more forward-thinking nations that increasingly prefer trade rules that respect national sovereignty and protect domestic industries. Under President Biden, the US has begun to flout WTO rules by prioritising efforts to reshore domestic industries and secure more resilient supply chains for green technology. Likewise in the EU, state-aid laws that stopped governments intervening in the economy are being watered down. In short, the paradigm that put shareholder returns above all else in international trade is beginning to shift, and the rules are being rewritten to give governments the flexibility they need to meet other democratically-decided priorities. 

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A progressive vision for UK trade. Many organisations have proposed ways to improve the UK’s trade policy. The IPPR has urged the UK to work with allies to reform the World Trade Organisation so as to safeguard and improve labour and environmental standards. They have also argued that these reforms should allow for divergent domestic approaches needed to deliver faster climate action across the world after the Inflation Reduction Act signalled a move away from a liberal trade regime. War on Want explores the UK’s trade policies with countries in the global South, calling for agreements that will allow low-income countries to support their own industries and economies. The TaPP network proposed six steps to improve parliamentary scrutiny of free trade agreements in the UK.

Good morning from New Economy Brief.

Next week, the Bank of England’s Monetary Policy Committee (MPC) will decide whether to maintain the base rate at 5.25% (a 15-year high), as they did in September, or to increase it yet again. The committee recently voted to keep rates where they are by a tiny margin (the majority was just 5-4), suggesting that we may not have hit peak interest rates just yet if the ‘hawks’ get their way.

For a taste of the debates taking place inside the committee, take a look at the recent comments of MPC member Swati Dhingra. One of the five members who voted to keep rates at 5.25% in September, she told the BBC that higher rates could hit younger workers and those on lower incomes the hardest. Monetary ‘hawks’ believe that raising interest rates is essential to bring down inflation and help with the cost of living. Whereas monetary policy ‘doves’, like Dhingra, are more concerned with the wider impacts of rate rises, including their distributional effects.

So, are interest rates increasing inequality? Or, conversely, have the historically low interest rates since 2008 contributed to the economic disparities we see today? This week’s New Economy Brief explores the relationship between interest rates and inequality, and how monetary policy may be worsening the cost of living crisis.

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High rates, poverty and inequality. 

The full impact on households of the recent period of high interest rates will not be clear for some time. It can take up to two years for the economic effects of interest rate changes to be fully felt. There have been seven rate rises over the past 12 months, and already anti-poverty organisations are warning that this is harming low-income families, with more than a million low-income mortgage holders going without essentials like food, clothes or unable to pay their bills, and renters also getting squeezed by the rising cost of borrowing. In the face of squeezed budgets and higher debt, it is no surprise that lower and middle income households are feeling the effects of rate rises the most acutely. In 2021, European Central Bank board member Isabel Schnabel warned that raising policy rates in response to a “temporary inflation surge”, will “hurt households with low incomes the most.” Worryingly, it seems her prediction may have been correct.

Gender and high interest rates. Using interest rate rises to tackle inflation disadvantages women in particular, according to the Women’s Budget Group (WBG) think tank. After a long period of wage stagnation, average earnings are now growing faster than inflation and this is being used to justify keeping rates high. However, as the WBG argues, this “headline figure masks significant differences within our fragmented labour market.” Pay in parts of the economy dominated by women (such as the public sector, where wages have grown 6.6% over the past year) is rising much slower than in male dominated sectors like finance and business services (where wages have risen by 9.5%). The WBG adds that women have 8.8% less in savings than men, so they are less likely to benefit from higher rates.

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Low interest rates, poverty and inequality. 

There is lots of evidence that current high interest rates are exacerbating the cost of living crisis faced by low and middle income households. However, periods of very low interest rates can also harm those on low incomes. In theory, these people should benefit from lower rates through boosted employment and higher disposable incomes. But those at the top see much greater returns, argues the Finance Professor José-Luis Peydró, because low interest rates increase the prices of assets like shares and property, and the harm this does to poorer households outweighs the gains from increased employment opportunities. As Servaas Storm has argued, low interest rates “fuel asset-price bubbles, creating wealth gains for the rich, and over-indebtedness for the bottom 90% of households, which use cheap credit to finance essential expenses on education, medical care and housing.” 

Interest rates and the ethnicity wealth gap. Low interest rates can also entrench other inequalities. According to the Resolution Foundation, the consistently low interest rates of previous years have “played an important role in sustaining ethnicity wealth gaps, via inequalities in the housing market and the ownership of other assets”. White British, mixed white and Asian and Indian families have the highest total net wealth, while Pakistani, Black African and Bangladeshi families have the lowest.

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Looking beyond monetary policy for solutions.

Recent experience shows that monetary policy, in the form of interest rises, is too blunt a tool to tackle the type of inflation currently impacting the UK - that is, inflation sparked by external supply shocks rather than increased demand driven by higher wages.

Growing numbers of economists, including those at the Institute for Public Policy Research, say we need to look to fiscal policy for solutions to high inflation, including the use of fiscal price caps. These involve spending public money to hold down the prices of certain household essentials - for example, the current energy price guarantee. This could be done in other sectors like public transport too, delivering immediate benefits for households and also pushing inflation down. The growing risk of external price shocks from climate change also points to the need to strengthen Britain’s social safety net, so as to ensure that everyone has access to a living income.

As we explored in New Economy Brief back in July, countries like Spain have used these tools to curb inflation while protecting lower income households. The growing evidence of the recent inflation surge’s devastating impact on low income households highlights the need for UK policy makers to adopt a more sophisticated approach to tackling the problem rather than relying on crude interest rate rises.

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Good morning from New Economy Brief.

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With both parties setting out plans to reform the National Grid, New Economy Brief looks at the why energy campaigners are focusing on the Grid, surveys the UK energy system’s structural problems with ownership and extraction, and explores a new paper from Common Wealth which makes the case for public ownership.

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The National Grid in the spotlight. 

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The National Grid has been in the spotlight in recent weeks as both Labour and the Conservatives set out reform proposals aimed at speeding up the deployment of clean energy infrastructure. The National Grid is the private company that owns and runs the UK’s energy transmission and distribution system (see Common Wealth’s helpful explainer on How Britain’s Energy System Works). It has recently come under fire for “decade long” delays in building new connections allowing business and households to contribute to the grid, which the head of Ofgem says endangers the UK’s net zero target. For example, Octopus Energy has been told it will have to wait 13 years to connect three solar farms. What do Labour and the Conservatives propose to do about it?

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The Conservatives’ plan for regulatory reform. New connections to the grid are approved on a ‘first-come, first-served’ basis, so speculative projects that may never be built can take priority over others that are funded, designed and ready to go. In his speech last month on the government’s new approach to net zero, Rishi Sunak announced an overhaul of the system to fast-track the most viable projects.

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Labour’s plan to “rewire Britain”. In response, Labour outlined their own plan to “rewire Britain” and unlock £200bn of private investment currently that’s being held up by the “out of control” queue for new grid connections. Labour propose a publicly-owned energy company (GB Energy). This would launch a “super-tender which will procure the grid supply chain that Britain needs”, open up new grid construction to competitive tendering and bid to build or co-build new connections. 

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We all pay for decarbonisation. 

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New energy infrastructure, charging networks for electric vehicles, and the electricity to power heat pumps all depend on good grid infrastructure. Decarbonising the electricity network (whether by 2035 or 2030) will require unprecedented investment in the grid to get new renewable generators connected. BEIS estimates that households and businesses will have to pay between £40bn and £110bn through their energy bills to transmission and distribution companies by 2050 to do this. Coordinating this investment and building so much infrastructure so quickly will be difficult, and distributing the costs for this fairly will be crucial for maintaining political support.

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Where is the money going? Many question whether the UK has the right ownership model for such a critical piece of national infrastructure. The National Grid has been a private company since the electricity industry in 1990 was privatised - an anomaly by European standards. This means one of the Grid’s key aims is maximising shareholder value. Analysis by Common Wealth shows that National Grid PLC’s top ten shareholders range from global asset management firms like BlackRock and Vanguard, to Norway’s government pension fund and the Abu Dhabi Investment Authority. Importantly, over the last five years, the company has paid its international shareholders nearly £9bn in dividends and stock buybacks. 

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The wrong priorities? Carbon Tracker notes that investment in the grid has stagnated in the past decade, and has fallen since 2017 despite a fourfold increase in the deployment of new solar and wind projects. Customers can be charged up to £62m a day in ‘congestion costs’  - effectively paying power companies to stop producing when there is more energy being generated than the grid can handle. National Grid has committed to invest up to £9bn in electrical transmission in the five years to 2026, but it will pay nearly as much again to shareholders over the same period, assuming dividends stay around their average.

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The case for public ownership.

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Common Wealth argue that the government will not be able to meet its target of a decarbonised electricity system by 2035 if it leaves transformation of the grid to private investment and coordination. They add that, if Labour is serious about a 2030 target, a publicly-owned grid is vital: “underinvestment is a feature, rather than a bug, of the regulated private monopoly model of grid ownership and governance, which is unable to deliver the scale of investment and strategic coordination of deployment needed at the pace required.” They argue for public ownership, which allows strategic coordination through direct public planning, investment and delivery. The government actually partially accepted this case last year, announcing the nationalisation of the Electricity System Operator, the part of the Grid that balances supply and demand across the network.

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Costings: ‘how are you going to pay for it’? Of course, opponents of nationalisation argue that it  would be an expensive distraction from other spending priorities. Common Wealth helpfully calculated that eliminating dividend payments from the company’s energy transmission wing for 10 years would cover the cost of acquiring it. They also note that the company spent   £9.2bn on servicing debt over the last decade - almost a quarter of its total capital expenditure - and that public ownership would slash these costs, since the public sector can borrow more cheaply than the private.

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‍The limits of privatised climate policy. Labour emphasised the importance of using public investment to ‘crowd-in’ private investment into the green economy at their party conference, while also talking about the importance of public sector control through GB Energy. If we are to learn the lessons of Bidenomics, we need to grapple with these issues of power and control of crucial infrastructure, and watch where the money is flowing. We are likely to hear more questions over whether we want private capital owning (and profiting from) from vital parts of the green economy. (For more, read our briefing on The UK in the ‘green arms race’.)

Good morning from New Economy Brief.

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Labour put the economy front and centre of their party conference in Liverpool, arguing for a new programme of ‘securonomics’ to address the cost of living crisis and generate growth. 

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In this week’s New Economy Brief we map out this programme, analyse the announcements in recent days, and explore the politics of economic policy ahead of the general election.

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Paradigm shift. “Globalisation, as we once knew it, is dead”. These were perhaps the key words in Shadow Chancellor Rachel Reeves’ speech on Monday, and the basis of the economic argument that followed. Labour economic philosophy springs from the belief that challenges from climate change to China's rise necessitate a new way of doing economic policy. At the heart of this is the idea of economic security - hence ‘securonomics’. We have covered this concept before, but in essence the argument is that economic policy should aim to secure Britain against financial shocks (for example by increasing supply of domestic clean energy and ‘friend-shoring’) and to give individuals more economic security in their daily lives (for example through stronger rights at work and more affordable housing). Sitting alongside this philosophy is the party’s economic mission to have the highest sustained growth in the G7.

• A new role for the state. Labour's central economic argument is that in this new world, economic security and high growth can only be achieved by rethinking the state’s role in markets. Specifically, through a new green industrial strategy where the government and business partner to drive investments in green industries and create the ‘jobs of the future’. Here, Labour is leaning heavily on Bidenomics and the US Inflation Reduction Act, as well as the influential work of UK-based economists such as UCL’s Marianna Mazzucato. The centrepiece of this is the Green Prosperity Plan, including the pledge to invest £28bn a year in climate policies, a National Wealth Fund that would invest strategically to ‘crowd in’ private finance, and creating a new publicly-owned energy company: GB Energy.
• Workers rights. Alongside the industrial strategy is Labour’s ‘New Deal for Working People’ - a package of reforms to workers’ rights including banning zero-hours contracts, ending fire and rehire, and giving workers full rights from day one of a contract (after a probationary period). Perhaps more significant is Labour’s interest in sectoral collective bargaining, starting with the care sector. Labour has strongly defended this package against the charge of being anti-business, with Starmer arguing that “worker rights are good for growth”. Again, the parallels with ‘union man’ Joe Biden are obvious.
• Other priorities. Elsewhere, Labour’s economic offer contains many familiar themes. Devolution, planning reform, a ‘real living wage’, and abolishing non-dom tax status are the signature policies.
• Fiscal credibility. Finally, Reeves has spent a great deal of time and energy stressing Labour’s fiscal prudence, setting out relatively tight fiscal rules including a commitment to cutting debt as a share of GDP by the end of the next parliament, a promise that every pledge will be fully funded, and new powers for the Office for Budget Responsibility (billed as avoiding a repeat of the Truss mini-budget).

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So what’s new? So far, so familiar. Those hoping for big new economic policies from this conference will have left disappointed. It was, overall, a policy-light affair. Some new ideas were eye-catching but not hugely significant, like a ‘Covid corruption commissioner’ to try to recover some of the Treasury’s £7bn fraudulently claimed and wasted during the pandemic. Far more substantial was Starmer’s announcement of ‘new towns’ built across the country, accompanied by reforms to the planning system and extra planning capacity for councils.

• Where is the growth coming from? The emphasis on planning was part of Labour’s efforts to demonstrate how they will achieve economic growth - their central mission. The other part was Reeves’ focus on unlocking private investment, which she called “the lifeblood of a growing economy”. Labour argues that a combination of stability, a renegotiated Brexit deal, planning reform, industrial strategy, and catalytic public investment can help revive anaemic UK business investment, and that this in turn will generate jobs and growth. The industrial strategy will mean these are concentrated in industries of the future and located in previously overlooked areas.
• Investment is the order of the day. Reeves used the word investment twelve times in her speech and there was a step-change in Labour’s willingness to argue for public investment alongside private, and to defend the idea of borrowing to invest and its potential effect on private investment. Reeves announced that Labour’s National Wealth Fund would aim to generate £3 of private investment for every £1 of public money, while a striking passage in Starmer’s speech links investment to fiscal responsibility: “We say yes to sound money. Yes to cutting waste and debt. Embrace the need for stability. Fiscal responsibility is non-negotiable. And if investment can kick-start growth. If investment can save money in the long-run. Can protect jobs, create jobs, crowd in billions of private investment. Then yes – we must get on and do it.”
• Doubling down. This newfound willingness to make the case for public investment reflected a wider doubling down on potential dividing lines which was one of the conference’s key take-aways. ‘Bring it on’ became a mantra, and senior Labour figures embraced differences from the Conservatives on the speed of the climate transition, willingness to invest, and workers’ rights. It looks like the party is comfortable fighting an election on these issues.

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So will it work politically? It is hard to avoid thinking this message is working for Labour given how far ahead they remain in the polls. Focusing on the cost of living and reviving public services mean they are addressing the two issues that overwhelmingly matter most to the voters they need. In contrast, we noted last week how little those issues featured at the Conservative Party conference. Emphasising stability and investment also seems to be winning more business support for Labour, further strengthening their position.

• Potential weaknesses. Conservative attacks on Labour come from three main angles. Firstly, the Green Prosperity Plan represents irresponsible spending, would be inflationary, and would end up costing people more by keeping interest rates higher for longer. Second, the new post-Uxbridge by-election focus on the costs that the climate transition could impose - costs that Labour plan to force on households. Third, the perennial attack that Labour would end up raising taxes. All three could be tricky for Labour - particularly the first, which is likely to cause much debate as the election nears, especially if inflation remains high.
• Retail offer. A potentially more damaging question is whether, for all Labour’s focus on the cost of living, the party really has enough of a ‘retail’ offer that would make people immediately better off. The worker’s rights package, living wage, and investments in clean energy are all designed to help with the cost of living (or ‘economic security’), but they mostly work over the medium to long term. It will be interesting to see if Labour come forward with a more tangible policy with immediate benefits for voters’ living standards closer to the election.

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And will it work economically? We can now be pretty confident that all this will broadly be the shape of Labour’s economic policy heading into the election. The party has certainly worked hard to repeat and flesh out the economic offer, but some areas are still vague (what does a ‘real living wage’ mean? How will it be pegged to the cost of living?). There are also big gaps where very little has been said (the absence of policy on welfare, or a real strategy for addressing poverty, remains striking.)  But the programme’s success or failure ultimately rests on the answers to two questions.

• Delivery. The first is whether these policies really can generate the levels of growth Labour hopes for, as quickly as they need to. As UCL’s Josh Ryan-Collins points out, while the turn to industrial strategy and focus on house-building are welcome, there are serious delivery challenges, not least in terms of the labour force required. 
• Will ambition exceed the current fiscal rules? The second question is whether it is really plausible to attempt such an ambitious programme, ‘rebuilding Britain’ as Labour put it, within the fiscal straightjacket they have made for themselves. As Common Wealth’s Mat Lawrence and JRF’s Alfie Stirling argue, the combination of tight fiscal rules, high interest rates and debt servicing costs (not to mention the cuts already baked into government spending plans) will make it incredibly difficult to invest on the scale needed to fund their green industrial strategy while simultaneously reforming and repairing dangerously underfunded public services and mending a damaged social safety net. Reeves argued that “you cannot tax and spend your way to growth”, but if Labour really are committed to these fiscal rules and to not raising taxes, big questions remain over whether they can achieve their ambitions. ‍
• Go big or go home. These questions are partly why Starmer adopted the slogan “a decade of national renewal” - warning that with such a terrible economic inheritance it will take time to see results. Labour’s worry is that if improvement comes too slowly, the public may decide to cut that decade short.

Good morning from New Economy Brief.

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There wasn’t a lot of economic policy announced at Conservative Party Conference this week (which is a story in itself), but the outline of the Conservative’s economic argument at the next election is becoming clearer. This week we look back at the conference and map the contours of the ‘new approach’ which will underpin the party’s electoral strategy in 2024. 

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Sunak, Agent of Change? Rishi Sunak’s speech to the Conservative Party Conference floor focused on the idea that politics and the way decisions are made need to change, and that Keir Starmer and Labour embody the last 30 years of status quo politics. How credible that is after 13 years of Conservative government will be questioned, but Sunak’s argument was that Britain needs a new politics of bold, pragmatic and radical decisions that prioritise the country’s long-term future, and that he is the man to deliver it. That’s the pitch, but how do the new policies announced at Conference map onto this rhetoric?

• Network North replaces the Northern leg of HS2. The showpiece announcement of Sunak speech was that £36bn of rail infrastructure investment that was due to go into connecting Birmingham and Manchester as phases 2a and 2b of HS2 has now been freed up and spread across the whole country, where it will improve roads, motorways, buses, trams and rail networks. However, IPPR North argues that “scrapping the Manchester leg is a betrayal of the North”, as their analysis shows the North would need £86bn more transport investment just to match what has been invested in London over the last decade. So even if all the £36bn goes into improving transport infrastructure in the North, it's still £50bn short.
• Watch the money. And while £36bn of capital investment can now be used to improve other areas of the country, it may take years of planning before funds are released for ‘new transport projects’. This underspend is behind the idea that there are ‘scorecard savings’ from cancelling HS2 - i.e. that it will free up some room in the OBR forecast period. This means the Conservatives are likely to argue they have more ‘fiscal space’ to make manifesto commitments in the Autumn Budget and ahead of the next election, with speculation that this may be used for tax cuts. (It should be noted that many would question the economic logic of using one-off savings on capital spending projects to fund permanent tax cuts.)

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The Conservatives’ wider macroeconomic and electoral strategy. Chancellor Jeremy Hunt explained a key part of the party’s economic strategy in his conference speech, where he asserted that any new borrowing would be inflationary, and that cutting inflation is the best way the government can help families with the cost of living. This positioned Labour’s spending plans (particularly their £28bn Green Prosperity Plan) as potentially inflationary and therefore against the interests of cash-strapped working people, sharpening the Conservative dividing line on spending ahead of the Autumn Statement.

• “Sound money under the Conservatives or run out of money with Labour.” Other than this argument about borrowing, and an allusion to the Prime Minister’s U-turn on net zero targets saving families money (we covered this here), the cost of living was strikingly absent from the main conference speeches. The Chancellor did announce that the national living wage would rise to at least £11 per hour, but this was largely expected given the level of inflation. Otherwise, Hunt and Sunak doggedly maintained that any additional support or spending would only push inflation further. 
• The leadership held the line on tax cuts. This anti-inflationary argument also allowed both to resist calls for tax cuts - instead they branded reducing inflation as itself a ‘tax cut’ for working people. While there was plenty of tax-cutting fervour around the fringes of the conference, not least from Liz Truss herself, there was no sign of the rumoured pre-election abolition of inheritance tax, or anything else from the menu of tax cuts being championed by various Conservative MPs.

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What does it all mean? The Conservatives are betting that positioning their party as a new ‘agent of change’ will bring them electoral success (though it looks like the public aren’t buying it). As the FT’s Steven Bush explains: “That many of his priorities offend other Conservatives, and cause high-profile rows, only helps to establish the perception that he is a changed Conservative leader and this is a reformed Tory party.” However, he concludes, “for a political message to work it has to align with the policy reality”, and here there is a growing disconnect between the rhetoric of long-termism, and an approach which has mainly involved pushing back climate action and cancelling a large infrastructure project. 

• Is it landing with voters?. Sam Hall suggests that Sunak’s previous speech on his government’s ‘new approach’ to net zero was a “deliberate attempt to confect climate dividing lines that don’t really exist”. In a separate article, he concludes: “YouGov polling suggested [his speech on climate delay] had damaged Rishi Sunak’s ratings among Liberal Democrat voters, which will not help the party in its blue wall seats. Another poll showed a dramatic fall in the party’s already low vote share among younger voters, a major concern for conservatism’s longer-term prospects.” A new report from Onward concurs that weakening climate commitments will damage the Conservatives at the ballot box, especially among younger voters 
• The public supports stronger social security. Although the Conservatives’ are positioning themselves as a reformed party, they are returning to the Cameron/Osborne era’s ‘strivers and shirkers’ narrative on social security, exemplified by the Prime Minister questioning whether people deemed too sick to work were genuinely ill. Yet the public’s views on welfare have changed since the 2010s. The latest British Social Attitudes survey - the ‘gold standard survey of public opinion’ in Sam Freedman’s words - shows “the perception that benefits recipients are undeserving has reduced substantially since 2010.” 19% agree that most people who get social security don’t really deserve any help, down from a high of 40% in 2005. Responses in 2019-22 are the lowest since the question was first asked in 1987, which the authors attribute in part to the increased prevalence and visibility of poverty in recent years. Where Universal Credit pays £35 a week less than the cost of essentials, more punitive sanctions are unlikely to go down as the Conservatives might like. Conversely, an essentials guarantee (as JRF’s Katie Schmuecker called for) might.
• The economic case against sanctions. Hunt suggested he is looking into reforming the work capability assessment. But economic evidence for benefit sanctions is weak and most studies suggest they don't help people into work - they force people into hunger and drive them to food banks. IPPR’s Harry Quilter-Pinner explains why ramping up sanctions isn’t the answer to our employment challenges. (For an outline of the economic case against benefit sanctions, read our earlier New Economy Brief.)

Good morning from New Economy Brief.

Last week the Government announced delays to critical net zero targets, to widespread condemnation from business leaders, climate experts, cross-party MPs and trade unions alike. Why did they do this? 

This week’s New Economy Brief explores the economics and the politics of climate delay and explains why the government’s risky electoral strategy to pit net zero against the cost of living crisis may backfire. 

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Net zero targets delayed. Last week the government outlined its “new approach to net zero” which was widely perceived as “a string of U-turns” on legal targets - the 2030 ban on sale of new petrol and diesel cars was delayed to 2035, phasing out gas boilers was similarly delayed, and the PM scrapped plans to require landlords to meet new energy efficiency regulations. Alongside these reversals, the government did increase the heat pump subsidy grant from £5k to £7.5k and change the rules about grid connections so new renewables projects can connect faster, but despite this the announcement met widespread condemnation from corporate leaders, business groups, MPs from all parties, climate experts, trade unions and the rest of civil society. 

• Businesses need certainty. Delaying targets sends a mixed signal to businesses who need policy certainty in order to plan investment, develop new technologies, scale up production and create jobs. Consequently, Shevaun Haviland, director-general of the British Chambers of Commerce, noted that the “ambiguity” triggered by the announcement has undone “years of work” in “depoliticising the debate and building investor confidence”. Similarly, the Trades Union Congress warned that the government’s “incoherent” and “reckless climate politicking” risks losing 800,000 manufacturing and supply chain jobs in automotive, steel and other sectors to other countries with more stable and ambitious industrial strategies. 
• A chequered history of Conservative industrial strategy. Industrial strategy - or the process of “coordinating a wide range of economic policies to achieve particular objectives”, according to this parliamentary briefing - was revived in 2017 under Theresa May’s government. The Industrial Strategy Council was set up to provide expert, impartial evaluation of the government's progress, headed by the Bank of England’s Chief Economist, Andy Haldane, with members drawn from business leaders, academia and civil society. But Johnson’s government soon replaced May’s strategy with the Treasury’s Plan for Growth and the scrapped the Industrial Strategy Council - a move that Darren Jones, then chair of the BEIS Committee said “resulted in a short-termist, unclear and unwelcome approach to industrial policy when business is crying out for long-term consistency and clarity.” Last week’s announcements seem to be a continuation of the Conservatives’ decision to “mark a departure from the industrial strategy brand”, despite being seen as the new international consensus, and widely regarded as a pragmatic way to grow the green economy. 

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Economics of crowding-in. Many economists have argued that clear policy signals and ‘missions’, such as decarbonising housing and transport, can help to ‘crowd in’ private investment into strategically vital areas (see our previous Briefing for an explainer of ‘mission-led’ industrial strategy). As UCL’s Green Innovation Policy Commission found “green innovation can dramatically bring down the costs of low-carbon technologies”; increased investment means more technical innovation, allowing firms to find efficiency gains so the cost of production reduces and consumer demand grows. But certainty is a key part of this equation, and the legal targets underpinned that certainty, giving industry and investors confidence about the direction of travel for government policy and de facto creating new markets for products, like heat pumps and electric vehicles. It is easy to see why the UK car industry and other sectors feel that ripping up those targets with little warning and no consultation undermines the whole process. For example, most people will buy second-hand electric vehicles, and whilst prices have been dropping, a later target of banning the sale of petrol and diesel cars means fewer people will switch to newer electric vehicles and the second-hand market will struggle to supply enough used EVs to meet eventual demand. 

• We’re losing industries to other countries. The government’s failures to secure a stable future for the UK’s car battery industry is a case study in how to lose the private sector’s confidence and thereby destroy investment and jobs. The day after the government announced a U-turn on the commitment to ban on internal combustion engine vehicle sales in 2030, Green Alliance highlighted that the absence of clear government direction is why the UK's battery market lacks appeal to potential investors. The report warned that the piecemeal approach to the battery industry has driven manufacturers to seek opportunities abroad, eroding confidence among private sector investors. By contrast, the “biggest climate spending package in US history”, the Inflation Reduction Act, includes $369bn in emissions-reduction spending, including tax breaks aimed at directing private investment into low-carbon energy and electric vehicles. This spending will continue for a 10 year period, signalling policy stability for developers and investors (Read IPPR’s Luke Murphy’s report on Lessons for the UK from the US' Inflation Reduction Act for more). 

• Best resources to understand this concept. Drawing on the analysis of its founder and Director Mariana Mazzucato, the UCL Institute for Innovation and Public Purpose argues that government must explicitly steer the direction of economic activity in order to achieve sustainable, inclusive, investment-led growth. It calls for a 'mission-oriented' approach to industrial and innovation policy. 

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So why are the Conservatives doing this? The economics of the government’s “new approach to net zero” may be questionable at best, but what about the politics? Though most of the public wants more action from the government on climate change, even more people care about their personal finances, and sowing conflict between climate policies and cost of living priorities could help the Conservatives win the support of crucial swing voters. This seems to be the lesson that the Government has drawn from the Uxbridge by-election, where fears around the future cost of climate policies contributed to a shock Conservative hold.

• The green wedge. With Labour already proposing to defend the original target for banning the sale of petrol and diesel cars, the Conservatives may try to portray Labour’s approach to net zero (which, it is worth remembering, was also their own until last week) as a radical stance that will cost voters dearly - for example by forcing them to install heat pumps and buy an EV. They can then position their own plans as more sensible - e.g. “we are still committed to net zero, but with a more balanced approach that will protect your wallet”. (This is probably why Labour has not confirmed it will stick with the government's original target of phasing out gas boilers, saying that their party would not “put people’s bills up”) There is some polling to support this; research by Stop the Squeeze finds that climate change comes behind the cost of living in the policy priorities of ‘disillusioned suburbans’, and argues whichever party wins the argument on the cost of living will win the next election.
• But there are holes in their strategy. There are ways to convey to voters that faster action on climate will make them better off. The Energy Climate Intelligence Unit calculated that households with net zero technologies like electric vehicles, heat pumps, solar panels and good levels of insulation could have saved over £2,000 in 2022 compared to those that rely on petrol cars and gas boilers. Over 100 leading economists wrote to the government over the weekend to echo this point. They argue that these delays will also perpetuate key structural economic problems that underpin the cost of living crisis: “By keeping the UK dependent on volatile and expensive fossil fuels, and by reducing the likelihood of securing high paying jobs in green manufacturing, you are choosing to expose the nation to a high cost of living longer into the future.” Combined with lower energy costs, and the economic benefits of investment (job creation, productivity and wage growth), there is a compelling economic case for climate action both boosting growth and reducing the long term cost of living.‍
• Explaining the connection between climate action and lowering the cost of living is crucial. Round Our Way’s Sofie Jenkinson looks back at previous focus group research with ‘Red Wall’ voters and argues that “being anti-green, anti-net zero isn't, ultimately a vote winner because it misreads where the public are at.” She offers 10 recommendations for persuading voters to support green policy. Similarly, Paul McNamee and Steve Akehurst’s report for Labour Climate and Environment Forum found that “People view climate action as one of the best ways to encourage economic growth and tackle the cost of living crisis. Those who saw Starmer talking about climate were twelve percentage points more likely to think Labour was the best party on the economy…Over three quarters of people view improving housing efficiency and investing in renewables as a key measure to improve growth in the UK economy.”

Good morning from New Economy Brief. 

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Even a quick internet search of “NHS record high waiting lists” brings up a long list of near-identical stories from nearly every month of the past year. They each detail how unprecedented numbers of patients - millions of them - are waiting for NHS treatment. This month was no exception. Last week, the estimated number of people in England waiting to start routine hospital treatment hit 7.68 million - an estimated all-time high. 

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In a bid to meet this rising demand, the government released its long-awaited NHS Long Term Workforce Plan in June. It sets out how the government intends to increase the number of NHS staff in England from 1.5 million to between 2.3 and 2.4 million by 2036-2037.

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Unsurprisingly, this will be expensive - at a time when the health service is already entering a “financial crisis”. Critics warn that these costs are unsustainable and say it’s time to consider an alternative to free at the point of use healthcare. Still others argue that it is NHS privatisation that is driving many of these costs and that it should be reversed. But could more health investment save not just the NHS, but the whole economy? 

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This week’s New Economy Brief explores the ‘cost’ of meeting the growing NHS demand and why, when it comes to the public finances, health is wealth. 

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The NHS Long Term Workforce Plan. The NHS Long Term Workforce Plan aims to “train, retain and reform the workforce, and put the NHS on a sustainable footing into the future”. The Institute for Fiscal Studies (IFS) thinks it means average yearly staffing growth of between 3.1% and 3.4%. For comparison, the workforce only grew by around 1.1% a year from 2009-10 to 2019-20. The IFS also reckons that if this growth is achieved, almost half (49%) of public sector workers will work for the NHS by 2036-7. 

• Other costs. The workforce plan includes £2.4 billion of extra funding to train new staff. However, the IFS says it leaves out “the (much larger) medium-term implications of this large increase in staffing for the NHS paybill, nor the required increase in other inputs if the NHS is to treat substantially more patients”. It also estimates that such a rapid expansion of the workforce will require higher wages for NHS workers, perhaps matching or even exceeding real terms pay growth in the rest of the economy. 

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Healthy public, healthy public finances. Expanding the NHS is going to cost. But what about the cost of not meeting rising demand for healthcare? Let’s look at two key trends. Firstly, the UK is getting sicker, with the last century’s progress in morbidity and mortality both stalling or even reversing for some groups. Secondly, it is getting poorer. The combination is no coincidence, argues the Institute for Public Policy Research (IPPR). Rather, “growing sickness is making us poorer, as individuals and as a nation” according to the think tank’s new report. More people are economically inactive due to sickness than ever recorded before. This has a profound effect on individuals: becoming seriously ill cuts the average person’s annual earnings by around £2,200. But the costs of sickness don’t stop there. A combination of foregone tax revenue and higher spending on welfare and healthcare makes sickness “one of the gravest fiscal threats facing the country”. Some key stats from IPPR’s report: 

• Foregone tax revenue. The OBR estimates that since just before the pandemic, rising economic inactivity due to sickness and increasing in-work sickness have combined to reduce yearly tax receipts by some £8.9 billion.‍
• Higher welfare spending. The OBR says the above trends have also increased  annual welfare spending by £6.8 billion.‍
• Higher healthcare spending. Finally, the OBR says that whenever someone becomes economically inactive, this costs the NHS an extra £1,800 per person per year (OBR 2023a).

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Prevention is better than cure. Policies like the NHS Long Term Workforce Plan focus solely on the ‘supply side’ of healthcare policy. In other words, they try to meet  growing need by allocating more resources. There has been less attention to reforms on the ‘demand side’, argues the IPPR. Healthcare services are generally reactive, “inclined towards ‘one size fits all’ solutions” and focus on treating acute sickness. The IPPR argues that as well as treating sickness, the NHS could respond to “the changing nature of health needs and demography” with “the construction of a complementary ‘prevention service’”. It proposes three structural reforms:

• Putting primary and community care at the centre of prevention. Healthcare spending tends to flow to hospitals, rather than to smaller-scale, local services. The IPPR says that this shows a bigger problem - the UK struggles to invest in the right places. Early years, mental health and community healthcare are identified as key priority areas for “smart investment” in prevention.
• Delivering a social care guarantee. The IPPR argues that decent adult social care is a “central pillar in the shift to prevention”. Getting people the support they need at home and helping them live independently and stay healthy may avoid the need for more acute (and expensive) interventions later. 
• Unlocking ‘prevention-first’ services with Integrated Care Systems. Integrated Care Systems (ICSs) are a “promising” route to better prevention. In theory, they encourage providers to focus on cross-cutting outcomes rather than just considering their own specialisms. However, the IPPR warns ICSs “may yet fail to achieve any meaningful change” if they do not embed a mission-oriented approach, focusing on long-term outcomes for public health, rather than short term targets.

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Public spending beyond health. Expanding the health service is expensive, but so is having an unhealthy population. As the IPPR argues, sickness is making us poor. But what about when poverty makes us sick? In many ways, the relationship between Britain’s health and public spending is a vicious circle. According to the Health Foundation, low income, insecure work, debt and poor housing conditions all make illness more likely. All of these issues can be, to some extent, ameliorated with higher public spending. Governments that are afraid to spend money will do less to raise incomes, make housing more affordable or introduce bolder solutions to the cost of living crisis. When fiscal restraint is the political order of the day - as it currently is for the two main parties - policies that could improve people’s health (and therefore reduce NHS demand) are deprioritised.

• Sickness is an economic risk. For many years, healthcare spending has lagged behind demand, leading to falling outcomes and ever-longer waiting lists. Under pressure to curb public debt, politicians of many stripes are reluctant to invest the large sums required to meet healthcare needs and to prevent the conditions that lead to ill health. There is a long-term argument for addressing these conditions: reducing loneliness, poor housing and stagnant incomes. But for the moment, any government that is wary of the cost of saving the NHS - both by meeting existing demand and through better prevention - should know that allowing it to fail could have an even higher price tag. Sickness is an economic risk not just for individuals, but for the country as a whole.

Good morning from New Economy Brief.

Last week, a coalition of over 30 campaign organisations, think tanks and trade unions launched the Early Education and Childcare Coalition (EECC). According to its first report Pulse Check: Public attitudes towards early education and childcare, these issues could be an important factor in the next general election, with 42% of voters saying they will influence their decision.  

But why is childcare so significant for voters? And what are campaigners proposing? This week’s New Economy Brief explores the state of childcare and early education provision in the UK, and why any party hoping for electoral success will need comprehensive proposals for reform.

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The childcare problem. Childcare is expensive - particularly in the UK. So much so that it is a key driver of the cost of living crisis, as New Economy Brief explored last year. A couple with median incomes and two young children pay more than half the mother’s net income for childcare, more than double the OECD average and worse than any other OECD country. In a survey of mothers by the campaign group Pregnant Then Screwed, almost half of respondents had considered quitting their jobs because of childcare issues and a quarter skip meals or heating to pay for it. Clearly, the astronomical cost of childcare does profound harm to many parents’ lives - but also to the economy more generally. It’s no surprise that this is a priority for voters. 

• Why is it so bad? One explanation for why the UK has such a bad childcare problem is that the system relies on extractive ownership models. Christine Berry has described how the private-sector model underpinning much of the childcare sector (“often backed by private equity investors and laden with debt”) is the source of high prices, low pay and working standards for childminders and poor quality provision. A UCL Social Research Institute paper explores how private-for-profit and charity (not-for-profit) sectors differed in their use of public money to subsidise childcare provision. (Check out parent-led cooperative childcare company Friendly Families for an example of best practice.)

Public opinion. Unsurprisingly, research by Claremont and More in Common on behalf of The EECC found that very few people oppose reforming and investing in early education and childcare. And, as we mentioned earlier, nearly half of voters said that early years reform will influence them at the general election. What’s more, while voters generally support the expansion of government support announced in the 2023 Spring Budget, only 18% could explain the government’s plans in detail. Support drops from 68% to just 32% when the public is presented with evidence about funding rates, workforce strategy and lack of floor space, which many say make the plans unworkable without more investment.

• Reservations. The disconnect between headline policy announcements and the lack of funding provided has long been a source of frustration for those campaigning for early years reform (such as free and universal childcare). These campaigners may also be disappointed to learn that a significant chunk of voters aren’t keen on universalism, with over half saying that government support for early education and childcare should be targeted at parents who would otherwise struggle to afford it. Furthermore, most of the public (73 per cent) think parents should pay some of the cost of early years education and childcare.
• How to pay for it. When childcare is so unaffordable for so many, why are voters not clamouring for a free and universal alternative? Essentially, because they don’t know how the government could fund it. Qualitative research carried out for the EECC found that voters worry about “value for money” and are concerned that government money is tight: “Participants wanted to know how much government plans were likely to cost and how they would be funded.” 

Social infrastructure. One of the report’s key findings was that voters do not see longer term, economic benefits to investing in early education and childcare. However, they clearly care about value for money, with around half (47%) saying that increased investment is a good idea only if the economic benefits outweigh the costs. In other words, voters think it is a good idea for the Government to spend money on childcare if we eventually see the returns. According to economists, this is exactly what would happen. Researchers Jerome De Henau and Susan Himmelweit calculated that 30 hours of free childcare for all children aged between 6 months and 4.5 years, with a pay rise for carers, would cost £10.4bn. This investment would create 310,000 new full time jobs and 70% of the spending could be recouped from increased tax receipts as more people were enabled to take on more work. At the moment, spending on public services such as childcare is seen as “current expenditure” or “public consumption”. But because of its positive implications for growth and productivity, think tanks and campaigners have argued that it should instead be viewed as ‘social infrastructure’ and therefore as investment. This would allow governments to spend more on childcare and early years and consider this spending as part of longer term policy.

Clearly, childcare and early years provision is a key issue for the public and a worry for families up and down the country. However, when it comes to solutions, the problem is met with a degree of fatalism, with voters lacking confidence that there is enough money to reform the system. It seems, though, that voters don’t mind spending as long as there is a return on investment. Perhaps a focus on the long term benefits of childcare investment, and its role as social infrastructure, is the answer to persuading more voters to back more structural childcare reform.

Good morning from New Economy Brief. 

It’s no secret that the UK is suffering from an investment gap, consistently ranking lowest in the G7 for private investment and well below average for public investment. In fact, UK investment as a proportion of GDP hasn’t made it above the G7 median since 1990. But in gloomy economic times, investment is exactly what the UK needs. From the US Inflation Reduction Act to the EU’s Green Deal Industrial Plan, governments around the world are realising that investment is the key to boosting growth and stepping up to the challenge of Net Zero. For the moment at least, it seems the UK is getting left behind. 

This week’s newsletter explores different methods of state investment, including a new proposal from the Institute for Public Policy Research (IPPR) for a National Investment Fund. 

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The current state of affairs. So how does a state actually invest? Before we look at the IPPR’s new proposal, let’s explore some existing mechanisms: 

• Sovereign wealth funds. These are a relatively recent concept and have grown rapidly since 2008. The International Forum of Sovereign Wealth Funds (a network of more than 30 IMF member countries which have such funds, define sovereign wealth funds (SWFs) as “special purpose investment funds or arrangements that are owned by the general government”. According to the IPPR, SWFs aim to “maximise the long-term returns of a country’s global investments for future current expenditure requirements”. They typically invest in overseas assets, so their main goal is to maximise financial returns, not to support domestic industrial policy. The UK has been called an ‘outlier’ for not yet having a SWF of its own. 
• State grant funding. Unlike SWFs, state grant funding aims to promote domestic industry, strategically directing investment towards certain industries or activities. It comes in the form of one-off fee transfers, so it does not generate a direct financial return for the state. 
• State investment banks. If sovereign wealth funds exist at one end of a scale and state grant funding at the other, state investment banks can be found in the middle. While the former aims to improve financial returns and the latter to boost domestic industry, state investment banks (SIBs) seek to balance the two, providing “a reliable, longer-term, and lower-cost source of finance that private counterparts may be unwilling to supply due to a lack of market incentives”. 
• The UK’s history of state investment banks. According to the IPPR, the UK has never introduced a state investment bank on a comparable scale to other European countries, and the Green Investment Bank, established in 2012 to help finance the green transition, was privatised and sold to Macquarie five years later. In 2021, the UK Infrastructure Bank (UKIB) was established to plug the gap left when the UK lost access to the European Investment Bank after leaving the EU. But this year, the Public Accounts Committee noted that the Bank's impact so far has been limited by the relatively conventional nature of its investments. Of its 10 deals so far, seven were loans and while the other three did involve taking equity directly, instead making investments via equity funds. The committee questioned whether the UKIB is really financing projects that would be too new or risky for the private sector.

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A national investment fund. To plug the UK’s investment gap, the IPPR proposes the establishment of a National Investment Fund (NIF). This would provide finance to help companies expand green manufacturing activities and decarbonise heavy industrial processes. To access investment from the NIF, companies would have to sign up to specific projects aimed at making them more sustainable - for example, investing in net zero manufacturing technologies. The IPPR says the NIF would not be “picking winners” but instead “picking the willing”. It would publicly outline the kinds of economic activity eligible for funding (according to policy priorities), and companies would then draw up project proposals. 

• Geography. Unlike SWFs, the NIF would only invest domestically. It would also encourage investment in economically weaker areas, as measured with specified economic indicators. All else being equal, a company in less economically prosperous areas would be preferred. 
• Financing. The NIF would operate through equity financing and equity-convertible loans. Although these would be real investments, intended to make a profit, they would also aim to support industrial policy objectives. In some cases this could mean waiting longer for a project to become economically viable and start generating financial returns.. The NIF’s immediate purpose would be to lower the overall financing costs of long-term investment projects, securing their cost effectiveness in advance.
• So, what’s new? The NIF would complement existing public financing institutions, not replace them. It would have similar financial and policy objectives to a traditional state investment bank, but would focus more on industrial strategy less on  financial returns on investment, helping steer the economy towards certain objectives. But what would really set NIF apart from a traditional state investment bank is the equity element, which has been  dubbed ‘Dragon’s Den investment’. Instead of merely offering loans, the state would become a co-owner of the businesses it invests in.

‍The politics of investment. Following the US Inflation Reduction Act (IRA), how to finance the green transition has been a central political question on both sides of the Atlantic. While Labour’s pledge to invest £28bn a year a part of the Green Prosperity Plan has had its fiscal prudence scrutinised, with Shadow Chancellor Rachel Reeves recently arguing that “economic stability, financial stability, always has to come first”, less attention has been paid to how such investment should be made. Last year Reeves argued for a National Wealth Fund, but there is little detail on how it would operate. As IPPR’s paper shows, this question is almost as important as the scale of investment itself. As an election approaches, it will be interesting to see how political parties propose to close the investment gap, and whether any of them seize on the idea of a NIF as a model that would work for the UK.

Good morning from New Economy Brief.

This week’s newsletter examines the politics of the cost of living by exploring new polling from Stop the Squeeze that takes an in-depth look into how voters are processing the policy debates around it, and how important the issue will be to the forthcoming general election.

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The cost of living crisis will swing the next general election. As the summer ends, political parties are gearing up for an impending general election. We may not know exactly when it will happen, but the issues it will be fought on are becoming clearer. The Bottom Line: How Bold Action on the Cost of Living is Key to the Next Election, a new report from the steering group of Stop the Squeeze (a coalition of 50 civil society organisations campaigning for structural solutions to the cost of living crisis), sheds new light on a crucial one. The report sets out to discover what voters, and especially key swing voters, are hearing from the parties, how they are responding, and the kinds of messages and policies on the cost of living crisis that might sway them in 2024.

• Policies to tackle the cost of living crisis are critical to swing voters. The cost of living crisis will be the second-biggest factor in voters' decisions at the next election, just behind the NHS. This is especially true for voters in the vital swing voter demographic which is sometimes called ‘Stevenage Woman’. Here, the cost of living, the NHS, and the economy are the only issues that gain any sort of traction - no more than 17% of people identified any  other issues as important.
• …but voters aren’t confident in either major party on the issue. While the cost of living is a priority for most voters (50%), far fewer (<25%) think the same is true of either of the main parties. For swing voters, this is even lower (<20%). Both parties need to do much more to reassure voters that they really care about the cost of living, and have a clear plan to bring it down. (This supports previous findings by The New Britain Project and More in Common on the lack of trust in politicians to solve the crisis.)
• The Conservatives are losing voters on the cost of living, but Labour could do much more to win them. Labour may be slightly ahead in being seen as the party with a better plan to tackle the crisis, but a Labour majority is certainly not in the bag. Only one in ten (11%) Conservative 2019 voters rate Labour higher on the cost of living, with more than three times as many (37%) not choosing either party. Three quarters of voters don’t have a clear idea of what Labour would do to solve the crisis, implying that Labour has yet to land the message that it has a real plan to improve people's living standards. Overall only 15% of voters have a good idea of what either party would do to address the crisis, indicating that the public have noticed the absence of proactive policies. Lots of voters are still in play, and a stronger policy offer from the Conservatives or Liberal Democrats could have a huge impact on the result. For Labour, the issue is less that the public think the party is focused on the wrong things, and more that they are not sure what its priorities are at all. 

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How to win over swing voters on the cost of living. The voter group dubbed 'Stevenage Woman’ (or ‘Disillusioned Suburbans’) by the think tank Labour Together will be particularly important in the next election. Representing 21.8% of the electorate in England and Wales, these voters are particularly well represented in the East of England, in London’s suburbs, and in the North East and West. They are young, economically insecure, worried about their finances, and unlikely to own their own homes. They are not highly politicised, but are generally socially conservative while leaning left on the economy. How this group votes will decide which party wins the next general election. As Labour Together say: “A working majority depends on Labour’s ability to convert their current support amongst Disillusioned Suburbans into votes at an election.” So how can political parties win over these crucial voters?

• The public support bolder messaging and more ambitious policies. Stevenage Woman wants to be shown practical policy solutions that will make her own personal finances more secure. The Stop the Squeeze report demonstrates that clear, concrete policies to deal with the rising cost of living, such as lowering energy bills, increasing the minimum wage and social security payments, and raising taxes on the super rich, would help Labour win over this crucial target group (policies such as the National Living Income and the National Energy Guarantee proposed by the New Economics Foundation could fit into this bracket, and there are lots of options for increasing taxes on the wealthy, as explained by Tax Justice UK). While putting policies like these on the table might be unpopular with some voters, the report argues that having a political argument around these policies could reinforce the message that Labour does have a plan on the cost of living, strengthening resolve among key voters and increasing the chances of those voters actually turning out on polling day. Conversely, if the Conservatives were to make a renewed offer on the cost of living at the election, this could chip into some soft Labour support and leave the party vulnerable.‍
• What policies do swing voters want? Voters prefer government support for energy bills, which continue to be a major source of pain for many families. Help with mortgage and rent payments also performed very strongly in the polling. Increasing the minimum wage ranks second highest for swing voters, and performs well across all demographics. It is more popular than cutting taxes on wages for everyone, except among right-leaning demographics. ‍‍
• ‍Tax cuts are a red herring. Political debates have focused heavily on the level of taxation over recent years, but there is no real evidence that the public see tax cuts as the answer to the cost of living crisis. Cutting taxes on wages came sixth out of a list of possible priorities for action, only performing strongly among core Conservative supporters. Cutting taxes on goods and services (i.e. VAT) was slightly more popular overall. Overall a party could get significantly more mileage from policies to reduce the impact of escalating energy and housing costs than from offering tax cuts. Voters also overwhelmingly think that cost of living support should be funded by taxing the richest in society, although they remain divided on the question of whether or not additional spending on this would be inflationary.

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The political opportunity for all parties. The report suggests that a party that is willing to make a bigger offer on the cost of living, focused on areas the public care about such as energy bills and housing costs, and funded by taxation of wealth, could reap the rewards with voters who are desperate for government action that could really improve their lives.

• In summary: Voters think the cost of living is one of the most important issues for the next election - if not the most important. They think neither party cares about it as much as they do. And while they lean towards Labour on the issue, they don’t have a clear idea of what either party proposes to do to address the crisis. This creates a significant opportunity for both parties. This matters both because it indicates that a Conservative comeback is still possible, but also because the lack of policy solutions on offer is highly likely to lead to voter apathy and low turnout.‍
• The road to a Labour majority? If Labour were to put forward bolder policy solutions on the cost of living, this could help them win over key swing voters like ‘Stevenage Woman’ in the run up to the next election. This supports an argument made by Alistair Campbell, who says that Labour needs to develop “a positive policy agenda that would persuade the country that Labour was a credible and compelling alternative…in order to turn possible into probable, or move the prospects of a hung Parliament into a good Labour majority”.

Good morning from New Economy Brief.

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Recent changes in inflation and average earnings figures have subtly changed the politics of social security uprating this year, intensifying scrutiny of the state pension ‘triple lock’. 

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This week we explore how those changes feed through the uprating system and ask whether working age social security payments should have a ‘triple lock’ of their own - a policy which new polling shows has broad political support. 

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Falling inflation, rising wages? Last week, media headlines celebrated the biggest six-month fall in inflation in over three decades, proclaiming we’d reached a turning point as monthly CPI showed ‘record pay growth’ outpacing inflation for the first time since the cost of living crisis entered the political lexicon. 

• It's not all good news, though. The Resolution Foundation’s James Smith reminds us that the UK still faces the worst inflation in the G7 (at 6.8%). The Trades Union Congress’s Alex Collinson criticises the ‘misleading’ positive headlines about this month's pay growth and inflation figures, noting that real pay is still falling and remains £22 per week lower than in 2008. As Collinson notes, headline pay growth is mainly being driven by the finance sector, and most people who work elsewhere in the economy are still not receiving pay rises that outstrip inflation. (Real public sector wages are particularly bad - down £51 per week since 2008).

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Pensions will be uprated by (misleading) rising pay growth figures. One consequence of rising headline earnings and falling inflation is that the state pension may be uprated by a higher percentage than working age benefits later this year, because of how the uprating mechanism works. Essentially, under the triple lock, pensions rise each April by whichever is highest: the rate of pay growth (measured in July the previous year), inflation (September figures), or 2.5%. This has protected pensioners’ incomes from inflation since being introduced by the Coalition government in 2010. 

• But social security will (probably) be uprated by lower headline inflation figures. Yet there is no similar legal mechanism that pegs social security (or indeed the minimum wage) to inflation, meaning civil society has to repeat the same battle to pressure the government to protect the real value of social security benefits from being eroded by inflation. The absence of a triple lock for working age benefits means that for the first time in this cost of living crisis, the state pension will almost certainly increase more than working age social security payments.
• Already inadequate. The gap between income received from working age benefits and the cost of living continues to grow. In 2013, social security covered 39% of the cost of living for a single person over 25 after housing costs. This has now fallen to just 28%. Universal credit is now falling £890 a month short of paying for essentials, despite its inflation-linked uprating. This is because “rates are not benchmarked to a meaningful assessment of need,” explains the New Economics Foundation’s Sam Tims.
• Reverse ferret? Interestingly, earlier in the summer when inflation was higher than earnings growth, government sources were briefing that this year the government would save money by starting to use the former as the basis for uprating social security payments. Now the situation is reversed, and though the government has not indicated which metric they will use, it’s still unlikely to be the higher one.

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Triple lock for social security? The government should seek to recreate the success of the triple lock policy by applying it to working-age social security payments, as well as the state pension, argues Paul Waugh in the i. Waugh says the policy’s costs over time would be modest, and that it could “cut child poverty as effectively as it has cut pensioner poverty in recent years”. 

• Politics of the triple lock. Waugh argues that the triple lock should be a driver of social solidarity between generations - rather than used to drive a wedge between them. He cites new polling research from the Stop the Squeeze campaign finding that extending the triple lock to working age benefits would be popular with voters across the political spectrum. (59% back the policy, with only 21% opposed, and twice as many Conservative voters (61%) support the move as oppose it (31%).) 
• The triple lock on pensions comes under pressure. The Office for Budget Responsibility has warned about the soaring cost of the triple lock on pensions as inflation increases its price tag, but last week Rishi Sunak pledged to protect it despite it costing an extra ~£10bn next year. The Conservatives will be reluctant to drop the triple lock due to their need for ‘the grey vote’, as Onward’s Adam Hawksbee explains: “People of pensionable age make up a sizable portion of the Conservative vote, and those who have shifted towards “don’t know” since 2019 are disproportionately of that demographic.”

Good morning from New Economy Brief.‍

Last week the Italian government announced a windfall tax on the country’s bank profits, before, rather chaotically, changing course and watering down the policy the next day, seemingly because of falling share prices of the banks.

This episode isn’t a wonderful advert for policy-making- but the question of whether bank profits should be taxed more highly is a serious one. Campaigners in the UK argue that banks are reaping windfall profits due to rising interest rates, and that taxing them could raise billions to support public services or cost of living support.

This week’s New Economy Brief examines why banks are making huge profits, and the case for taxing them.

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Banking the rewards. The fact that UK banks are making record profits is not contested, but the scale of these profits is eye-popping. According to think tank Positive Money, UK banks made record profits of £33bn in 2022, and are set to blow that figure out of the water in 2023. In the first half of 2023, the Big Four UK high street banks (Barclays, Lloyds, HSBC and NatWest) alone made pre-tax profits of over £28bn, an 80% increase from last year and 725% up on 2020.

• What is going on? There are a number of factors driving bank super-profits, but the crux of the story is the impact of rising interest rates. The Bank of England’s policy of sharply raising interest rates in response to inflation has boosted bank profitability in two crucial ways, one which has received some coverage, and one which has received a lot less.
• Failure of transmission. The first is the way in which banks pass on the impact of rising interest rates to their customers. Broadly speaking this happens through two mechanisms; raising the cost of borrowing (mainly the interest rates on mortgages) and raising the interest rate customers get on savings. Anyone who has been following the mortgage market will know that banks have been very quick to pass on interest rate rises to mortgages (although most existing mortgage holders will be shielded for a time by fixed rate deals). But they have allegedly been less assiduous at rewarding savers with higher interest rates. This delay in passing on the higher rates to savers boosts bank profitability, as banks will be charging higher rates on money they are lending out, without offering those same rates to those depositing money in the bank. This prompted the Financial Conduct Authority to issue a warning to banks last month that it will not tolerate this kind of practice, while Conservative Treasury Committee Chair Harriet Baldwin put it more bluntly: “It is difficult to avoid the conclusion that our biggest banks are taking advantage of their most loyal customers to increase profits and CEO pay”.
• Central bank reserves. Where the picture gets really complicated is when it comes to the issue of central bank reserves, and the messy interaction between monetary and fiscal policy. The story starts with the enormous programme of Quantitative Easing (QE) undertaken by the Bank of England since the financial crisis in order to support the economy when interest rates were at rock bottom. This involved the creation of new money in the form of central bank reserves, which were used to purchase government bonds through the Bank’s Asset Purchase Facility (APF). The reserves that were created are held by private banks, and remunerated by the Bank at the base rate. Given that the rate that the Bank was getting on the bonds it purchased was higher than the base rate, this meant the Bank made big profits, which were recycled back to the Treasury. But now that the base rate has risen substantially, the Bank is actually paying significantly more in interest on its reserves than it is receiving on the bonds it holds. The Treasury is on the hook for these higher interest payments, so in effect what we are seeing is direct transfer from the Treasury to private banks who are holding large amounts of central bank reserves.
• How much are we talking? It’s a lot. The Bank of England created nearly a trillion pounds of central bank reserves through QE. These have started to be unwound as the bonds mature through the Quantitative Tightening programme, but banks are still holding hundreds of billions in central bank reserves. Last year the New Economics Foundation estimated what the impact of rising rates would be on fiscal transfers to the banking sector. They found that over the OBR’s five-year forecast period,taking into account the QT programme, an average base rate of 4% would result in a transfer of £161bn from the Treasury to the banks. Given that the base rate is already over 5%, and expected to remain high for some time, this might be a reasonably likely scenario. Certainly we can expect the transfer from the Treasury to banks this year to be in the tens of billions as a result of higher interest on central bank reserves.

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So is this a windfall? Campaigners argue that, just as energy companies are benefiting from high global gas prices, banks are profiting from high interest rates despite not doing anything to ‘earn’ these profits in terms of productivity gains or being rewarded for risks that they have taken. The point about the central bank reserves is that they are risk-free for the banks, and now they are effectively being given a huge reward for holding them.

• Undermining policy. In fact, some of the ways in which the profit is being made is actively working against government policy. Not passing on interest rates to savers, for example, blunts the effectiveness of interest rates in reducing headline inflation. Similarly, at a time when public services are struggling and politicians are arguing that there is ‘no money left’, it is hard to justify huge income transfers from taxpayers to banks, simply because those banks are holding risk-free central bank reserves.

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To tax or not to tax. For some campaigners this is a slam dunk case. Positive Money, for example, is arguing that this is clearly the case of a windfall that should be taxed. They say the simplest way to do this would be to raise the Bank surcharge from 3% to 35% (the same as the energy windfall tax) and estimate this would raise around £20bn this year from the Big Four banks alone that could be spent on public services or cost of living support. This would still leave banks incredibly profitable by historical standards. The windfall tax idea has gained support from ex Bank of England Deputy Governor Sir Charlie Bean, who has argued that it could raise tens of billions of much-needed revenue for the exchequer.

• International precedent. The botched Italian windfall tax may not be a wonderful advert for the policy, but Italy is far from the only country to impose a windfall tax on banks. A host of European governments including Spain, the Czech Republic, Hungary and Lithuania have imposed such windfalls. The FT summarises how windfall taxes are being used across Europe in response to the cost of living crisis.
• The Lady was for taxing. The main historical parallel for such a such comes from an unlikely source. In 1981 Margaret Thatcher imposed a windfall tax on banks in very similar circumstances (having first levied one on the oil and gas sector). The justification was that: “they had made their large profits as a result of our policy of high interest rates, rather than because of increased efficiency or better service to the customer.”
• The case against. Opponents of a windfall tax have two central arguments. The first is that bank profits are not a windfall, that they are a natural result of raising interest rates, and that bank profits always fluctuate according to conditions in the economy. The second is that imposing such a windfall tax could have negative economic consequences, by lowering bank share prices (as happened in Italy), hitting investment, and causing instability in the sector. US think-tank the Tax Foundation has accused governments of “punitively targeting certain industries” and some have argued for tightening of regulations instead of taxes. On the instability point, Dan Neidle, from Tax Policy Associates, argued that the original Italian proposal was incredibly badly designed and communicated, and it was this, rather than the principle of a windfall tax, which spooked the markets (others would argue that policy should not be determined by what is best for the share price of banks).
• Longer term solutions. Finally, it is worth pointing out that a windfall tax will not solve the underlying issue of the unintended interaction between monetary and fiscal policy as a result of private banks holding central bank reserves. There is arguably no good policy reason why banks should be making huge profits from this, and the New Economics Foundation has argued that the UK should adopt a ‘tiered reserves’ policy where interest is only paid on a portion of reserves held by banks. Both the European Central Bank, and the Bank of Japan operate tiered reserve systems, and NEF argues that the UK should follow suit and stop this problem at source, saving billions and untangling the muddle of monetary and fiscal policy in the process.

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Good morning from New Economy Brief.

The concept of economic security is gaining traction in British politics. The Labour Party have made ‘securonomics’ a central frame for their green industrial strategy, and more of the public, particularly swing voters, are longing for more secure personal finances.

But, aside from energy, what would policy that backs up this rhetoric look like? Couldn’t improving economic security be a successful political frame for a holistic economic strategy to build more secure workplaces, secure childcare provision, secure housing, reformed social security, and more? 

This week’s New Economy Brief explores a new paper from JRF’s Graeme Cooke, who proposes economic security as “a lens through which we can diagnose where we’re falling short as a society, and for inspiring and guiding a project of social reform in response”.

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‘Securonomics’ and secure personal finances. Rachel Reeves made ‘securonomics’ a central plank of Labour’s economic policy platform earlier this year, referring mainly to the use of a more active and interventionist state to improve the resilience of supply chains and disperse opportunities for economic growth across the country. (See our explainer here.) The New Statesman’s Anoosh Chakelian documents how the concept of security has spread around the Labour leadership’s communications and policy development. And now, a new paper by Joseph Rowntree Foundation’s Graeme Cooke argues that improving economic security for individuals could be a valuable frame for a political strategy of social reform and electoral success.

• Economic security. In a comment piece for the New Statesman, Cooke explains that the concept of economic security is “rooted in household finances”, how they interact with income, costs, assets and debt, but also how wider factors such as employment, housing, education and health affect households exposure to risks (“concrete, everyday experiences” such as “a cancelled shift, an unexpected rent hike…childcare falling through…rising borrowing costs”) and their ability to cope in a more uncertain world. 
• Political philosophy. He argues that “economic security puts human agency centre-stage, in pursuit of autonomy, control and individuality, drawing on Isaiah Berlin’s notion of ‘positive freedom’, “where true liberty requires far more than the removal of external constraints”; security is “a precondition for people to feel in control of their life, to have a stake in the future, and to believe that daily efforts can pay off and that hard work will be rewarded.“ Improving the economic security of individuals is a logical progression of Labour’s green industrial strategy, which goes beyond neoliberal ideals of the role of the state (beyond free-market ideals of efficiency, towards personal and collective resilience).

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Policies for improving economic security. In policy terms, a strategy for expanding economic security combines “defensive action to protect against harmful insecurities, by placing limits on markets and entrenching state-backed minimums”, with “positive action to advance the foundations of security”. Cooke argues that longer term trends have undermined the foundations of security - such as precarious employment, wealth inequality, rising poverty and the crisis in care services - and proposes various social reforms for a government to protect personal finances in response. Let's take a look at some of these:

• Secure childcare. UK families face some of the most expensive childcare costs in the OECD, which eats into household incomes and holds back earnings from work. (See our Briefing on childcare as an underreported driver of the cost of living crisis.) Cooke explains that “a pro-security response” to the childcare crisis would invest in a system of social infrastructure to protect parents from losing out and “creating statutory care pay, modelled on maternity provision, to enable people to look after loved ones without losing their attachment to the world of work”. The Women’s Budget Group has proposed a universal and free childcare system, delivered as a public infrastructure service on an equal footing with school education, which can largely pay for itself due to the increased tax receipts from parents being able to return to work. 
• Secure housing. Housing has become increasingly insecure in recent years. The proportion of households in the private rental sector has more than doubled over the last 20 years, and more secure tenures such as owner-occupied or socially rented homes have also been in decline. This exposes more of the population to unexpected rent hikes, evictions and a lack of stability. Cooke suggests a strategy to improve security of housing would involve intervening in markets to increase more secure housing tenures, for instance by “establishing a publicly owned master develop to drive the delivery of major new settlements in the public interest (maximising homes for resident-owners and social rent)” and creating “an institutional vehicle to support social landlords to turn the properties of distressed buy-to-let landlords into homes for social and sub-market rent”. (See JRF’s paper for more on this policy, plus our previous briefing on ‘navigating a housing market crisis’ and the idea of a common ground trust.)
• Social security. The value of unemployment benefits (core working age benefit) is at its lowest in real terms for almost 40 years, and only replaces 12% of average earnings, so more and more people are falling into deep poverty. Cooke proposes that “guaranteeing that Universal Credit is enough to afford the essentials would establish a foundation for economic security, as would addressing state-driven insecurity in the benefits system (like the operation of sanctions and the extent of income volatility for low earners).” (See NEF’s proposal for a National Living Income to cover the rising cost of living.)

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Security as a frame for a ‘retail offer’. The concept of economic security is an interesting political strategy that justifies ambitious interventions in markets, whilst aligning with how the public’s views have changed after successive economic crises and linking to their day-to-day concerns about their finances. NatCen’s latest Society Watch has found that concern about money or debt, mental health and work-life balance have all risen since 2018, where 40% of Brits are now “very or extremely worried” about money or debt. A political programme and economic strategy to improve economic security could be a helpful frame for pinning a ‘retail offer’ to voters on the cost of living. Crucially, this framing can help to place the burden of risk onto the status quo, meaning that solutions that might otherwise seem radical are seen in a different light by voters. 

• Swing voters and economic insecurity. The Onward report that identified ‘Workington Man’ as the swing ‘red wall’ voter which could win the Conservatives the 2019 General Election argued there was a “sea change in British politics away from freedom and towards security”. Whilst Labour Together has more recently identified ‘Stevenage Woman’ as the swing voter Labour needs in order to win the next general election, and found that she could be won over with “a politics grounded in providing ‘security’ in the form of secure work, safe streets and a strong nation”. Anoosh Chakelian argues that “security on the left means strengthening the state, protecting the country from geopolitical shocks, enhancing social bonds, and sheltering individuals and places from market forces”, whilst Graeme Cooke argues that social reforms which are justified on grounds of improving economic security can mobilise support from across the political spectrum. 

Good morning from New Economy Brief.

In the words of Joss Garman (Director of the European Climate Foundation), decarbonisation has become “the dominant question in British politics” and this week, the Prime Minister is keen to tell us which side he’s on. The PM kicked off the Government’s ‘Energy Week’ on Monday by giving the green light to hundreds of new oil and gas licences. This followed a weekend in which he branded himself as on the “side” of motorists. 

What is the logic here? Time and time again, polls show that the British public is growing increasingly concerned about the climate crisis. But there’s a caveat - polls also show that voters only back Net Zero policies when it doesn’t cost them too much. The government’s answer is to talk the language of cleaner energy, while simultaneously trying to draw a dividing line with Labour on energy security. How do they square that circle? Carbon capture and storage. By capturing the carbon dioxide that is released in the process of using fossil fuels, then storing it back in the ground, the Government argues that you can have your Net Zero cake and eat it. But is it all too good to be true?

This week, we take a look at the political debate around decarbonisation and whether carbon capture is the silver bullet the Government claims it to be.

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What actually is carbon capture? Carbon capture and storage (CCS) is often promoted as a useful tool to mitigate the use of fossil fuels during the transition to more renewable energy sources and is seen by some as a vital part of Net Zero strategy. It encompasses a range of technologies which take two basic forms. One type of CCS relies on human-made processes to capture carbon and store it deep underground. This may involve giant air filters to capture CO2 directly from the atmosphere or pre-combustion methods which separate CO2 from hydrogen before fuel is burnt. Once the carbon is captured, it must then be stored. This may involve the use of saline aquifers: underground formations of sedimentary rock filled with salt water that are injected with CO2 to be stored permanently. The other main type of CCS involves taking advantage of nature’s capacity to absorb CO2, using ‘carbon sinks’ such as forests and wetlands to remove CO2 from the atmosphere. Sometimes, the use of natural materials is taken one step further, using a technology called bioenergy with CCS (BECCS). More on this later… 

• Does it work? So, CCS can take many forms - but is it effective? Its supporters would say so, pointing to Norway’s CCS operations that have been running since 1996, storing “close to a million tonnes of CO2 every year”. Many, including climate change think tank E3G, say that the large-scale deployment of CCS is critical for the transition to Net Zero greenhouse gas emissions by 2050. However, even advocates of CCS, argue that while the technology can play a vital role in net zero transition, it must be considered as a last resort to complement other decarbonisation policies (such as rapid expansion of renewable energy).
• A distraction? One of the main problems with CCS, critics argue, is that it is a “distraction” from other decarbonisation methods such as renewable energy, energy efficiency and consumption reduction. While it may be a useful tool to mitigate the harm caused by fossil fuel use in the meantime, some say that it deflects precious resources away from the mission of transitioning to fully renewable energy altogether. And as we’ve seen with Rishi Sunak’s announcements this week, it can often be used as a sticking plaster policy by Governments who are reluctant to fully transition from fossil fuels to renewables, rather than as a helpful interim tool.
• A long way off. Another issue with CCS is that it might not actually be ready to use at scale. Research commissioned by Friends of the Earth Scotland and Global Witness found that “significant CCS cannot be expected in the energy sector until the 2030s at least”. In 2021, when this research was published, global operational CCS capacity was 39MtCO2 per year - about 0.1% of annual global emissions from fossil fuels. The research also highlights that to reach the Climate Change Committee’s projected CCS capacity of up to 176MtCO2 by 2050, the UK would have to quadruple the entire global CCS capacity. 
• The “scam” of CCS and its history. Some critics of CCS argue that it can help energy companies to produce even more fossil fuels and profit from higher production, all while receiving Government support for using a ‘green’ technology. Greenpeace describes CCS as the “Great Carbon Capture Scam” - a scam that can be dated to as far back as 1972 when US energy company Chevron used waste carbon dioxide from a gas field to extend the life of another field 400 kilometres away. After using the CO2, the company vented the gas, meaning that there was “no real climate advantage”, but the technology did help to produce more oil. CCS has since been used in several cases “primarily” to “enhance oil production” rather than to offset or capture emissions, even in cases where companies have received huge Government grants for the storage. Greenpeace has described this practice as socialising costs and privatising profits. 
• The dangers of BECCS. One method of carbon capture is Bioenergy with Carbon Capture and Storage (BECCS) which often involves the capturing of carbon via the photosynthesis of biomass crops. The biomass is then harvested and taken to a power plant where it is burned for energy. Some of the carbon released during the burning process is then recaptured and stored underground. Friends of the Earth has argued that not only does BECCS distract from “taking real action”, but will also “have unimaginable social and ecological impacts” due to the “deforestation” and “land-grabbing” required to provide biomass for BECCS at scale.
• Energy security. Even if CCS was perfectly effective, it still means that we’re reliant on oil and gas. As we’ve seen recently, this reliance exposes us to energy insecurity and volatile international markets. Just because the drilling happens just off our shores doesn’t mean that we reap all the benefits - much of the oil and gas is exported. 

‍Can we transition without CCS? Obviously, less reliance on CCS means more reliance on other technologies or major shifts in behaviour. As part of the Paris Agreement, Integrated Assessment Model scenarios “with low or no CCS deployment require considerable increases in energy efficiency and near-term rapid fall in energy demand”. Reducing energy demand or increasing efficiency obviously require huge investment and behavioural change to have as effective an impact as possible. According to the think tank Ember, reaching “clean power” by 2030 means adding 90GW of wind and solar in the next 8 years. Currently, wind and solar have a combined total installed capacity of 42GW. Bridging that gap requires a lot of investment. However, many argue that investment in renewable energy is more cost effective and more efficient than investment in carbon capture which, as we’ve explored, has had limited proven success so far. According to research by Nature Energy, even moderately efficient renewable locations (e.g. for wind and solar power) “provide a better energy return than the majority of carbon capture technologies”. 

• Ecosystem restoration. While chemical carbon storage, as promoted by the UK Government this week, has had limited success in recent years and could take a while to provide any benefits, some argue that the natural alternative could be the answer. Ecosystem restoration (for example of woodlands), would boost the country’s natural carbon sinks at relatively little cost. According to Green Alliance, new woodland is “expected to play a significant role” in carbon capture, with woodland “the only removal method deployed as scale in the UK” so far. Carbon markets, in which farmers and land managers are incentivised to plant trees and protect woodland can help to ensure that woodland is protected as a natural carbon sink. A total of 3,421 hectares of woodland were planted under the Woodland Carbon Code (WCC) in 2021-22, according to Green Alliance.
• Batteries. The problem with a lot of renewable energy is that its efficacy relies on the weather. Batteries, however, can store surplus energy for a rainy day (or rather, a less windy or sunny day) and therefore adjust supply and demand to balance the system. The Climate Change Committee has argued that not only do we need batteries, but the use of surplus generation “to produce hydrogen through electrolysis (‘green hydrogen’), providing long-term storage so it can later be used to generate electricity”.‍

‍So what does this all mean? The announcement of this week should be seen as primarily driven by politics, and the attempt by the government to create a dividing line on climate that positions themselves on the side of energy security and lower bills. Whether it will work or not remains to be seen, but whatever the political situation after the next election the debate about which technologies to pursue in the green transition is unlikely to go away. If victorious next year, the Labour Party will inherit the same “dominant question” of our times - decarbonisation - and will have to decide how it answers it. As the PM positions himself firmly on one side of the debate, Sir Keir Starmer will have to decide whether to join him or to take a different approach.

Good morning from New Economy Brief. 

Almost all Belgian workers have their wages automatically uprated by the rate of inflation, which ensures their standards of living are maintained and not eroded by rising prices.

Critics of the scheme argue that this should have produced a wage-price spiral…but it hasn’t. In fact, inflation in Belgium is dropping faster than many other economies. Why?

In the context of ongoing public sector strikes across the UK and slightly better than expected inflation figures last week, this week’s New Economy Brief looks at the system of wage indexation in Belgium and draws some lessons for the UK government.

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Belgian workers are insulated from the rising cost of living. Despite wages being eroded by inflation across the world, Belgian wages have been the most resilient across the OECD. Real wages have actually risen by 2.9% in the first quarter of 2023, where the OECD average was a 3.8% fall. This is due to Belgium’s unique system of wage indexation, which protects workers pay packets from any rise in inflation. Critics say this will lead to a wage-price spiral, but this is yet to materialise - in fact, CPI inflation in Belgium has been falling much faster than comparable economies this year; inflation peaked at 10.3% last year, and the European Commission forecasts it to fall to 3.4% in this year. What’s going on here?

• How does indexation work? The Belgian system of wage indexation insulates households from inflationary shocks and shifts the burden of adjustment to firms and the government, as employers and the state are legally mandated to uprate public and private sector salaries. Since 1996, the Law on the Promotion of Employment and Maintaining Competitiveness obliges ‘social partners’ to negotiate salary increases over a two-year period within the bounds of an upper limit set by anticipated hourly wage developments in key export markets (France, Germany, the Netherlands) and a floor determined by expected inflation in Belgium. A good explainer on wage indexation systems by UNI Europa explains that nearly all Belgian workers have some form of automatic wage adjustment to account for inflation due to the almost 100% collective bargaining coverage rate and state-facilitated sectoral bargaining.
• Inflation triggers automatic increases in wages. Wages are linked to inflation by a ‘health index’ - a calculation of the price of a basket of goods that excludes energy and unhealthy consumption items like tobacco and alcohol. Whenever a 4 month moving average of the health index increases by 2% or more, all public sector wages, most private sector wages, pensions and social security benefits are uprated by an equivalent amount.
• Stronger purchasing power has bolstered Belgian growth. Wage indexation has led to a more resilient economy in Belgium, as it “cushions the blow of higher prices on the purchasing power of consumers to a considerable extent” in the words of a recent paper by the International Monetary Fund. The European Commission also reports that: “Economic growth in Belgium is expected to reach 1.2% in 2023 and 1.4% in 2024, on the back of resilient private consumption… The automatic indexation of wages and social benefits is set to continue to contribute to maintaining the purchasing power of households, especially as headline inflation is projected to substantially slow down”. 

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Why hasn’t it led to a wage-price spiral? Critics warned that indexation would lead to wage-price spiral, where consumer prices and nominal wages rise simultaneously as firms are forced to put up their prices to maintain profitability, triggering a ‘second-round’ of inflation, further rounds of automatic wage indexation and thus spiralling prices. But analysts from Belgium’s central bank found that “Interestingly, markups appeared to play no role in driving up prices and in fact decreased or even offset the contribution of wages…To keep inflation under control, profits and/or wages should rise at a rate lower than overall price increases, and at least one side must be willing to accept a decline in purchasing power.” As the Belgian wage indexation system requires companies by law to increase wages, companies’ profits were forced to take the hit. “We however found that even in a country with automatic wage indexation, the profit-wage dynamics did not fuel prices increases in 2022.”

• International competition prevented firms from hiking prices. The answer lies in the highly competitive nature of Belgium’s export-led economy - where exports account for one of the highest proportions of GDP in the world. Belgian economist Henri Bogaert explains that “companies exposed to competition, and in particular international competition, cannot pass on this double increase in production costs [wages and energy prices] in their selling price, since the latter is, by definition, constrained by the prices charged by international competitors”. Essentially, export-oriented firms had to keep prices stable to maintain their market share, which cut into profitability but limited the second round effects of inflation. 
• But profits are still high. However, this has not led to a large reduction in profits. 3.95% of the 8.2% inflation in 2022 was still due to ‘unnecessary price hikes’ to finance the profit margins of companies (between €35-40bn over 2021-22), costing the average Belgian €3,200 over the past two years. In fact, a group of Belgian economists wrote to the countries’ business press arguing that 60% of energy intensive firms with the ability to protect their margins (due to their inelastic products) by passing on the increase in costs to their customers should reduce their excess profits by increasing wages further. The Belgian central bank also argued last year that “the impact of energy was ten times greater than the impact of wages on business costs”.

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Takeaways for the UK economy. As governments, central banks and businesses in the UK and other countries continue to argue that increasing wages risks stoking inflation further, Belgium’s system of automatic wage indexation is an important lesson for the debate on the risks of wage-price or profit-price spirals. Since the UK already has some limited semi-indexation - of social security payments through benefit uprating, the minimum wage through the Low Pay Commission, and full indexation of the state pension via the ‘triple lock’ - is embedding wage indexation into collective bargaining agreements the logical next step for making households, workers and the economy more resilient to inflation? 

• Increasing UK public sector pay won’t fuel inflation. A timely report from IPPR finds that “Contrary to claims made by the government and others, a real-terms pay rise for public sector workers would not meaningfully increase inflation”. Authors Joseph Evans, Carsten Jung, Henry Parkes and Pranesh Narayanan explain that public sector wages do not feed into pricing decisions of public services, and therefore can’t ‘pass on’ inflation into the rest of the economy by ‘second-round’ effects, and that there is no evidence that public sector pay growth puts upward pressure on private sector wages either, pointing to the Treasury’s own analysis. They calculated that an additional stimulus of £7.2bn in 2023/24 to increase public sector pay by 10.5% would not stoke inflation, especially if funded through taxation, but even if it was financed via borrowing.
• But it could solve many problems in the economy. Even if public sector workers receive a 6% pay rise on average, they will still be £1,400 worse off this year in real terms than before the pandemic. But “a stronger pay settlement would help to address four problems facing the public sector: declining living standards, a workforce crisis, the decreasing quality of services and the reality that pay for the UK’s public sector workers lags behind our international peers” argue the authors. Increasing public sector pay in the NHS in particular is likely to help ease labour shortages there but also in the private sector due to the rise in long-term sickness.‍
• Labour market architecture. Finally, it is worth pointing out that implementing large-scale wage indexation outside of the public sector in the UK would require the creation of new labour market institutions. The UK lacks the tripartite labour market structures that exist in Belgium and many other European countries and which bring government, unions, and employers together. The calls for sectoral collective bargaining from unions, some of which have been adopted in Labour’s New Deal for Working People, would be a step to recreating these institutions and bringing more workers under the umbrella of collective wage agreements.

Good morning from New Economy Brief.

A punitive social security policy introduced by the DWP in 2017 has been in the news this week after Keir Starmer announced that Labour would not repeal the ‘two-child limit’ over the weekend. 

It’s caused a row at all levels of the Labour Party, including in the Shadow Cabinet. New research this week has found strong evidence that the policy fails on its own terms and only serves to increase child poverty.

This week’s New Economy Brief analyses the policy at the heart of the row, and outlines  why many are pushing for its abolition.
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Labour row over the two-child limit. Over the weekend Keir Starmer confirmed that a Labour government would keep the two-child limit in Universal Credit and child tax credits, which removes support for third and subsequent children born after April 2017. Senior Labour figures have previously attacked the policy in public and a broad coalition of civil society organisations, such as Save the Children, Barnardos, the NSPCC and others, have signed an open letter to party leaders opposing the policy. This has sparked a fresh row within Labour, as the Leadership is keen to show its commitment to fiscal responsibility, but Labour MPs with constituents in more deprived areas may find the policy difficult to defend.

• History and background. The two-child limit was introduced as part of the Conservative government’s efforts to reduce spending on social security. The two-child limit prevents families from receiving additional income for their third or subsequent children (worth up to £3,235 a year per child in 2023/24), affecting 1.5 million children in April 2023 (10% of all children, this includes all children in families subject to the cap). This is often confused with the benefit cap, which places a cap on the amount of social security paid to households if they have no or low earnings and where they do not have a disqualifying criteria, including having caring responsibilities or a disability. Both policies are ‘highly unusual’ in an international context: only Denmark has an equivalent benefit cap in the EU and only 3 other EU countries have a cap imposed on financial support relative to the amount of children a claimant has (and none of these are as low as two children). 
• Part of a move towards a sanctions-led social security system. The reform of benefit conditionality in the 2010s reflected a shift in welfare policy towards a punitive system that aimed to improve work incentives by sanctioning claimants and reducing their entitlement to means-tested benefits. A 2016 report from the National Audit Office found no evidence that benefit sanctions are an effective way of helping claimants find a job, while “the overall impact of sanctions on wider public spending is unknown.” Peer-reviewed academic research has found many flaws in the economic case for benefit conditionality in the UK welfare system, such as that it is “largely ineffective in facilitating people’s entry into or progression within the paid labour market over time” and that businesses held negative views on conditionality as it led to them “receiving large numbers of unsuitable and unfiltered job applications, with associated negative resource impacts…which undermines their chances of securing employment”. We will explore welfare conditionality more generally in a future edition of New Economy Brief.

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Fiscal prudence? The decision not to scrap the policy, as with so many of Labour’s recent policy proposals, has been driven by a desire to demonstrate ‘fiscal prudence’. The argument from the leadership is that the economy that Labour might inherit is in such a dire state that ‘good Labour policies’ need to be sacrificed on the altar of fiscal rectitude, and that any spending commitment needs to be ‘fully funded’. Given the party also has no interest in going into an election talking about tax rises, this in practice means that new policies need to be ‘funded’ by finding savings from other departmental budgets. (We have discussed the debate around fiscal rules elsewhere.)

• Will it happen? A note of scepticism is sounded by the FT’s Stephen Bush, who argues that, while Labour is arguing that they will stick rigidly to Conservative spending plans in their pre-election communications, the chances of them doing so in office are limited. It should be noted that most commentators do not seriously believe that even Jeremy Hunt plans to stick to his own spending plans (which pencil in a large post-election spending squeeze). Likewise, the Guardian’s Polly Toynbee argues that Labour will ‘do’ more than they feel able to promise, and she bets that “Reeves and Starmer will be bolder than anyone now expects”.

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Has the policy been working on its own terms? The government’s rationale for implementing the two-child limit is to change work incentives and influence low-income families’ decisions to have children, ensuring that “families in receipt of benefits face the same financial choices as those supporting themselves solely through work”.

• Strong evidence says ‘no’. A timely report from academics studying Benefit Changes and Larger Families found “no evidence of any increases in employment among families affected by the two-child limit” and that “the two-child limit has had only a very small effect on fertility, meaning its main effect is to push families with three or more children further into poverty.“ (Mary Reader and Jonathan Portes provide a good explanation why in an article for the Guardian.) The Child Poverty Action Group also found that most families subject to the two-child limit are already in work. 
• It disproportionately affects minoritised groups. As the policy is targeted at larger families, households from marginalised backgrounds are hardest hit, particularly women and lone parents from ethnic minorities. The cumulative impact of tax and welfare reforms, published by the Equality and Human Rights Commission, found that changes to policy between 2010 and 2017 disproportionately and adversely affected women, ethnic minorities, low-income households and disabled people.
• And risks increased violence against women and girls (VAWG). Women's Budget Group argue that the policy fails to recognise the impact of domestic abuse and can leave survivors trapped with an abusive partner, as claimants are often forced to choose between poverty and personal safety.

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Political case for scrapping the two-child limit. Whilst one poll has shown the majority of the public still back the policy, pollster John Curtice suggests that the public has been more supportive of income support for working age people since the Covid-19 pandemic. He thinks that “an opportunity will indeed open up for the [Labour] party to create a narrative that persuades voters that it should be given the task of running an enhanced welfare state in post-Covid-19 Britain.“ The ‘scrounger’ narrative about benefit claimants has also been in decline: the proportion of people disagreeing with the statement that “many people who get social security don’t really deserve any help” in the British Social Attitudes survey has been over 40% since 2018, whilst those who agree has dropped to around 20%. Further, between 40-50% of the public think that the benefit system offers too little support for people on low incomes bringing up children, around double the proportion of those who think that it offers the right amount of support and triple the proportion of those who think it offers too much support.

• The economic case for abolition. It is important to remember that social security spending has an economic, as well as a social benefit. IPPR and the TUC have previously calculated that abolishing the two-child limit, alongside uplifts to the child element of universal credit and the child tax credit, would increase GDP by 0.5% (£14 billion a year). The Child Poverty Action Group argue that “unless the policy is abolished, the number of children affected will reach 3 million, as more children are born under the policy.” Their analysis finds that abolition would cost £1.3 billion and lift 250,000 children out of poverty completely and reduce poverty for a further 850,000 children. The Women’s Budget Group calculated that lifting 250,000 children out of poverty could save £2.3 billion in future ‘societal costs’ - through higher demand for public services, lower earnings potential and higher unemployment - “nearly twice as much as it would cost to remove the policy”. “If there is a cheaper child poverty reduction policy out there, I’d like to know what it is” notes Sam Freedman, podcast host and former senior policy adviser to Michael Gove.
• Communications strategy. The Fabian Society has argued that scrapping the policy altogether would require communications that appeal to fairness between children of different ages and explain the policy on the basis of the parents' circumstances, such as parents who are working, disabled or caring for young children. Their research found that these arguments are “likely to be more effective than saying that children are not to blame for their parents’ choices or that supporting children is an investment in the country’s future”.

Good morning from New Economy Brief.

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Spanish inflation is now below 2% - the 3rd lowest in the Eurozone behind Belgium and Luxembourg - and it has been falling faster than in other Eurozone economies. Spain has also been implementing interesting policies to shield their citizens from the rising cost of living, and Spain’s President has claimed these have played a role in driving down inflation.

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This week’s New Economy Brief explores the Spanish government's use of ‘unconventional fiscal policies’, their role in reducing inflation, and the lessons that can be learnt for other governments. 

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How unconventional fiscal policies can help tackle inflation. There are growing calls for governments to use fiscal policies to tackle current high inflation levels, as opposed to relying on interest rate rises. The IMF’s Chief Economist, Pierre-Olivier Gourinchas has argued that ‘unconventional fiscal policies’ have played a significant role tackling inflation in the Eurozone by reducing inflation expectations and preventing inflation ‘passing through’ from areas hit with supply shocks into core inflation in the rest of the economy. 

• E.g. The energy price cap reduced UK inflation. Here in the UK, the energy price cap is an example of such an inflation-busting fiscal intervention, explained here by IPPR’s Carsten Jung 

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Spain’s policy interventions on the cost of living. The evidence does suggest that Spain has gone further than many European countries, and certainly further than the UK, in terms of intervening in its economy to hold down the prices of certain essentials and shield citizens from the rising cost of living. Let's have a look at some of these interventions.

• Insulating essentials from the rising cost of living. Economist Phillipp Heimberger has highlighted that the Spanish government was quick to implement price controls in the energy and rental market early on in response to this recent wave of high inflation. A peer-reviewed study by Jorge Uxó explores these interventions: “The authorities have adopted significant measures to reduce inflation, especially in energy (capping gas in the electricity market, limiting the gas price for consumers in the regulated tariff, lowering indirect taxes, or discounts for vulnerable households) and public transport and housing rents. Other measures include transfers to the most affected households and economic sectors to offset the effects of inflation.” (See page 24 for a table detailing each policy implemented until 2022.) 

• Making housing more affordable through rent controls. Since 2022 the Spanish government has prevented landlords increasing their rental prices by more than 2% higher than their previous contract as a measure to contain inflation. This has since been extended until 2024 and a new Housing Law has been introduced. Eduardo González de Molina, policy adviser at Barcelona City Council and affiliate academic at UCL IIPP, explains how the new housing law is informed by the idea of a ‘Right to Housing’ and the Catalan government’s experiments with rent controls. A new peer reviewed paper provides robust empirical evidence showing that the rent controls in Catalonia reduced average rents paid by between 4 and 6% without lowering the supply of housing. (UK Mayors have also been calling for powers to implement rent controls recently.)

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How have they impacted inflation? Spain’s President Pedro Sánchez claimed at the end of 2022 that the Spanish government’s use of various policy interventions had been successful in driving down Spain’s inflation rate to the lowest level in the Eurozone (nearly half the average, at the time), and protecting families from the cost of living crisis. 

• ‘Second-round’ effects may be lower. Reducing the ‘second-round effects’ of inflation passing from energy prices, and the other interventions undertaken to hold down prices will definitely have impacted the rate of inflation. Economist Jo Michell notes, “We have to be careful with causation, but the experience of other European countries suggests that unconventional tools are helping to bring down inflation”, also citing the Spanish case

• …but real wages have also taken a very big hit. However, Michell has warned about fully attributing Spain’s low inflation to these progressive policies. Other, more concerning particularities in the Spanish economy are also at play, most notably the fact that Spain suffered the worst erosion of real wages of any large economy in the Eurozone over 2022. This means Spanish workers lost more purchasing power as inflation swallowed any nominal wage increases. This major erosion of real wages could explain a lot of what’s behind Spain’s experience of lower inflation, and why the government is trying to use fiscal policy to offset the impacts of inflation on workers by protecting the cost of essentials. 

• Tackling profit-driven inflation? Spanish trade unions have agreed to lower than inflation level wage increases over a number of years but argued that any ‘social pact’ to tackle inflation should not just be borne by workers, but by companies' profit margins too. Firms are passing on higher costs to consumers via price rises, and protecting, or in some cases increasing, their profit margins. An annual report from the Spanish Economic and Social Council concluded that increases in Spanish corporate gross profits drove 90.7% of domestic inflation in 2022, with wages only contributing to 10.9% of the general price rises. Consequently, the Spanish government is launching a ‘Corporate Profits Observatory’ which will analyse corporate profits to aid collective bargaining processes and ensure a fairer distribution of surplus value between workers, shareholders and senior executives. This could help reduce future bouts of ‘greedflation’ spreading around the economy. 

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Lessons for the role of the state in an insecure world. While it remains unclear whether Spain’s unconventional fiscal policies have played a significant role in keeping down its inflation, the Spanish experience does illustrate the potential for the state to play a bigger role in protecting people's disposable incomes by ensuring they can afford the basic essentials. As climate change makes extreme weather events and supply-shocks much more common (e.g the El Niño weather event is expected to re-inflate global commodity prices another couple of percent), inflation is likely to become a more permanent feature of the global economy and a much bigger ongoing problem for government policy. ‘Unconventional fiscal policies’ can prevent second-round effects of inflation moving from supply shocks and becoming embedded into other sectors of the economy, and can redistribute its impacts more fairly. With elections only a week away, we will see whether Spain’s strategy to tackle inflation is also a solid political strategy.

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Good morning from New Economy Brief.

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Last week, reports emerged that the Government was on standby to put Thames Water into special administration. Despite the initial promise of efficiency and investment following privatisation in 1989, critics argue that Thames Water and other privatised water companies have neglected essential infrastructure upgrades, leading to pollution and mounting corporate debt. With debts reaching approximately £14 billion (roughly 80% of the value of the assets of the business), Thames Water faces the risk of collapse, prompting concerns about the continuity of water and sewerage services for its 15 million customers. While the UK government may step in to manage the company temporarily, many see this as a much needed opportunity to renationalise. 

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In this week’s newsletter, we explore the lessons from Thames Water, the problems with water privatisation and what can (and can’t) be done about it.

A lost three decades? The potential collapse of Thames Water isn’t the first time that water privatisation has been deemed a failure from across the political spectrum. Amid droughts last summer, former David Cameron advisor Camilla Cavendish wrote that it was “time to admit that water privatisation has been a failure”. One of those who actually worked on the privatisation of water in 1989, Jonathan Portes, has called the policy an “organised rip-off”. 

• A list of failures. Whatever your politics, it would be difficult to argue that England’s privatised water companies have done a good job in recent years. According to Ofwat, water companies in England and Wales lost more than one trillion litres of water via leaky pipes last year. Since privatisation, water companies have sold off 25 reservoirs (and not replaced them). And of course, who can forget sewage dumping. In the words of the Environment Agency, the environmental performance of England’s nine water companies is “the worst we have seen for years”.

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Investment has declined since privatisation. Privatisation has failed to deliver what it was supposedly introduced to achieve: increased investment, argues Professor David Hall of the University of Greenwich. In fact, companies have invested “no net additional shareholder funds (equity) since privatisation” meaning that “money has been taken out, not put in”. 

• Debts are climbing. At the beginning of privatisation, all water companies were debt free. Now, however, they are collectively in debt of nearly £52 billion and a large (and increasing) bill for interest. Analysis by Karol Yearwood in 2018 found that any investment that does occur is almost entirely financed through income from customers, “usually with sufficient cash remaining to cover interest payments”. As Professor David Hall argues, companies are essentially getting further and further into debt simply to pay huge shareholder dividends. 

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Who are the shareholders? The privatisation of water has been described as “a cash cow for investment firms and private equity companies”. According to Professor David Hall, English water companies paid shareholders a total of £18.9 billion in dividends from 2010 to 2021. Thames Water alone has paid out a total of £7.2 billion in dividends since privatisation. But who are the shareholders receiving these payouts while failings continue? Well, the answer to this question has been described as “as murky as the water in the river”.

• Overseas investors. Since 2006, Thames Water “has been owned by a consortium of institutional investors, including funds from China and Abu Dhabi”. Infamously, it was managed by the Australian Macquarie Capital Funds, notorious for its “focus on profits”. However, Macquarie sold its shares in 2017, leaving Thames Water “with an extra £2bn debt burden”. Now, the largest share (26%) of Thames Water belongs to Kuwaiti and Canadian investors, represented by the Kemble Water Holdings holding company. This is where it gets murky - there are about seven other intermediary companies between Kemble and Thames Water customers (helpful diagram here). England is unusual in having all of its water companies in private ownership, but most of the beneficiaries of this system are based overseas. Research by the Guardian found that 72% of English water is owned by offshore investors which include “private and state-owned international funds, banks, multinationals and billionaires headquartered outside the UK”. 
• “An experiment in complex financial engineering”. The huge debts we see at Thames Water and other companies may in fact exist by design, not by accident. England has been “at the forefront” of the ‘financialisation’ of infrastructure in which “diverse physical structures have been transformed into financial assets”. According to Kate Bayliss, this can be traced back to the 2000s when “a new kind of financial investor began to dominate the [water] sector”. By 2021, nine out of 15 English water and sewage companies were owned by “special purpose companies”. These investors, made up of private equity funds, pension funds and sovereign wealth funds, have been able to generate significant shareholder returns by “hiking up debts”, Bayliss argues. Increased debt has been used to refinance water companies “so that investors could repay themselves part of the original cost of buying the water utility”, she explains. However, a “perfect storm” of inflation, high interest rates and pressure to improve performance mean that the high levels of debt we see now, as in the case of Thames Water, are becoming increasingly unsustainable.

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So, what now? It is possible that the shareholders of Thames Water could bail out the company. But failing that, the government will have to step in in some way. One option is that Thames Water will be put into special administration, a power outlined in the Water Industry Act 1991 which can be used when a private company is on the brink of collapse. This would enable the company to carry out its functions and provide a public service until either being transferred to another private company (in the case of Bulb in 2022) or into public ownership. 

• Renationalisation? Many view the current situation with Thames Water and the apparent failure of privatisation more generally as an obvious case for renationalisation. Of course, public ownership would eliminate profit motives and dividend obligations. However, this isn’t necessarily so straightforward. Opponents of renationalisation argue that taking Thames Water into public ownership would require transferring corporate debt onto the government's balance sheet, which some would argue is unfair for taxpayers to foot the bill and pay the debts incurred under poor management. Additionally, the administration process typically involves asset sales to repay debts, but in the case of a water company, the integrated and complex infrastructure makes breaking up assets impractical. Buying the assets from the shareholders would entail an enormous cost, necessitating adequate compensation for existing shareholders, including pension funds.
• Reducing the costs to the Treasury. Think tank Common Wealth argues that the answer to this problem lies in the 1991 Water Industry Act. Under the act, they argue that the government could trigger special administration proceedings and use these to facilitate the transfer to public ownership: “the special administration procedure enables secured debts to creditors to be reduced, subordinated, or removed, where they would not be “consistent with the purposes of the special administration order”. Such an order’s purposes include ensuring a water company’s “functions... may be properly carried out” such as stopping leaks or pollution. This will reduce or eliminate the cost of transfer to public ownership.”
• Regional ownership. Nationalisation does not have to mean direct ownership by central government. All three failing water companies (Southern Water, South East Water and Thames Water) could be taken into special administration but then, instead of being renationalised, could be “transferred into public ownership under the councils in the region as the first regional publicly owned water company”. 
• Enforcement. The Water Industry Act 1991 also enables ministers and regulators to issue enforcement orders to control the company’s behaviour. They could order the company to pay down debts, restructure, reduce payouts or keep bills down. Critics of this approach argue that this is essentially renationalisation but without the same level of accountability. 
• Let it go bust. Some have suggested that the government could let Thames Water go bust and take it back into public ownership then. However, this would have profound implications for customers and as the Guardian’s Environment Correspondent Sandra Laville explains, is “simply… not allowed”. 
• The Welsh model. Academics Robert Branston and Phil Tomlinson propose that Thames Water follows the “unusual” example set in Wales. “Welsh Water has a unique corporate structure, with no shareholders and is run solely for the benefit of its customers. It is commercially run, with professional managers held to account by 62 independent trustees. While not perfect, its performance in recent years compares favourably with that of the other privatised water companies”, Branston and Tomlinson argue. They admit that creating such an organisation “would not be easy” but does have a precedent in the case of Network Rail “which was created when its commercial predecessor Railtrack went bust”. Railtrack’s debts were subsumed into Network Rail and underwritten by the government. Branston and Tomlinson explain that “while it is true that these public-interest companies are funded by debt, a government debt guarantee helps keep the costs of servicing this debt down (while costing the government very little)”.
• Regulation and social purpose. Purposeful Company co-chair Will Hutton argues that through good regulation, water companies like Thames Water can deliver social purpose while remaining in the private sector. “The sunshine of accountability” could ensure that Thames Water gets serious about its environmental responsibilities, invests properly and banishes “opaque ownership structures”, says Hutton.

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Lessons from Thames Water. You’d be hard pressed to find anyone who could enthusiastically defend the record of water privatisation over the last 34 years. As the climate crisis worsens and debt becomes more expensive, reforming the water sector so that investment is put before shareholders has never been more urgent. The legacy of years of privatisation can be difficult to unravel, with high debts and the need to make up for historic deficits in infrastructure investment both providing significant barriers to action.

• Funding the future. Ultimately the question of how necessary future infrastructure upgrades will be financed is the long term challenge facing the sector. Common Wealth argues that if the industry remains in private hands, even with additional stakeholder responsibilities, bills will rise significantly. This is because such capital demands a return, and this return can only be extracted from consumers. In contrast they argue that the public sector can borrow for upgrades at lower rates, making public ownership “a cheaper and more strategic mechanism to fund the water industry’s future”.
• Voice and value. But who gets a say in the industry's future is also a vital question. For example newly renationalised water companies could be structured so that consumers, workers and other stakeholders are represented on the board as with the newly remunicipalised Eau de Paris in France (where bills fell by 8%). This would end the domination of shareholder interests, which has arguably led to the current mess in the industry.

Good morning from New Economy Brief.

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The mortgage crisis has dominated the UK news cycle for the last week, but the relationship between inflation, interest rates, and mortgages is not always well understood. 

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In this week’s newsletter we look at the impact of rising rates on mortgages, the political fallout, the solutions being proposed by the main parties and some progressive alternatives, before considering what this all means for the debate about how to tackle inflation.

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Mortgage misery. Last week’s decision by the Bank of England to hike interest rates by 50bps to 5%, the highest since the 2008 financial crash, has sparked a wave of panic in Westminster over what Money Saving Expert Martin Lewis has dubbed the ‘mortgage time-bomb’. It isn’t hard to see why. Mortgage holders who are on tracker products or whose fixed terms are coming to an end face significant increases of hundreds of pounds a month to their interest payments. These increases will intensify the cost of living crisis for millions, and put many families at risk of defaulting on their mortgage.

• A feature, not a bug. The intensification of the cost of living crisis is not a side-effect of the Bank’s actions, it is the intended consequence. Rate-setters continue to argue that high core inflation can only be tackled by removing excess demand from an economy which is ‘running too hot’. According to the theory, there are a number of ways that raising rates reduce inflation such as by encouraging saving, but a core plank of the theory is that rising mortgage costs force homeowners to cut back on other spending, thereby reducing inflationary pressures in the economy. 
• Delayed transmission. The Bank has taken action in response to stubbornly high inflation numbers which have seemed immune to previous interest rate hikes. Part of the reason for this is the structure of the mortgage market itself. Firstly, a large amount of (mainly older) homeowners own their homes outright and do not have mortgages, meaning that they are unaffected by changes to the base rate. (An important statistic comes via the FT’s Sarah O’Connor: in every region of England and Wales bar London, there are more homes owned outright than those owned with mortgages or rented). Of those that do have mortgages, only a small number are on ‘tracker’ products which are sensitive to changes in the base rate set by the Bank of England. The vast majority are on fixed rates deals which typically last between two and five years. Those homeowners unlucky enough to be on trackers or coming to the end of their fixed rates are seeing steep rises to their monthly repayments, but a significant amount of the mortgage pain is yet to be felt as fixed rates insulate many people from rate rises for a time.
• The risk of overshoot. The fact that much of the monetary tightening has yet to work its way through the system is one of the reasons that many have criticised the decision to continue hiking rates, arguing that it risks going too far and causing unnecessary damage and instability. Two members of the Monetary Policy Committee voted against raising interest rates for this reason, and the Bank’s decision has heightened fears of a recession (some commentators have been explicit in their belief that the Bank should be trying to cause a recession in order to tackle inflation). Others have argued that because inflation is being largely caused by supply issues (including the war in Ukraine, bad harvests relating to climate change, and Brexit trade barriers) and corporate profits, efforts to crush inflation by suppressing demand will be ineffective.

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Political fallout. The immediate political fallout has been three-fold. First, Labour have seized on the opportunity to brand the crisis as a ‘Tory mortgage penalty’, sensitive to the fact that middle-aged families with mortgages are exactly the demographic of people that the party hopes to win back from the Conservatives at the next general election. YouGov’s Patrick English has mapped the mortgage crisis and found a significant overlap with the most marginal constituencies in the country, while in the Times, Emma Duncan argues that this could spell the end for Conservative hopes in Barratt Britain (a demographic of northern homeowners largely thought to be responsible for Conservative victories in the ‘Red Wall’). Also sensitive to this fact are Conservative backbenchers in marginal seats who have been calling on the government to do something, anything, to alleviate the pain their constituents are feeling. And remember, the structure of the mortgage market means that the vast majority of homeowners have not yet felt the effects of monetary tightening on the mortgage payments yet, meaning that as millions of fixed rate deals expire between now and a likely general election next year, the political pain of this crisis is only going to intensify.

• Just blame the Bank. Thirdly, the Bank of England has come in for (occasionally contradictory) criticism from the Conservative backbenches, with the Bank being simultaneously accused of having lost control of inflation by being too slow to raise rates, and having caused the mortgage crisis by raising rates too quickly - with the central message being that angry voters should blame Andrew Bailey for their rising mortgage bills, rather than Rishi Sunak and Jeremy Hunt. Some have even gone as far as to question the independence of the Bank of England (although others would argue that the ability to blame the Bank for rising rates is one of the key political motivations for keeping the Bank independent of government).
• It’s hurting, but it’s not working. There are two unfortunate realities for MPs pushing this line however. The first is that the government has inextricably linked itself to the mortgage crisis by pledging to halve inflation this year (a pledge which now looks set to be missed). The second is that, as Jeremy Hunt has set out, the government has absolutely no intention of providing direct support to mortgage holders, arguing that doing so would defeat the object of interest rate rises and therefore prolong the inflation crisis. The logic of the government’s argument about inflation has always been that the cost of living crisis needs to be intensified for many families in order to re-anchor price expectations. It has so far largely avoided making this argument explicitly, and it appears that many of its own MPs are simply unwilling to tell their voters that the pain they are feeling is not just an unfortunate side effect of the fight against inflation - it is the explicit mechanism by which the Bank and the government intend to meet the pledge. In short, a pledge which was intended to ensure the government was rewarded for falling inflation while avoiding the blame for rising interest rates, now looks set to result in the government both suffering the embarrassment of missing its pledge while also becoming the focus for irate mortgage-holders.

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Help for homeowners? Caught between the voters and the pledge on inflation, Chancellor Jeremy Hunt has attempted to walk a difficult line between being seen to respond to the crisis whilst not undermining the government’s central argument on inflation. The result is a ‘mortgage charter’ voluntarily agreed with some of the UK’s main mortgage lenders. The deal involves lenders offering various forms of temporary relief such as short-term switches to interest-only repayments, as well as a longer period between missed payments and forcible home repossession.

• Labour attack. This plan is not enough for Shadow Chancellor Rachel Reeves who has labelled it as a “bad cover version” of Labour’s own plan. The central difference is that Labour would force lenders into offering these forms of relief, as opposed to a voluntary charter.
• The conservative debate on intervention. The package also falls short of the expectations of MPs on Hunt’s own side of the House who are scrambling for solutions, from Cabinet minister Michael Gove suggesting 25 year fixed rate mortgages to Trussite backbenchers Jonathan Gullis and Jake Berry calling for the reintroduction of mortgage tax relief (a scheme introduced by Thatcher’s government in 1983 and later scrapped by Gordon Brown). The tax break is known as a mortgage interest relief at source (Miras), allowing borrowers to claim tax relief for interest payments on their mortgage. However, as the FT’s Stephen Bush points out, this would both cost a lot of money and defeat the purpose of rate rises, making this an unpopular suggestion among the majority Conservative MPs. As Bush highlights, this speaks to a significant ongoing problem for the Conservatives - how to stick to their pledges while assuring vulnerable marginal constituents that they may actually be able to alleviate the cost of living crisis.
• Equity stakes for mortgage relief. An alternative idea comes via a Joseph Rowntree Foundation paper earlier in the year by Toby Lloyd, Rose Grayston and Neal Hudson. They proposed that the government should “provide an exit route” for highly leveraged and low-income homeowners by establishing a new version of the Mortgage Rescue Scheme launched in the wake of the Global Financial Crisis, which would fund social landlords to buy the homes of mortgaged homeowners in distress: “Beneficiaries would see their mortgage debts cancelled by the purchasing social landlord with any negative equity gap funded by the Government, but, as social renters, they would not retain any equity". Having the government take public equity stakes socialises the risk of financial crisis and creates a new kind of tenure: co-ownership between the state and households, where the government receives a stake or income flow.
• ‍Rent controls. Of course, mortgage holders aren’t the only ones feeling the squeeze. A paper for the US Federal Reserve found that higher interest rates also increase housing rents, despite reducing house prices. Renters tend to pay around 30% of their income on rents, much higher than the predictions that mortgage holders will have to pay over 20% of their income as the current crisis unfolds, and many mortgage holders have benefited from the era of ultra low interest rates and rising house prices. In this context, Mayors such as Sadiq Khan and Marvin Rees are calling for powers to implement rent controls alongside any government support for mortgages. 

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Alternative strategies for controlling inflation. Ultimately, the mortgage-timebomb is caused by a combination of high levels of housing debt, and a policy choice of trying to control inflation primarily through interest rate rises. The result is a very big squeeze on one particular cohort of homeowners, which may prove to be politically unsustainable (and economically ineffective).  This also illustrates what UCL IIPP economist Josh Ryan-Collins calls ‘the paradox of contemporary monetary policy’: the tension between the Bank of England’s mandate to maintain both price stability and financial stability. As many commentators are starting to note, monetary tightening is far from the only tool for tackling inflation, and excessive reliance on it leads to political problems because the distribution of the pain is felt so unevenly. So what are the alternatives?

• Taxing those who can afford it. It may be political heresy in some quarters to suggest that taxes could rise, but this is one of the options available to the government to cool demand in a way that avoids penalising those worst affected by the cost of living crisis. Writing in the FT, former MPC member Adam Person suggests “taxes on high income workers, and capital gains, as well as on property”. A paper from IPPR demonstrated how the government can use fiscal policy to stabilise the UK macroeconomy, and, in order to tame inflation, “taxes will need to play a larger role, taking demand out of the economy”.
• Stopping ‘Greedflation’. Politico’s Esther Webber has suggested that “One alternative option would be to go after “greedflation”, where profits outpace costs among suppliers of goods and services, by asking the competition regulator to investigate the scope of the practice. Last year, IPPR’s Carsten Jung and Common Wealth’s Chris Hayes proposed that the Competition and Markets Authority (CMA), launch “pre-emptive investigations into the potential for excess profits in the most concentrated sectors in the UK economy.” (Pressure is also building to tackle corporate profit-driven inflation in the Eurozone…from the IMF, of all places.)  ‍
• Tackling profiteering in the banking sector. John McDonnell argues that UK banks have been profiteering from the rise in interest rates, citing analysis by Unite the Union that UK banks made an extra £7bn by refusing to pass on higher interest rates to savers. It is this kind of profiteering that has led some to call for excess profit taxes on the banking sector. McDonnell says that banks should "accept that mortgagees are struggling to pay and cut their interest rates, covering the cost from their profits. But if the banks are not willing to act, the government should intervene and levy an excess profits tax on the sector." He calls for a windfall tax of 15% on the UK's big 5 banks to fund a mortgage interest relief scheme of £5.5bn .

Good morning from New Economy Brief.

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The Bank of England's Monetary Policy Committee is set to raise interest rates again tomorrow. 

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This risks limiting private sector investment and pose a political problem for a government wanting to ‘ramp up’ capital investment to grow the green economy.

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But what if the Bank had a lower interest rate for green projects (as they do in Japan)? Read on for an explanation of how green credit guidance - a policy solution championed by the Monetary Policy Committee’s newest member, Megan Greene - can keep finance flowing towards net zero.

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Raising interest rates harms the economy in various ways…Markets are pricing in further interest rate hikes before the Bank of England’s Monetary Policy Committee meeting tomorrow, as the UK’s persistently high inflation rate is expected to stay higher than comparable economies, for much longer than expected. Media commentary is focusing on the negative impact of higher interest rates on people trying to repay their mortgages and on the higher costs of government borrowing, but less attention is being paid to another consequence of rising interest rates; the impact on business investment. How will the UK meet its legally-binding Net Zero targets, when financing the investments needed for the green transition are becoming more expensive?

• …but green investment will particularly suffer.  Achieving an environmentally sustainable and Net Zero economy requires a significant increase in investment in green technologies and sectors. Unfortunately, the UK has an absolutely dire recent record on investment, both public and private. As new research from the Institute for Public Policy Research explains, the UK is at the bottom of the G7 league table for business investment. If the UK had invested at G7 average levels from 2006-2021, an extra £562.7 billion in public and private money would have been invested in our economy. Higher interest rates will be particularly detrimental for investments in the green transition, given that those projects, while generating operational savings over a longer term, typically have high upfront capital costs.
• Is monetary tightening self-defeating? Higher interest rates will be particularly detrimental for investments in the green transition, given that those projects, while generating operational savings over a longer term, typically have high upfront capital costs. The irony of this is that the Bank’s aims of price stability are being further hindered by its own blunt tool of monetary tightening. Green investment can reduce the exposure of the UK economy to future bouts of ‘fossilflation’ - inflation that was primarily caused by fossil fuel-related energy price shocks - e.g. by providing more lending for building retrofits and clean energy projects. Further, green investments will also protect longer term financial stability from climate-related risks, but it is green investment that will suffer the most from higher interest rates.
• How will the government fill the green finance gap? The UK government’s Net Zero Strategy outlines their plan to meet their legal emission reduction targets. It estimates that additional capital investment must grow to “an average of £50-60bn per year through the late 2020s and 2030s”, which the Climate Change Committee (CCC) assesses is “an ambitious, credible path for UK decarbonisation…in line with the Paris agreement”. (Keep an eye out for the CCC’s latest analysis of the government’s progress on Net Zero report, due out next week...watch this space!). Higher borrowing costs then pose a political problem for the Conservatives and Labour Party, both of which have emphasised the importance of ramping up private sector finance to stimulate green investment.

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Is green credit guidance the answer? One proposal for making green investments cheaper is to have a lower interest rate for borrowing for low-carbon projects. The policy has been championed by the newest member of the Monetary Policy Committee, Megan Greene. This ‘dual interest policy’ is part of a wider framework called ‘green credit guidance’. 

• How it works. Monetary policy can ‘shield’ green investments from interest rate hikes by offering banks refinancing at preferential rates for financing clean investments in the real economy. Interestingly, offering lower costs of credit played an important role in supporting economic and industrial policy during the 1945 – 1973 ​‘golden age’ in the West, and more recently in aiding the rapid development of East Asian countries. 
• The experience of other countries. Green Central Banking’s David Clarke has covered how the Bank of Japan (BoJ) have been “providing zero-interest financing to lenders supporting action to address climate change” since early 2022. The BoJ’s governor justified taking action on climate by arguing that doing so falls within the BoJ’s price stability and financial stability mandates. Christine Lagarde has also put green credit guidance as one of her top priorities for her presidency of the European Central Bank.

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Implementing a dual interest rate policy in the Bank of England. The New Economics Foundation’s (NEF) Frank van Lerven and Lukasz Krebel have proposed that the UK could adopt such a scheme by repurposing the Bank of England’s Term Funding Scheme (TFS) - which currently providers cheaper credit to businesses and households - to provide cheaper credit to banks to lend for sustainable investments. This would keep interest rates lower for green investments. (The question of which investments qualify for the lower interest rate, and how to determine if they are actually sustainable, will be explored in a future Digest.)

• How it works. The authors illustrate how the policy would work in practice with accelerating investment in building retrofits: “The interest rates for the TFS green credit lines to banks could be set at 0%, or in all cases below the Bank rate, to ensure lower costs of green credit. The refinancing rate could be made negative (echoing the European Central Bank (ECB) on the condition that commercial lenders pass on a minimum predefined rate discount to retrofit borrowers – for example, by offering loans to households and businesses at 0% interest.” (Watch their video explainer.)

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A holistic strategy for green finance and decarbonisation. Whilst more interventionist credit policies would be particularly useful for political parties looking to stimulate private finance as a way to fill the green investment gap in the UK and ‘ramp up’ spending on Net Zero without using public money, economists have warned that “fiscal policy must lead the way on the green transition” and green credit guidance should be not be seen as a ‘silver bullet’, but part of a holistic strategy of discouraging ‘dirty’ investments as well as ramping up both public and private green finance. 

• The importance of public investment,… The scale of the funding gap in addressing the environmental emergency has led many to suggest that private finance alone is not enough, and that public finance is particularly important. Indeed, public investment can play a crucial role by directly investing in critical projects that the private sector is reluctant to support, as well as those that are socially important but do not generate high returns. Furthermore, many economists have argued that direct public investment can help to ‘crowd in’ private investment into strategically vital areas. A principally market-coordinated transition that is overly reliant on private finance also risks normalising extractive behaviours in the green economy, such as profiteering and greenwashing. (Read our previous Digest explaining the risks of relying on private finance to decarbonise the economy.) Common Wealth’s Melanie Brusseler explains that publicly-led coordination is necessary for a timely and effective transition. She argues that “Market coordination—premised on private investment and profitability—cannot effectively deliver this in line with climate targets and economic functioning” and that “building institutions to coordinate the transition should be Labour's first term focus”. NEF have argued that the UK’s state-owned financial institutions (such as the British Business Bank, UK export finance and the CDC group) should also be given Net Zero mandates to redirect their ~£7bn annual investments and scale them up to help grow the green economy.
• …industrial strategy,... The experience of green credit guidance policy in France and Japan showed that it worked best when the state made clear policy directions through a solid industrial strategy, giving the private sector more certainty to make the necessary investments. Economists Katie Kedward, Josh Ryan-Collins and Daniela Gabor explain how an ‘allocative green credit policy’ regime can be organised around green industrial policy objectives and democratically agreed green ‘missions’. 
• …and discouraging dirty investment. Penalising loans that promote high carbon activity and phasing out investments in fossil fuels will also be important for meeting the UK’s climate targets. A key part of the green finance equation is ending government support for fossil fuels, e.g. through tax relief for oil producers in the North Sea. This week, the Labour Party released a briefing outlining how it plans to ‘make Britain a clean energy superpower’, including a pledge to ban future licences for oil and gas exploration. 

Good morning from New Economy Brief. 

This morning, The Crown Estate, one of the UK's largest landowners, releases its annual report. Who owns land and how they use it is at the heart of some of the most pressing policy issues of our time. Any serious attempt to improve problems like the housing crisis, food shortages, climate change and inequality require changes to how land is used. Land ownership is a key issue which often goes underexplored. This week, we take a deep dive into the question of who actually owns land in the UK, the economic and political consequences of this, and what can be done about it.

Who owns land? The answer to this question - at least in a UK setting - has been described as “one of the most closely-guarded secrets in the thousand-year-old history of this country”. The Who Owns England? project, run by Guy Shrubsole and Anna Powell-Smith, attempts to solve this very mystery. Through the use of public maps and data released through the Freedom of Information Act, it finds that half of England is owned by less than 1% of the population. The aristocracy and gentry alone own 30%. That’s significantly more than the amount of English land owned by the public sector, homeowners, conservation charities, the Royal Family and the Church of England put together (a total of 17.4%).  After the aristocracy and gentry, corporations are the second largest landowning group, with an 18% share of English land. Oligarchs and City bankers own 17%. Crown estates and the royal family own considerably less than these groups, however their land share of 1.4% still results in increasingly large revenues for royal family members. For example, King Charles and the late Queen Elizabeth II have received total payments equivalent to more than £1 billion from the duchies of Lancaster and Cornwall. The profits made from the farmland, hotels, medieval castles, offices, shops and real estate owned by the royal family have increased substantially since the beginning of the late Queen’s reign. 

• Hidden landowners. 17% of land in England and Wales remains undeclared at the Land Registry. Someone owns it - we just don’t know who. There is a strong likelihood that the owners of this undeclared land are members of the aristocracy and gentry, meaning that their combined share of the country may in fact be far higher than 30%. Because aristocratic estates remain in families for centuries, they are not generally sold on the open market, and will not have needed to be recorded with the Land Registry. According to Anna Powell-Smith, the Land Registry has committed to comprehensive registration by 2030, though it is unclear how this will be achieved. Powell-Smith and Shrubsole propose a government requirement to make all land registered, with details of its beneficial owner, before it can receive farm subsidies. Given the amount of land used for farming, it is hoped that this would incentivise owners to register the land and help solve the mystery of England’s undeclared land.
• And why does this matter? The question of “who owns land?” matters because, as Shrubsole and Powell-Smith explain, “who owns land gets to choose how it’s used… Where we build our homes, how we grow our food, how we protect ourselves from flooding, how much space we set aside for wildlife”. As the connected crises of climate, nature and food continue, what we do with our land takes on an even greater significance. Often, important natural resources are “mismanaged” by those who own the land, argues Guy Shrubsole. Peat soil, for example, is often set fire to for grouse shooting, releasing 11 million tonnes of carbon dioxide per year. About one million acres of peat is owned by just 124 individuals and organisations. 

Politics, policies and rentierism. One of the most direct consequences of concentrated land ownership in the UK is housing. Landowners can often decide where homes are built and can earn rents from them. Home ownership should in theory allow people to achieve a degree of financial independence and security. It’s no wonder then, that the promise of home ownership plays a central role in British politics. It is often accepted (though increasingly questioned) that home owners generally vote Conservative. Meanwhile, the Labour Party says it wants to be the party of home ownership. Of course, this wasn’t always the case. Shifts in fiscal policy during the second half of the twentieth century saw the state’s involvement in housing move from the provision of social housing to the promotion and subsidisation of home ownership. While social housing still exists, provision remains 25% less than in 1979. Home ownership is promoted as the ultimate aspiration, offering security and longevity to voters. Policies like Right to Buy provide the hope of financial independence - an opportunity to have an economic stake in a political system in which state provision of security is not guaranteed. 

• But… The irony of home ownership politics is that, without significant structural intervention in the housing market on both demand and supply-sides (which would require a huge shift in the fiscal consensus towards much higher government spending), the home ownership dream becomes less and less accessible the more it is promoted. Instead of directly providing affordable housing, governments increasingly intervene on the demand side, “supporting would-be homeowners to buy in the private market”, hoping (in vain) that the private sector will pick up the supply-side slack and get building. But, as economist Josh Ryan-Collins explains, this leads to a “damaging feedback cycle” between finance and housing. Instead of promoting security and independence for ordinary people, the market becomes increasingly inaccessible and profitable only for a small number of landowners and property owners. As the role of banks shifts towards mortgage lending rather than capital investment, “credit creation for the purchase of existing property and land increases property prices without stimulating investment or wages”. As a result, household spending shrinks and debt rises. In turn, the demand for mortgage debt rises too, “generating a positive feedback cycle where increasing mortgage credit effectively creates its own supply”, says Ryan-Collins. Houses become more unaffordable, and land more concentrated in the hands of a few. 
• Rentierism and the leasehold system. The vicious cycle of the financial system and housing contributes to what is often referred to as ‘rentier capitalism’. This describes the system in which concentrated property ownership allows owners to extract increasingly high rents. Those paying the rents are then prevented from gaining wealth of their own due to extortionate property prices and the fact that large portions of their disposable income is spent on paying such rents. Though this often affects those literally paying rent, i.e. in the private rented sector, archaic laws mean that even homeowners can be on the sharp end of such rent extraction. The “feudal” leasehold system (Michael Goves’ words, not ours) is yet another thorn in the side of politicians who want to be able to promote home ownership as a means to achieving security. However, the Government announced that it is scrapping plans to abolish the leasehold system in England just last month. 

‍So what do we do about it? 

• Making homes available. Building more affordable homes is of course one solution that would redistribute property ownership to some degree. However, policies that more generally shift the balance of power away from landlords could have a similar effect. Rent regulations, stronger renters rights and high taxes on second homes are all policies which may lead to many more houses ending up on the market without new ones even being built. 
• Taxation. One proposal which attempts to address rentierism incrementally is that of a land value tax. The FT’s Martin Wolf has described the policy as “economically efficient and morally just”. The idea is that it is unjust for landowners or homeowners to increase their wealth (or potential wealth) because their assets have become more valuable through no effort on their own part. Someone living in a house for several decades may see the value of it increase massively having made zero renovations because a train station has been built nearby, for example. Without attempts to redistribute this “unearned” wealth, land ownership and the potential to earn economic rents becomes further consolidated. Economist John Muellbauer has proposed a Green Land Value Tax in which those eligible to pay the tax would receive discounts for making green developments to their homes. Campaigns like Fairer Share also propose replacing council tax with a proportional property tax in which property owners would pay a simple flat rate of 0.48% on the value of properties. Fairer Share’s interactive map demonstrates how this would redistribute wealth from the South East to the rest of the UK. 
• Community ownership. Taxing those who benefit from land ownership is one method. Another is to find a more equitable distribution of land in the first place. A transition towards community ownership, for example via Community Land Trusts and a Community Right to Buy, has been proposed by both left and right in recent years. In 2003, Scotland introduced a Community Right to Buy in which communities are given first refusal when local land goes up for sale. Campaigners argue that this should be replicated elsewhere in the UK. 
• Compulsory Purchase Orders. One of the most direct ways to redistribute land is not only to allow communities the right to purchase land when it is voluntarily up for sale, but to actively pursue it. Compulsory Purchase orders would grant public authorities the power to require land that has been left vacant or derelict for a defined period to be sold at public auction, offering community groups the right of first refusal. Just last month, the Labour Party announced that it would introduce a new law which would give ​​local development authorities in England the power to buy up land via compulsory purchase orders at a fraction of its potential cost if they want to build on it.

‍Now what? The political incentive to offer security feels increasingly important. Recent geopolitical events have turned the issue of renewable energy into one of economic security. The cost of living crisis too has shone a light on just how many of us are financially insecure. The Labour Party clearly sees the need to appeal to the nation’s desire for security with its new language of ‘Securonomics’. Of course, there are plenty of examples of where security can be offered without the promise of home ownership. In theory, social housing and social security can provide this. But no matter what kind of homes people live in, who owns land will always be politically significant. The concentration of land ownership has implications for what we eat, our natural environment, our climate and whether more homes can even be built in the first place. Inequality in land ownership sits at the intersection of so many challenges we face. We have set out above how policies do exist to shift away from the current imbalance, whether the political will to do so exists is another question.

Good morning from New Economy Brief. 

As the Covid-19 Inquiry dominates the headlines, the TUC conducts its own investigation into the UK’s Covid response and preparedness. But rather than dodgy WhatsApps, this new report explores how austerity left the country “hugely unprepared” for the pandemic across four key pillars: 

• Safe staffing levels in public services
• Public service capacity and resources
• A strong safety net through the social security system
• Robust health and safety protections at work

We take a look at each of these pillars and how greater economic resilience could mitigate future crises. 

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Safe staffing levels in public services. The report finds that “multiple years of pay caps and pay freezes” left both health and social care “dangerously understaffed” during the pandemic due to low recruitment and increased staff turnover. Between 2010 and 2020, the number of nurses per capita in the UK grew by less than one per cent compared to the OECD average of 10 per cent. The report states that in the months before the pandemic, the average NHS worker was earning £3,000 less in real terms than in 2010 and that in social care, the turnover rate for staff in England increased from 22 per cent in 2012/13 to 31.8 per cent in 2019/20.

• Safe staffing and the law. The Royal College of Nursing is campaigning for legislation to guarantee nurse staffing levels in England across all sectors and settings as currently there is no such law in England. Wales implemented the first safe staffing levels law for nurses (The Nurse Staffing Levels (Wales) Act 2016), requiring health boards to provide sufficient nursing staff “so that all patients can receive sensitive care”. However, Section 25B only covers certain healthcare areas, with the RCN Wales continuing to to campaign for the extension of Section 25B to new settings, particularly mental health inpatient wards, community nursing, and care homes. Scotland implemented the first UK safe staffing law covering both health and social care (Health and Care (Staffing) (Scotland) Act 2019). However, implementation was delayed due to the pandemic with Act due to come into force in 2024. 

Public service capacity and resources. In 2020, spending per capita on transport, housing, childcare, schools, higher education, police, fire services and environmental protection was lower than in 2010. The TUC argues that these limited public services had a negative impact on “civil contingencies” and children’s education during the pandemic. 

• Children’s social care. One particular area where underfunding arguably led directly to lack of support for vulnerable people during the pandemic was children’s social care. Ofsted found that the pandemic “exacerbated existing challenges” such as delays in the family justice system and “existing staffing issues”. The number of council-employed social workers in 2021 was 1.5% lower than in 2020, and the number of social work jobs in local authorities fell from 17,455 to 17,280 over the same period. BASW, the union representing social workers, has highlighted the negative “consequences of the Covid-19 pandemic on funding, on services and on wellbeing” but have highlighted that behind this, there was a “backdrop of long-term underfunding of social services”. Care leavers, who normally should be supported by local authority teams in finding education and employment, are entering the workforce and education at lower rates than pre-pandemic. 

A strong safety net through the social security system. Benefit cuts largely made between 2010 and 2016 damaged the social security safety net and caused increases in poverty levels, argues the TUC. It highlights that “living in poverty was associated with greater risks of exposure to Covid-19, and greater levels of vulnerability to more serious health consequences from being ill with Covid”.

• Systemic change. The pandemic exposed a vast number of people to job insecurity who may not have had previous experience of the social security system. With the backdrop of a weakened social security system following austerity policies, the government was forced to introduce a number of quick measures to guarantee people’s incomes such as an uplift in Universal Credit and the furlough scheme. Social Policy academic Ruth Patrick critiqued these measures as failing to implement “systemic” or “enduring” reforms which could provide much-needed resilience in the face of future crises. The New Economics Foundation suggests that a Living Income scheme, guaranteeing a minimum income level beneath which nobody can fall, could provide a more robust social security system. The good news for proponents of such systemic change is that attitudes to social security seem to have changed because of the pandemic. A peer-reviewed study in 2021 found that the pandemic had led to an increase in support for Universal Basic Income both in the US and UK.

Robust health and safety protections at work. Health and safety took on a new meaning during the pandemic amid the presence of such a contagious and in some cases deadly disease. But according to the TUC, “the enforcement of rules to keep workers safe at work was compromised by cuts that decimated public health and workplace safety regulator” which particularly affected those who couldn’t work from home. Staffing numbers at the Health and Safety Executive, for example, have been cut by 35% since 2010, and the number of workplaces investigated by a safety inspector fell by 70% from 2010 to 2020. To avoid such issues in the future, the TUC proposes “long-term, adequate funding of health and safety regulators”, “a realignment of health and safety regulation is needed to ensure independence” and better “regulatory clarity”, ensuring “greater level of awareness among employers, the public and stakeholders.”

Austerity on trial. The wider significance of highlighting the relationship between austerity policies and Covid is twofold. First, the Covid response highlighted cracks in state capacity that normally go under-analysed, whether that is lab capacity, sick pay levels, or number of health and safety inspectors. These areas were often the target of cuts precisely because they got little attention and therefore less public backlash. This inquiry is an important opportunity to shine a light on these decisions, and provides an important example of the link between public spending, state capacity, and economic resilience. Perhaps the more important reason is more forward-looking. State capacity in the UK is likely to be stretched in similar ways again in the near future, whether by other pandemics, by the effects of climate breakdown, or other unforeseen events. At the same time, the government has pencilled in yet another round of public spending squeezes in the middle of the decade in order to comply with their fiscal rules. With UK public spending levels back at the centre of national debate, this inquiry’s verdict could have a significant impact on wider attitudes towards public spending.

Good morning from New Economy Brief.

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With Rachel Reeves setting out her economic philosophy in a big speech in Washington last week, we take a deep dive into the origin and substance of Labour’s emerging economic policy.

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Read on for our explanation of ‘Securonomics’, where it comes from, the electoral and economic problems it seeks to solve, as well as two key lessons from the US: the scale and delivery of public investment and questions of power and control over critical infrastructure and the green economy.

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Rachel Reeves’ ‘Securonomics’. Last week, Shadow Chancellor Rachel Reeves gave a speech in Washington outlining Labour’s economic policy platform, framed by the term ‘Securonomics’. Reeves provided more detail in a policy report released by Labour Together: A New Business Model for Britain: Building Economic Strength in an Age of Insecurity. 

• Post-neoliberalism and paradigm shifts. The speech was the clearest sign yet that the Labour Party are serious about accelerating an economic paradigm shift beyond neoliberalism, as Reeves explained the need for a new model for economics and a more interventionist role of the state. This follows an emerging global consensus that economies have suffered from an over-reliance on market mechanisms, rather than the power of the state, to solve deep rooted structural issues, and that previous economic models have contributed to widening geographic inequalities. Reeves emphasises these two failures in her speech. 
• Bidenomics, modern supply-side economics and productivism. In the US, ‘Bidenomics’ is characterised by a more active role for the state in its industrial strategy to make and shape markets central to domestic industries of the future, particularly, reshoring (or ‘friendshoring’) supply chains to secure the supply of critical materials and create good quality jobs. (See our previous briefing on Bidenomics and what the UK can learn from the US.) Reeves drew explicitly on this model which is referred to variously as ‘Bidenomics’ or ‘modern-supply side economics’. IPPR’s George Dibb notes that a more accurate term would be what Harvard economist Dani Rodrik calls ‘productivism’: “a “major shift from the last-gasp-neoliberalism currently being offered by the Conservative government” and “also a shift from the approach of previous Labour administrations”. Dibb’s paper for Renewal explains why the UK economy needs a more active and strategic state to “meet our carbon emissions targets whilst also capturing the economic upside through domestic reindustrialisation.” Demos’ Ben Glover provides an explanation of ‘productivism’ - “An approach that prioritises the dissemination of productive economic opportunities throughout all regions of the economy and segments of the labour force.” - and argues that this “wider vision, if adopted by Labour, could deliver a genuine economic paradigm shift”.
• Securonomics in Britain. The substance of this shift is not especially new, but this is perhaps the clearest Labour have been to date about the intellectual underpinning of their economic policy. Reeves’ paper and speech argue that Labour would make two fundamental economic shifts in government, the first is a move away from free market economics and towards the idea of a strategic state working in partnership with business on an industrial strategy, the second is away from an economic model focused on growth in London and the South East, towards a model of growth that actively seeks to disperse growth opportunities throughout the country. The substance here is mainly found in Labour’s Green Prosperity Plan including public investments made through an initial £8bn National Wealth Fund, a publicly-owned Great British Energy renewable generator and, importantly, that “throughout, we will use public investment to underpin and unlock further private investment” pointing to the Inflation Reduction Act and the CHIPS Act in the US. IPPR’s George Dibb commented that "this is a smart move which leans into a new international consensus, aligns the UK with a global economic hegemon, and positions Labour with a powerful narrative of reform & renewal." 
• How new is this? Critics might say that lots of these themes have been around for a while in British politics, including on the right. After all, in recent years the UK government has experimented with industrial strategies, taken a strategic role during Covid, and have famously committed to ‘levelling up’ the country. This shift has been driven partly from the inability of old economic models to address challenges, and partly from the new electoral reality of the so-called ‘red wall’. However none of these nascent ideas have really translated into serious policy, partly because they have not been rooted in a serious critique of modern British capitalism. Reeves’ speech indicates Labour are approaching this agenda in a more strategic way.

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Learning from the US 1: fiscal challenges. Reeves was keen to emphasise that Labour’s ‘Securonomics’ and £28bn Green Prosperity Plan would be subordinate to their fiscal rules, which could threaten the amount of spending available for their industrial strategy, and ultimately, its chances of success. Since their rule is to have public debt falling as a percentage of GDP, a Labour government would be constrained by the level of growth in the economy, which could make it hard to break out of the ‘doom-loop’ of low growth and low investment . (A previous report from IPPR’s Carys Roberts and Carsten Jung explains how debt:GDP ratios don’t have to be a hard constraint on government investments so long as they generate growth.)

• Green industrial strategy on the cheap? The US’s green industrial strategy is characterised by huge increases in state spending to direct capital into new industries and catalyse massive growth in the green economy. John Chowcat explains how Labour’s current climate spending pledges “seem disproportionate to the existing scale of rival Western financial ambitions”, “even allowing for currency differences and the small size of the UK economy compared to that of the US, China and the EU”. IPPR’s George Dibb explains why a ‘modern supply-side economics’ “must be maintained in parallel” with stimulating demand. Consequently, Labour may need to rethink its fiscal framework to allow for more government spending for its green industrial strategy to be successful.
• Rewriting the rules. Is there a way of squaring Labour’s stated fiscal rules with the need for higher investment? Future Economy Scotland and IIPP academic Laurie Macfarlane has previously explained how governments could spend far more on capital investment without increasing debt:GDP ratios if they change the accounting rules which remove liabilities of publicly-owned corporations, like state investment banks, from measures of public debt. Germany targets general government debt rather than public sector net debt to exclude the liabilities of its public investment banks, which enables their publicly-owned banks to increase capital investment; their government has a below average general gross government debt (71% of GDP), but if they included the liabilities of public corporations in their accounting of the public finances - as we do in the UK - their debt would account for 181% of GDP, the third highest in the EU. (For more on state investment banks, read our resource bank page.)
• Taxing wealth. Keen observers of Joe Biden’s Administration would note that Bidenomics also included increasing taxes on the rich and the largest corporations. Reeves was keen to draw attention to the UK’s tax burden in saying she wouldn’t raise taxes. However if there is no changing of fiscal rules then the serious amount of revenue that could be raised via taxation of wealth is another option for increasing investment. Even former US Treasury Secretary Larry Summers now believes “there is capacity to raise revenue from the wealthy on a quite substantial scale – far more than is politically imaginable – without doing any appreciable damage to economic growth”. 

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Learning from the US 2: carrots and sticks. In recent months critics of the Inflation Reduction Act in the US have warned that the approach of using public subsidies to catalyse further private investment is risks embedding corporate power in the green transition, rather than challenging the primacy of shareholder interests. 

• Derisking vs the big green state. In her speech, Rachel Reeves suggested mobilising more private capital from UK pension funds to help fund green infrastructure. (Read our recent briefing for critique and alternatives.) The US’s Inflation Reduction Act embodies a ‘derisking approach’, which grants and tax credits to boost corporate profits and companies’ market shares for those that invest in the green transition. Brett Christophers warns that by allowing active asset management firms to gain control over crucial elements of America's infrastructure such as the road network, electricity grid, and housing stock, the state is inadvertently strengthening their power and enabling them to extract excessive profits. Political economist Daniela Gabor contrasts ‘de-risking’ private capital in the green transition to a ‘Big Green State’ approach that exercises close control over credit flows as an instrument to discipline private capital: “derisking and capital discipline are fundamentally at odds because former relies on private profitability to enlist private capital while latter forces capital into pursuing strategic objectives of the state”.
• Democratic industrial policy?. The Times’ Mehreen Khan explains how “concentrating more power in the hands of multinationals and private capital, which will be in charge of executing the green transition”, may pose problems for Labour, but also suggests that their plans for a National Wealth Fund to take direct public equity stakes in clean energy projects and a publicly owned renewable energy producer “could put the UK at the forefront of a more democratically controlled industrial policy that does not cede power to the private sector to manage the transition from fossil fuels.” Common Wealth’s Melanie Brusseler explains how Labour's proposals for a National Wealth Fund and a publicly-owned renewable energy generator breaks with the market-led approach of Bidenomics and could avoid the perils of a derisking approach if designed correctly. 
• Corporate power shouldn’t direct the green transition. IPPR’s George Dibb highlights the importance of strong competition policy to ensure the green transition is not directed at the expense of workers and consumers: “A mission-oriented, supply-side approach means being pro-business, but not pro businesses that work against the interests of society or extract from it. It means recognising the power of the private sector when it works with purpose, but acknowledging that not every firm in every sector does that.” Dibb concludes that Bidenomics includes both “carrots and sticks for firms, not just handouts. Examples include robust competition policy and clawback clauses on excess profits, as well as making support conditional upon union recognition, good pay, and a commitment to decarbonisation. These are the sorts of solutions that Labour should consider to boost the British economy and confront concentrated markets.”

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Building economic strength in an age of insecurity. Inevitably, much of the reaction to Reeves’ speech has focused on the merits of the word ‘securonomics’ - one of a long list of ‘onomics’ that UK politicians have used to characterise their economic policy. The interesting point here is not whether the phrase itself is any good, but what it says about the way Labour is framing the economic debate. The frame of insecurity is politically savvy as it marries the worries of voters about job security and personal finances with a wider narrative of climate disruption and the need to bolster the UK’s resilience to external shocks. With the cost of living crisis yet to dominate politics for a while longer (and is still top of voters priorities), there is an electoral logic to Labour using this frame to link their longer-term plans to the immediate pain voters are feeling. Whether or not ‘securonomics’ lasts the distance as a phrase, we should expect labour to be speaking the language of economic security in the run in to the next election. 

Good morning from New Economy Brief.

Pay may be the hot issue for workers and their unions at the moment due to inflation, but it is far from the only topic to gather momentum recently. 

One trend in recent policy discussions over work has been the centrality of time, with the 4 Day Week campaign the most famous example. 

This week we explore another proposal around working time, the ‘Right to Disconnect’, explain how and why this issue has shot up the agenda, and offer some thoughts about the evolving politics of workers’ rights.

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‍Labour backs new laws to improve work-life balance. The news that the Labour Party are set to propose the introduction of a new "right to disconnect" policy caused a stir in Westminster last week. This policy would grant employees the ability to disengage from work-related communication and tasks outside of their normal working hours, with the objective of addressing work-related stress and promoting a healthier work-life balance.

• Combatting the ‘always on’ work culture. The objective of the "right to disconnect" is to establish boundaries between work and personal life, ensuring that employees have designated periods of rest and leisure. A report on the right to disconnect from the trade union Prospect notes that ‘always-on’ working cultures and poorly managed remote work arrangements can give rise to various concerns for workers. These include undisclosed overtime, heightened work intensity, challenges to mental health and well-being, musculoskeletal disorders resulting from strain on muscles, joints, and bones, unequal treatment and discrimination against women and individuals with disabilities, increased utilisation of monitoring and surveillance technologies, as well as instances of remote and digital bullying.
• Rationale. The Labour Party argues that this measure would help alleviate the negative effects of constant connectivity and enable individuals to better maintain their mental well-being in an ‘always-on’ culture of checking emails and taking calls away from work. The right to disconnect seeks to enforce clear guidelines and regulations to protect employees from excessive work demands beyond their official working hours. Allowing individuals the right to disconnect fosters a more sustainable and balanced approach to work, safeguards against burnout and enhances overall productivity. Andrew Pakes, Research Director and Deputy General Secretary at Prospect Union explains the rationale for the right to disconnect after the pandemic accelerated trends in digital surveillance and abnormal working conditions: (e.g. one-in-five companies are now using digital surveillance to monitor workers or planning to do so.)

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‍Part of Labour’s ‘New Deal for Working People’… The proposed policy is part of Labour’s wider package to improve working conditions and pay: the New Deal for Working People. The plan focuses on strengthening workers’ rights, improving job security, fair pay, work-life balance, health and safety and providing more education and training opportunities at work. 

• …and a fraught politics of working time. The proposal should also be seen as part of a struggle against working longer hours. Reducing working hours has been a longstanding proposal to improve working life and the balance between work, leisure and important unpaid activity such as care. As Novara Media’s Polly Smythe notes: “In Economic Possibilities for Our Grandchildren, John Maynard Keynes speculated that technological advancement would soon precipitate a 15-hour workweek, and eventually do away with the need for human labour altogether. Yet the consequence of our hyper-connected lives has not been a reduction but an increase in hours.” The TUC’s online calculator made for Work Your Proper Hours day back in 2019 found that workers in the UK put in more than £35bn in unpaid overtime. Since the pandemic accelerated trends towards remote working, there has been a rise in digital surveillance of employees and a blurring between work and home life, where workers are expected to work longer hours and always be contactable. A Harvard study analysed the emails and meetings of 3.1 million individuals in 16 cities worldwide during the pandemic, it was discovered that the average duration of a workday had grown by approximately 48.5 minutes in the early stages of the crisis.

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‍How would it work? A 2020 guide from Prospect looks at different approaches to the “right to disconnect” and how to ensure unions are involved in safeguarding workers’ well-being and rights as new technology changes how we work. There are three primary methods of implementing a Right to Disconnect:

• Enterprise agreement. This approach involves employers and unions negotiating and reaching an agreement on the Right to Disconnect. Unions can advocate for this right either as part of collective bargaining or through a separate agreement. An example is Telefonica, which established its own Right to Disconnect in collaboration with its Works Council and unions.
• Directive approach. This method entails enacting a legislative framework that requires organisations to engage in negotiations with their workforce or unions to establish a Right to Disconnect. This approach is similar to the French model, where companies with 50 or more employees are obligated to negotiate rules suitable for their industry.
• Prescriptive approach. This approach involves the establishment of specific details about the Right to Disconnect through legislation or statutory regulations. Similar to the Irish Code of Practice implemented in April 2021, this approach outlines the necessary components and guidelines for implementing a Right to Disconnect within an organisation. A 2019 paper from Autonomy discusses the international precedents of such a proposal, as well as outlining the legislative wording of a hypothetical ‘Right to Disconnect’, thereby providing an off the shelf option for policymakers.

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‍Political analysis. The FT’s Stephen Bush thinks that the ‘right to disconnect’ “is a talker that, whether you are shaking your head at the prospect or counting the days until a Labour government implements it, will be broadly recognised by people in most workplaces. For good or for ill, it is going to define how a lot of people see Keir Starmer’s Labour party…ultimately the biggest change that Starmer’s Labour proposes to make to the UK’s economic model is to significantly increase the power of workers and trade unions”, which could be one “area of friction” for a minority Labour government reliant on Liberal Democrat support.

• New politics of work? While ‘Labour supports worker’s rights’ is hardly a shocking headline, it has perhaps flown under the radar how much policy exists in this space. The popular support for recent strikes, and success that Joe Biden has had in branding himself a ‘union man’ indicate a recognition that in turbulent economic times, the economic security offered by rights and unions is a potential vote winner, especially as economic insecurity is the key commonality among swing voters. The popularity of this agenda is perhaps best demonstrated by a Conservative candidate for London Mayor launching their campaign talking about the four day week.‍
• Support. The Right to Disconnect pushes the usual politics of worker’s rights into new territory, appealing to many white collar, younger and remote workers - all demographics that are traditionally underrepresented in trade unions. Polling commissioned by Prospect has found that two thirds of remote workers support the idea of a right to disconnect with companies required to negotiate with their staff over rules on when people could be contacted out of normal working hours.

Good morning from New Economy Brief. 

For as long as we can remember, ‘growth’ has been seen as synonymous with economic success, and the Gross Domestic Product - GDP - the de facto measure for the economic health of nations. Growth is one of Rishi Sunak’s five priorities for 2023. Keir Starmer wants Britain to be a “growth superpower”. Being part of an ‘anti-growth coalition’ became the political insult of 2022. A policy platform that isn’t focused on growth, or indeed actively opposes it, would be politically unthinkable. Or would it?

This week, MEPs, policy wonks and campaigners have gathered in Brussels to imagine what a “post-growth” Europe could look like. The ‘Beyond Growth’ conference is evidence of a growing movement which argues that exponential growth cannot be sustained in the face of a climate emergency and growing inequality. But can post-growth (or degrowth) become mainstream? Are there alternatives? And is there genuine political appetite for it? 

The problem with growth. Current debates around the limits of growth date back as far as the 1960s and 1970s, with the Club of Rome’s 1972 paper Limits to Growth seen as a seminal publication that has since been successively revised and republished. The central tenet of the paper and subsequent arguments for degrowth is that exponential economic growth cannot be decoupled from resource and energy use. In other words, if the commitment to growth continues, finite resources will run out and irreparable damage will be done to the environment and nature. In 2016, the Limits to Growth APPG found that the predictions in the Limits to Growth paper are essentially still correct and that new understandings of planetary boundaries have added new dimensions to the challenge. A 2009 study by the Stockholm Resilience Centre identified “planetary boundaries that must not be transgressed” in order to “prevent human activities from causing unacceptable environmental change”. An update of the research in 2015 found that of the nine planetary boundaries identified (climate change, ocean acidification, biodiversity loss, interference with global nitrogen and phosphorous cycles, ozone depletion, global freshwater use, land system change, atmospheric aerosol loading and chemical pollution) four have already been crossed. These boundaries have been incorporated into the Doughnut concept by Professor Kate Raworth, setting an ecological ceiling above a social foundation and outlining a safe ‘space in which humanity can thrive’. 

• The problem with GDP. When we talk about growth, we generally mean the monetary value of goods and services produced in an economy - or GDP. However, this “ultimate yardstick of economic performance” not only fails to account for economic harms but makes us “lose sight of what actually contributes to a happier, more prosperous society and a healthier environment” such as by ignoring non-monetised yet essential activities such as unpaid domestic work and childcare, argues NEF’s Lukasz Krebel. What’s more, the often used GDP per capita statistic is an inadequate tool for measuring how prosperity is shared out in society, says Krebel: “higher GDP doesn’t necessarily mean a better life for all of a country’s residents, since how the economic pie is shared is often extremely unequal”. Even the ONS has highlighted the limitations of GDP and its failure to take account of “things like social, natural, or human capital – things which all improve our lives and contribute to our happiness and health”. 
• The Great Decoupling. One argument for the inadequacy of GDP is the decoupling of wage growth from GDP (sometimes referred to as the ‘Great Decoupling’). A 2018 OECD paper found that “on average across 24 OECD countries, real median wage growth has decoupled from productivity growth”. Advances in technology were cited as a “downward pressure on median wages” but also “‘winner-takes-most’ dynamics as labour shares at the technological frontier have decreased and between-firm wage dispersion has increased”. 

So what exactly are we talking about when we talk about degrowth? Faced with growth’s harmful effects on planetary boundaries, degrowth proponents advocate strategies which seek a deliberate and planned contraction in the economies of high-income countries with the ultimate ambition of a steady-state economy. It is argued that the reduction in the materials and energy produced by economies can be achieved without negatively affecting living standards. Central tenets of degrowth proposals are equitably sharing out resources, and reducing consumption and income by reducing working time. 

• Growth, but not as you know it. There are some who believe that growth can be decoupled from its harmful effects and can therefore still be pursued. Proponents of ‘green growth’, for example, argue that it is not economic growth per se that is impossible, but only its current patterns and forms. There is some evidence that economies such as the UK are experiencing a degree of relative decoupling of economic growth from carbon emissions, although this should be taken with a pinch of salt. Many countries like the UK have essentially ‘offshored’ emissions by importing carbon intensive products from economies where growth is still very much positively associated with carbon emissions. Advocates, such as the World Bank, say that growth is still necessary to eradicate poverty and improve living standards and, with renewable energy and resource-efficiency, can exist safely in a ‘circular economy’. An extension of this is ‘inclusive growth’, which the OECD defines as ‘economic growth that is distributed fairly across society and creates opportunities for all’.

Political implications. The line-up of the Beyond Growth conference alone shows that the post-growth debate is no longer happening at the fringes of politics and economics. The event is the initiative of 20 cross-party MEPs with speakers including President of the European Parliament Roberta Metsola and Deputy Secretary-General of the United Nations Conference on Trade and Development (UNCTAD) Pedro Manuel Moreno. Just last month, the Irish President, Michael D Higgins, condemned neoliberalism and the “obsession” with growth. However, while degrowth may be becoming less taboo, it is by no means mainstream. Polls show that growth is still popular with the UK public, leaving little motivation to the main parties to make the case against it. A poll conducted by Ipsos MORI last year found that while 49% of those surveyed said that economic growth does more good than harm, only 17% said the opposite. 

• But… the public aren’t quite as pro-growth when faced with its associated harms. In the same Ipsos MORI poll, 43% said that more focus should be placed on protecting the environment, even if that harms growth, with only 29% saying the opposite. The Covid pandemic may also have played a role in realigning many people’s attitudes to growth, too. A poll conducted by YouGov on behalf of Positive Money in May 2020 found that more than 8 in 10 thought that the UK should prioritise health and wellbeing of citizens over GDP during the coronavirus crisis. When asked whether the UK should prioritise improved social and environmental outcomes over GDP when pandemic is over, 60% agreed. Whether its pandemics or the climate, could the crises we face spell the end for the pro-growth consensus?
• Messaging matters. As with all political and economic ideas, how it is explained really matters. A study of framing around post-growth models for example has found that the phrase ‘green economy’ is as popular as ‘economic growth’ while the idea of ‘degrowth’ is much more mixed. 
• Everyone’s a winner. The political appeal of the idea of growth until now is that it allows for a story where everyone gets better off, without having to confront the tricky politics of redistribution, which are central to any post-growth model. This dynamic is difficult to break. However, the above polling evidence, alongside the effect of the great ‘decoupling’ and greater awareness of climate harms do suggest that models that decentre growth may gain traction in the coming years. This might at first look more like Keir Starmer’s pledge to introduce new measures of national wellbeing and value them equally alongside growth, but the idea of questioning growth is certainly no longer confined to the fringes of the debate.

Good morning from New Economy Brief

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Inheritance tax is in the news, for two rather different reasons. Firstly because of one person who isn’t paying it, and secondly because of the mounting rumours that it may be a leading candidate for the highly anticipated pre-election tax cut.

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The myths around inheritance tax are many and various, and the politics and economics of inheritance tax interact with each other in complicated ways. The tax has important distributional consequences, and proposals exist for reform from different sides of the political spectrum. This week’s briefing explores the political and economic debate around inheritance tax and examines the proposals for reform.

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Who pays inheritance tax? King Charles has been crowned, but the Monarch is exempt from paying any tax on the £15.2bn royal estate he inherited from his mother. Some have argued that this is unfair, as the rest of us have to pay a 40% levy applied on assets valued over £325,000. 

• A minority tax. It’s not just the King who doesn’t pay inheritance tax (IHT) though, in fact the relatively high threshold means that very few people actually pay the tax. HMRC data from 2019-20 reveals that only 3.25% of deaths resulted in an IHT charge, and Demos calculate that only 6,000 estates actually pay inheritance tax each year because of the high thresholds and exemptions. It’s not just those at the bottom that don’t pay inheritance tax though, analysis from the Office for Tax Simplification (p5) finds that the very wealthiest also don’t pay much IHT either, as there are many loopholes used to avoid paying. This results in a surprisingly low IHT revenue figure of around £7bn per year - although this is set to rise as asset values inflame while the threshold remains frozen.
• But inheritance tax is unpopular. Inheritance tax has an almost mythical political status. The prospect of any cut raises the spectre of George Osborne’s famous inheritance tax gambit which allegedly convinced Gordon Brown not to call an early general election in 2007. Despite most people not paying it, public attitudes research shows that IHT is unpopular, for instance only a third of Labour supporters think inheritance tax is fair, whilst two thirds think income tax and National Insurance are fair. Oxford Professor Ben Ansell suggests that “when it comes to property or savings, there’s very little public support because it gnaws away at many people’s fundamental views of desert, effort, and prudence”. Essentially, many people believe that parents should be able to pass on assets accrued over their lifetime to their children.

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However, inheritance tax has important distributional consequences. IHT remains one of the only taxes on wealth in the UK and is an important way of transferring wealth as inequality soars. A combination of rising house prices, declining home ownership and stagnating incomes has created stark inequality between generations, but this will accelerate as newer generations inherit wealth from their parents. An IPPR report explains that “wealth transfers, such as inheritances, confer opportunity on the recipient. Taxing and redistributing transfers, either to individuals or through investment in collective services, therefore promotes equality of opportunity… As such, failing to tax wealth transfers sufficiently perpetuates economic injustice, and negatively impacts social mobility, while also constraining economic growth.”

• Failing to tax inheritance will accelerate wealth inequality. The IFS have argued that wealth is the growing economic divide in the UK today, warning that the economic prospects of young generations are struggling to match those of their predecessors, and recent declines in social mobility may accelerate as inherited wealth becomes an increasingly important part of lifetime resources. The Spectator’s Ross Clark explains why “scrapping inheritance tax is a terrible idea… There’s nothing conservative about encouraging unearned wealth”. Demos’s Andrew O’Brien argues that “Any tax cut is not only unlikely to incentivise inheritance (given the growing levels of inheritance) it would also be a change that would benefit only a handful of already wealthy people”. They also found that a typical person in the South of England born in the 1970s is set to inherit three-and-a-half times as much as a typical person in the North East. A report from Demos on the UK’s ‘New Age of Inheritance’ found that the real value of inheritances transferred annually in the UK has doubled roughly every 20 years since 1979 to over £100bn a year. The Resolution Foundation expects ‘peak inheritance’ to be reached in 2046, where the value of inheritances is forecast to double again.

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But it’s not perfect, and can be reformed. IPPR propose abolishing IHT and replacing it with a lifetime donee-based gift tax levied on the gifts received by an individual above a lifetime allowance of £125,000. After this limit is reached, any income from gifts is taxed annually at the same rate as income from Labour. This would increase the tax level on higher earners who receive large gifts and also encourages gifting to less well-off beneficiaries. It also has fewer exemptions so no one can exploit the current loopholes which allow many wealthy people to game the system and avoid paying IHT, for example by putting their assets into trusts.

• The potential tax take. A similar gift tax has also been advocated for by the Resolution Foundation. They calculated that taxing gifts through the income tax system with allowance of £125,000 could have raised £15bn in 2020/21, £9.2bn more than the current IHT system, and would do so more progressively as most people would pay the basic rate, whilst a higher top rate helps to reduce wealth inequality by levying more from the highest earners.
• Getting around the politics. IHT currently taxes estates, not the inheritance of the individual receiving it, making it easier to be classed as a politically unpopular ‘death tax’, rather than a social mobility enhancing gift tax, which can be framed to appeal to values of equality of opportunity and fairness. Ben Ansell’s public attitudes research has shown that emphasising the benefits of lower income taxes and higher public spending “led to a decline in just under ten percentage points in people thinking inheritance taxes were too high”.
• Other options. The fact that IHT is one of the only taxes on wealth in the UK means it is doing a lot of heavy lifting in terms of redistribution. If there were better ways of taxing wealth more consistently, such as a land value tax, or a net wealth tax, the imperative for a tax on inheritances would reduce, although there would still be an argument from a fairness perspective.

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It’s all politics. Bloomberg’s Alex Wickham recently reported that PM Rishi Sunak is “considering cutting the UK’s unpopular inheritance tax ahead of the next general election, people familiar with the matter said, a move senior Conservatives think will give his ruling party a major boost”, particularly from ‘Blue Wall’ voters. This is worth exploring. The political logic of pursuing pre-election tax cuts has two driving motives. One is the desire to do something that will leave voters feeling better off before polling day, and given that improvements to public services or rising real wages are harder for the government to deliver in the remaining 18 months or so of the parliament, tax cuts begin to look attractive. The second is a belief held by many Conservatives that lowering taxes will lead to growth, and that championing low taxes can tell a story about a kind of small-state economy a Conservative government would create that is distinct from anything other parties are offering. It is hard to see how cutting IHT fulfils either of these objectives. By its very nature few people will feel any kind of material benefit from such a tax cut, compared to cutting income tax by 1p for example (which has a similar price tag), and even the most Thatcherite of Conservatives would struggle to argue that the rate of IHT is holding back the UK economy. 

• The language of priorities. Reading the above polling on IHT, it’s easy to see why a party in need of a polling boost and a dividing line with the opposition might be tempted by this idea, but it is also worth remembering that this is a party extremely vulnerable to the charge that they are determined to cut taxes for the 1%, as seen in the recent row over pension lifetime allowances. There is also the question of priority; while people might not like IHT, is it really a vote-moving issue for them? With the cost of living crisis devastating household finances and public services on their knees, there is a real risk of such a move backfiring and the government looking extremely out of touch with people’s priorities.
• Opposition choices. Finally, there is the question of how opposition parties and others would respond to such a move. There are important reasons, both principled and practical, for defending taxing inheritances. In principle the idea of restricting the ability for inequality to be passed through the generations is an important one, and practically while there are options for reform it is always easier to keep an existing tax than to create a new one. But if IHT were to be abolished before an election, the above examples demonstrate that there are options to replace the revenue and actually raise taxes on the wealthy in ways which are perhaps less politically difficult than pledging to reintroduce IHT.

Good morning from New Economy Brief. 

How sustainable are the public finances? This question shapes our political debate in so many ways, and yet there is precious little data that can help us understand the reality, leading to some quite blunt statistics (such as gross debt and deficit numbers) dominating our fiscal debate. 

In fiscal policy, as with many other areas of economics, what matters is what is measured, and, therefore, what is measured really matters. That’s why the decision to add a new public finance measurement, Public Sector Net Worth, is worthy of deeper exploration. 

In this week’s New Economy Brief we explain what this measure is, what it tells us about the UK’s public finances, and how it could be used in the future.

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‍Public Sector Net Worth. Last week the Office for National Statistics (ONS) began measuring Public Sector Net Worth (PSNW) for the first time. This is a broader measure of the state of the UK’s public finances, as it calculates the value of the total assets a government owns, minus its liabilities. Assets include physical assets owned by the state, such as schools, hospitals, roads and other infrastructure, and financial assets such as student loans. Grant Fitzner, the ONS’s Chief Economist, explained that the new PSNW measure “provides a fuller picture of long-term fiscal sustainability and captures the impact of a wider range of government activities”.

• It’s not that simple. Of course, as with many economic statistics, it’s a little bit more complicated than that. There are different ways of measuring the value of assets, and especially of which liabilities are included in the measure, these can skew the statistics and frustrate efforts to make comparisons between different economies.
• Why is this important? Economists have often complained that commentary about the public finances is overly focused on the total debt of the public sector rather than how much it is worth, which gives the government too little incentive to invest in the value of their public services and infrastructure. As the BBC’s review of its own impartiality on fiscal policy recently found, many journalists instinctively believe that all debt is bad, a lack of nuance which could be partially attributable to the paucity of the official statistics.
• The case for investment. The Institute for Public Policy Research’s (IPPR) Carys Roberts and Carsten Jung explain that the idea of PSNW helps to “enshrine in government thinking the notion that public investments should be encouraged if they generate value”. Richard Hughes, now head of the Office for Budget Responsibility (OBR), along with other co-authors from the Resolution Foundation, have previously called for the UK’s fiscal rules to include a PSNW objective “to deliver an improvement in public sector net worth as a share of GDP over five years. This would incentivise prudent investment decisions to address the long-term challenges facing the UK”. Interestingly, their suite of proposed changes to fiscal rules also includes an ‘escape clause’ which recognises the need for more active fiscal policy and the suspension of other rules “if the economic outlook deteriorates significantly”, which could enable fiscal policy to play the lead role in supporting the economy in the event of shocks. An IMF paper has also found that countries with higher PSNW are found to recover faster in the aftermath of recessions and experience shallower economic downturns. 

The value of the UK’s public sector: -£605.8bn. The ONS calculated the UK’s Public Sector Net Worth to be in a deficit of £605.8bn. The Resolution Foundation’s analysis notes that the value of the public sector has declined from -£530bn last year, continuing "a long-term trend of decline in net worth, which has fallen substantially from the surpluses recorded by the ONS pre-financial crisis” and shows that “the country is failing to invest in its future”. 

• Analysis: “Worst of any major economy”. A recent report from the Resolution Foundation’s Economy 2030 Inquiry shows how the UK’s public-sector net worth is “very low” by international standards - only Portugal performs worse (for countries where reliable data exists). They argue that “combining low investment with fairly normal borrowing levels and repeated economic shocks has meant steep declines in public sector net worth…which has fallen by more than 50 per cent of GDP over the past two decades…Had the UK’s levels [of public investment] been at the OECD average over the past two decades, public investment would have been a truly transformational £500 billion higher (in 2022 prices).” Economist Julian Jessop (Fellow of the right-wing think tank, the Institute of Economic Affairs) notes that the UK’s PSNW is “the worst of any major economy” and that including measuring PSNW as part of the government’s fiscal rules “could have broad appeal” as fiscal conservatives hope it would force the government to face up to the cost of longer-term liabilities, such as public sector pensions, and advocates of more expansionary fiscal policy hope “the inclusion of a wider range of assets in the fiscal rules might create more room for governments to borrow to invest… as long as the resulting increase in liabilities is matched by an increase in the value of the assets owned by the public sector.”

What could this enable politically? The primary practical application of PSNW is in its interaction with fiscal rules. Targets based on PSNW rather than debt or deficits could reduce the temptation for the Treasury to cut investment and engage in fire sales of public assets in times of economic downturn. Labour is planning to adopt a PSNW approach to fiscal policy, while stopping short of committing to a new fiscal rule. They argue that a focus on debt has led to “a short-termist mismanagement of the public finances under the Conservatives”, reports Bloomberg’s Philip Aldrick, where “privatizations and asset sales may reduce the debt but have left the government with one of the largest net worth deficits of all OECD members…Labour hopes a full balance sheet rule might also reframe the debate around its plans to borrow to invest in green infrastructure.”

• PSNW and public ownership. In 2019 Labour’s Shadow Chancellor John McDonnell proposed the adoption of a PSNW target to improve the ‘overall balance sheet by the end of the Parliament’. Crucially for Labour at that time, this rule would enable more government borrowing to return privatised utilities into public ownership, as they would then be listed as valuable assets when assessing the public finances.
• The rationale for change. Professor Simon Wren-Lewis has written on how a public sector net worth target would be a more appropriate fiscal rule given the acute need for major green investment, though he has also argued that there needs to be a broader de-emphasis of fiscal targets in favour of a more holistic economic outlook. (See his discussion with Bloomberg’s Stephanie Flanders on fiscal policy challenges during and after the pandemic.) 
• Rules vs principles. Wren-Lewis is not alone in questioning the concept of fiscal rules. The New Economics Foundation (NEF) recommended the government’s ‘fiscal rules’ be replaced with a new framework, including a Fiscal Policy Committee (FPC) housed at the OBR or other third-party institution, appointed by government and parliament and guided by a set of ‘fiscal principles’. The FPC’s mandate would be based on resource constraints, full capacity utilisation, the private sector balance sheet position, and public sector net worth.
• An unsustainable status quo? While the measurement of PSNW may not on its own herald a brave new dawn of fiscal understanding, it is part of a wider drumbeat of dissatisfaction with the current fiscal policy framework which is worth watching. In recent months the current framework of rolling targets based on debt figures has been criticised by a wide range of people and institutions including the NIESR, Resolution Foundation, the IfG’s Jill Rutter and the Times’ Simon Nixon. After many years where debt and deficit figures dominated all political debate in the UK to the exclusion of all else, it is possible that there may be a growing appetite for a new approach.

The public don’t generally like to think of their pension as risky, so it’s always a surprise when a politician argues that the issue with management of pension funds is that there isn’t enough risk-taking. But this is the view of UK Chancellor Jeremy Hunt, who argued recently that this is one of the ways to unlock investment in potential ‘high growth UK businesses’. 

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This week’s New Economy Brief looks at the debate over pension investments, including the growth of overseas ownership of UK businesses and infrastructure, and alternatives to the drive to leverage more private investment.

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Pension funds aren’t investing in the UK. UK pension schemes are some of the biggest sources of capital for British companies, but according to the FT funds have been moving away from investing in the UK stock market, and more UK firms are listing overseas. Prominent business figures such as Nicholas Lyons, Lord Mayor of the City of London, have urged Chancellor Jeremy Hunt to compel more capital from UK pension funds into growing domestic companies and infrastructure. 

• Who owns our companies? If UK pension funds don’t own UK shares, then who does? Pension fund demand for UK equities has fallen by £400bn since 1997. A report published in 2022 from the TUC, Common Wealth and the High Pay Centre finds that the proportion of UK shares held directly by UK pension funds decreased from almost 1 in 3 in 1990 to less than 1 in 25 in 2018. Most UK shares are now held by overseas investors, with the proportion rising from 12% to 55% during the same period. When accounting for direct and indirect ownership through pooled funds, UK pension funds own less than 6% of UK shares.

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Chancellor urges pensions to make ‘riskier’ investments. Pensions funds have been making less ‘risky’ investments since the shift from defined-benefit to defined-contribution schemes, meaning more money has shifted from company equities and into government bonds. The government is due to publish new measures in the Autumn Statement to “unlock productive investment” from defined-contribution pension funds to enable more financing for high-growth companies and make the London Stock Exchange a more attractive place to list businesses. This could include pooling of Britain's ~28,000 fragmented defined-contribution schemes so they are consolidated in larger funds and ‘mandating’ pension funds to make certain investments. 

• Looking to Canada and Australia? During a visit to Washington, Chancellor Hunt gave a speech noting that Australia and Canada have managed to increase their returns by consolidating their pension fund industry, which makes it simpler for them to invest in unlisted companies with higher growth potential. According to the OECD, the percentage of UK pension fund assets invested in equities dropped from 55.7% in 2001 to 26.4% in 2021. In comparison, Canadian funds had 40.6% and Australian schemes had 47% of their assets invested in equities.
• Crowding-in opportunities with carrots, not sticks. However, the FT’s Helen Thomas argues that “political edicts on investment strategy are not the right way to emulate the country’s success”, as pension funds in Australia were attracted by opportunities to invest in projects with high returns, rather than compelled. She suggests that the government is not offering enough opportunities in clean energy, housing, or transport infrastructure, quoting former regulator and professional pension trustee Andrew Warwick-Thompson: “It is not pension regime reform that is needed to increase investment in UK assets… but coherent, stable and sustainable economic and industrial policies to make the UK fundamentally more attractive to investors.” 
• Risky business? Encouraging risks with pensions isn’t necessarily something you would imagine a UK Chancellor doing, especially a few months out from the big LDI pensions scare (ironically, caused by pension funds being overexposed to falls in the value of ‘safe’ government bonds as rates rose). Arguably the current system already involves too much risk for savers. The IFS last week published a report setting out the case for a new review of the pension system, arguing that the move to defined-contribution pensions results in “individuals bearing risks that are difficult to manage well”.

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But is private investment necessarily the solution? British companies and infrastructure certainly need more investment, and both major parties have suggested mobilising private capital from pension funds as a way to revitalise the country’s infrastructure and grow the economy. However, Common Wealth’s Mat Lawrence argues that mobilising private capital can lock in extractive behaviours as investors seek ever higher returns, which could encourage profiteering from UK infrastructure and the green economy.

• De-risking private investment is not risk-free for the government. Private financing of infrastructure projects can be more expensive than government funding, exactly because private investors not only expect a steady flow of income in form of dividends but also want to minimise any risk to themselves. As economist Daniela Gabor has observed, attracting investment is increasingly accomplished through ‘de-risking’, where the state takes on the risks to ensure higher returns to private investors. In a piece for the Guardian, Professor Brett Christophers argues that the influence of asset management firms is inextricably linked to the ‘de-risking’ agenda (in which he includes the US Inflation Reduction Act). In a separate piece for the FT, Christophers explains the risks of relying on private pension funds to invest in public infrastructure. 
• Look at the experience of developing countries. The down-sides of de-risking private capital to fill infrastructure ‘financing gaps’ have been thoroughly demonstrated by the World Bank’s programme to leverage investment for developing countries. Packaging infrastructure projects in ways to interest risk-averse institutional investors, such as pensions funds, require transferring risks onto the public sector, which has shown to bring excessive costs to taxpayers and exacerbate financial instability. A report by Eurodad’s María José Romero Duarte found that the World Bank's strategy of encouraging private investment in infrastructure projects goes against the historical experience of successful developed and developing countries, as well as the current practice in emerging markets, where infrastructure is mostly financed by the public sector. 

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Neglecting the role of public finance. State-backed investment banks are one route to providing finance where private banks may be reluctant to do so – in disadvantaged regions, new technologies or in sectors where returns are either too low or too risky.

• Patient capital and innovation. National investment banks are particularly valuable for providing 'patient' capital: long-term finance that is beyond the time horizon of most commercial banking but which is essential for innovation and strategic economic development. Economist Mariana Mazzucato explains why patient capital delivered through state-funded investment or development banks allows investors to take more risk (necessary for green innovation) as they are not required to pay dividends to private stakeholders, can meet more ‘public good’ objectives, and “can set conditions for access to their capital in an effort to maximise economic or social value to their home country.” 
• National investment banks. The UK is unique among major advanced economies in not having a national investment bank. Advocates argue that such a bank would increase investment in innovation and support major mission-focused industrial transformations, such as building a green economy. UCL's Institute for Innovation and Public Purpose has examined the role which publicly-owned investment banks have played in a variety of countries to provide patient finance for innovation and business development, and proposed the creation of a UK National Investment Bank. The centre-right think tank Onward has also called for the establishment of a national investment bank, arguing that this could unlock £16 billion in capital for investment in small and medium sized businesses, municipal infrastructure and project finance to level up lagging regions. The Scottish Government established the Scottish National Investment Bank in 2020.  
• Improving the UK Infrastructure Bank (UKIB). The UKIB is an Arm’s Length Body of HM Treasury, but is on track to deliver “barely a fifth of the financial support the European Investment Bank provided before Brexit” and is set to miss its annual investment target according to a recent report by the OBR. The UCL Institute for Innovation and Public Policy’s Thomas Marois analysed how the UKIB compares with other national infrastructure banks in Germany and Canada. The author notes the “remarkably little” investment given to the bank by HMT (£1.5bn annually) and a “fraught public-private partnership strategy that often costs taxpayers more while delivering less.” He concludes that the new bank is “anchored to past ‘market-failure’ approaches rather than a future where public banks, public purpose, and citizen engagement provide credible and innovative solutions to green and just transitions for people and planet.”
• More resources. Read our resource bank page for more on public finance institutions that can support economic development and another on how to rethink finance for business investment.

Artificial intelligence (AI) has become an increasingly important technology that has impacted the economy and jobs in various ways. Or at least that’s what OpenAI’s artificial intelligence chatbot ChatGPT told us when we asked it to summarise the effect of AI on the economy and jobs.

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The chatbot isn’t wrong about its increasing importance. Over recent months, ChatGPT and similar services have made headlines as students and civil servants alike have attempted to outsource complex tasks to this type of artificial intelligence.

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So what are these “various ways” that rapidly developing AI technology are impacting the economy and jobs? And can regulation really solve the issues it presents? 

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White paper on regulation. Last month, the Government published a white paper detailing “plans for implementing a pro-innovation approach to AI regulation”. Central to the proposals is an ambition for the UK to be a science and technology “superpower” with AI identified as one of five key technologies in this effort. However, the proposed regulatory frameworks are “underpowered” and risk “leaving prominent AI harms unaddressed”, warns the Ada Lovelace Institute.

• Old regulations, new technologies. Artificial intelligence is by no means new, the term itself is well over half a century old, and yet the regulations around its development and use are still in their infancy. This is particularly alarming in the context of the drive to create AGI (Artificial General Intelligence), and the potential imminent arrival of  “God-like AI”, as argued by AI investor Ian Hogarth recently. This iteration of AI, of which some argue OpenAI’s ChatGPT and DeepMind’s GATO are precursors, “learns and develops autonomously, that understands its environment without the need for supervision and that can transform the world around it”. But the issue of regulation isn’t just about the future, it's about how the tools that exist now are being integrated into our lives. The Government’s White Paper, which includes a consultation that is open until the 21st June of this year, does seek views on the topic of general-purpose AI “for future action”. However, as it stands, the white paper relies heavily on existing regulatory frameworks and expects not to implement the new AI framework or assess its effectiveness for at least a year. As noted by the Ada Lovelace institute, this rapidly developing area of technology is already being “deployed in high-stakes contexts such as recruitment and healthcare”. 

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AI and work. The adoption of AI in workplace settings is one of the frontiers of this debate on adequate oversight and regulation. A reliance on AI for “hiring, firing, pay and promotion” could make workers in several sectors increasingly vulnerable, according to the TUC, with the TUC’s Kate Bell describing the Government’s white paper as “flimsy” at its AI@work conference yesterday. Recruitment in particular has been identified as a key area in which harms may already be present and must be addressed much more quickly than the expected timeline would allow. According to the TUC, AI systems are already being used “to draw conclusions from candidates’ facial expressions and their tone of voice in video interviews”. The Ada Lovelace institute argues that key risks in recruitment are either not covered by regulation or are covered by “a patchwork of regulators”. For example, it is unclear that any regulator is responsible for ensuring that AI videos used in recruitment processes are used transparently. A lack of “statutory backing” and “adequate resourcing for regulators” are also identified as key risks for monitoring the use of AI in these areas.

• Power and control. Ultimately, unions are exercised about AI because it has the potential to blur lines of accountability and power relationships in the workplace. Decisions will be being made about workers based on algorithms that often have very little transparency, and are barely understood by the managers and HR departments adopting them. In response, unions are arguing for new laws and regulations, such as the expansion of collective bargaining rights to include employee data, and for clear accountability for decisions made by AI so they can be challenged. 
• Job losses. Of course, the impact of AI on work is about the availability of jobs as well. A new study has found that around 80% of the workforce could have at least 10% of their work tasks affected by the introduction of LLMs (Large Language Models which includes Generative Pre-Trained Transformers like ChatGPT), and approximately 19% of workers may see at least 50% of their tasks impacted. Research by Goldman Sachs found that AI could replace up to 300 million jobs across the UK and Europe. The report also found that 46% of tasks in administrative and 44% in legal professions could be automated. 

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So what happens next? The response to the Government’s white paper has focused on regulation, with hopes that promptly updated regulatory frameworks with proper statutory oversight and resources could mitigate existing and emerging harms. While this is needed and can be helpful in protecting existing workers and job seekers, wider structural concerns about the impact on the job market must be addressed. Speaking in a US context, the founder of Stealth Startup JB Rubinovitz argues that governments “need to start building safety nets now”.

• Rights at work. In addition to specific new rights and regulations referenced above, there is a more old-fashioned point about power dynamics which needs to be considered every time there is a new technology or development promising to ‘disrupt’ work. With union membership and collective bargaining coverage still at relatively low levels, large amounts of the UK workforce have limited ability to shape or control the way that AI will interact with their working life, leaving them vulnerable to redundancy or even practices like ‘fire and rehire’ which might be deployed by employers in response to AI changing job roles. Extending both union membership and collective bargaining coverage is key if workers are going to have more of a voice in shaping the future of AI at work.
• Social Security. Another aspect is the ability of the social security system to cope with the impact that AI might have on the labour market. One issue is whether the social security system is robust enough to ensure people's incomes in and out of work can’t drop below a certain threshold, meaning calls for reform could gain traction. Another issue is churn, where ideas such as a new system of employment insurance to help give workers more resilience to bounce back quicker from periods of unemployment could gain momentum.‍
• Working time. Finally, it is worth asking the question of whether the productivity gains from the introduction of AI into the workplace should not be realised in the form of more leisure time for workers. That’s what Oxford economist Carl Benedikt Frey thinks - arguing that "Any technology that increases productivity, ChatGPT included, makes a shorter workweek more feasible.”

Good morning from New Economy Brief.‍

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The Inflation Reduction Act in the US has put pressure on governments across the world to ramp up their efforts to develop their own green economy. 

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The ‘Washington Consensus’ of free trade is dying. State-aid rules, a cornerstone of the EU’s single market, are being relaxed as Western governments move towards state-directed reindustrialisation and decarbonisation.

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But where does this leave the UK government and how could they catch up in the 'green arms race'?

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The green arms race. The Inflation Reduction Act (IRA) in the US has catalysed a ‘green arms race’ across the Western world, with many governments pledging billions in public investment to compete for private capital and grow their domestic low-carbon economies. Governments are moving away from the ‘Washington Consensus’ of free trade in favour of state-directed reindustrialisation, with the IRA offering tax breaks for businesses that invest in low-carbon manufacturing and for consumers who buy electric vehicles which have materials sourced in the supply chain from North America. The EU has responded with its own Green Deal Industrial Plan (GDIP) and loosened state-aid restrictions to allow for more state intervention by member states to develop low-carbon economies and diversify critical supply chains within the EU.

• ‘Made in America’: Reshoring US manufacturing jobs. The Biden Administration has pledged $369bn in tax breaks for companies investing in low carbon manufacturing if they have ‘local content requirements’, where goods are assembled or sourced domestically. The aim is that many businesses utilise the subsidies and reshore to the US so that around 90% of domestic demand could come from domestic manufacturing supply chains by 2030 and bring millions of good quality jobs with them. Households can also receive up to $28,500 in up-front incentives to switch to lower carbon appliances, electric vehicles and install energy efficient upgrades. More than 100 climate, energy and environmental investments in the IRA have been estimated to create more than 9 million jobs in the US over the next decade. In the seven months since the IRA passed, clean energy companies have announced over 100,000 new jobs across 31 US states with investments totalling $89.5 billion - nearly 10 times more jobs have been created there in the last 7 months than have been created in the UK’s low carbon and renewable economy over the last 7 years.
• Job quality was important for political support. The scale of investment is novel in US climate policy, but the legislation also unites climate and trade union agendas through requirements for green jobs to pay ‘prevailing wages’, apprenticeships, access to affordable childcare and other benefits to receive certain tax credits. International Climate Policy Expert Mary Hellmich explains the political context for this: “American support for climate action depends on these policies leading to well-paying, union jobs, in addition to the achievement of climate targets. Thus, the inclusion of domestic content and labor provisions in the IRA were critical to the legislation’s passage; without them, there would be no climate bill in the US.”

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Green protectionism and the end of the ‘Washington Consensus’. This new ‘interventionist moment’ should be seen as part of an international competition to develop low-carbon technologies by the world’s major economies. China currently holds at least 60% of the world's manufacturing capacity for technologies such as solar, wind and batteries and holds “a near-monopoly on the production of many minerals critical for low-carbon technologies”. The Western world now wants these jobs and industries back, and governments are prepared to go against the norms established in the era of globalisation and use state-directed green industrial development on a huge scale to shelter their own nascent sectors and secure domestic supply chains. (Angela Nagle provides a great overview of the economic history of protectionism and situates the green industrial strategy race in a geopolitical context.)

• The EU’s response. The EU has noted ‘at least nine points’ in the IRA which could be regarded as a breach of international trade rules; in particular, the stipulation for local content requirements are incompatible with World Trade Organisation rules which are supposed to be agnostic about where products are made. Because the IRA is likely to attract private investment and industry away from the European economies and towards the US, the European Commission has responded with its Green Deal Industrial Plan (GDIP) to get at least 40% of the EU’s low-carbon technologies - such as solar panels and heat pumps - produced within its borders by 2030. The EU 's goal is to avoid dependency on any single nation outside of the EU for more than 65% of any one critical raw material by 2030 - which has already reportedly “sent renewables shares plummeting” in the Chinese low-carbon industry.
• Developing the European green economy. The GDIP will be accompanied by Net-Zero Industry Act to “identify goals for net-zero industrial capacity and provide a regulatory framework suited for its quick deployment”, a Critical Raw Materials Act to reduce dependency on imported materials and diversify domestic and sustainable supply of materials such as lithium and rare earth metals needed for electric vehicles and wind turbines, and a loosening of state-aid rules to allow EU member nations to channel more public funds into critical minerals extraction. This latter change has been described by experts as “nothing short of a paradigm shift in EU State Aid law…The EU now leaves the achievement of its climate targets to the willingness and ability of the Member States to subsidise companies in support of accelerating the rollout of renewable energy, the decarbonisation of industrial production processes and accelerated investments in sectors strategic for the transition towards a net-zero economy.”  

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“The British way.” Whilst the UK’s formal response to the IRA is scheduled to be announced in the Autumn, Chancellor Jeremy Hunt has written in the Times warning against a protectionist “distortive” global subsidy race and says “Britain will not go “toe-to-toe” with the United States and the European Union by offering billions in green subsidies and tax breaks.” Hunt said the UK response will instead focus on private investment and a “pro-growth regulatory regime…this is ‘the British way’”. 

• Green day. The government released 44 climate and energy related documents on ‘Green Day’ last week, including a new net-zero strategy after a High Court ruling that its climate strategy was unlawful under the Climate Change Act and a carbon budget delivery plan, which showed the UK is not on track to deliver its legally-binding carbon budgets. Former President for COP26 Sir Alok Sharma MP has warned that a key test of “Green Day” last week would be whether the government’s announcements “materially accelerate significant private sector money into green technologies and green jobs in the UK”, and called for faster action to respond to US and EU incentives that are ”attracting billions and billions of private sector investment in their green energy sectors right now”. (It’s not just the US and EU though… the Canadian government also pledged an $80bn investment package in clean technology in response to the IRA.) Responding to the Government’s energy announcements on ‘Green Day’ the Executive Director of Policy for Renewable UK (the UK trade body for renewables) said: “These announcements do not go far enough to attract the investment we need in the renewable energy sector…Global competition for investment in renewable energy projects is fiercer than ever, and the UK risks falling behind and surrendering our global lead…we need much more than a “business as usual” approach to kickstart investment…Without that, we won’t land the UK-wide economic benefits of building up new clean energy supply chains, as they will go elsewhere where the investment environment is more conducive and attractive”.
• Missed opportunities. Whilst the UK government has criticised the ‘dangerous’ measures in the IRA, they have simultaneously argued that we are unable to compete with the scale of subsidies needed to attract private investment on offer in the US and EU, whilst also being “ahead of the game” on renewable energy, pointing out that the UK has the four largest offshore wind farms in the world. Critics note that much of this infrastructure is owned by foreign state-owned entities and that the wind farms are an “illustration of political failure because they should have been built by a home-based manufacturing sector”, in the words of GMB Scotland’s Peter Welsh: “The result is a situation where we have haemorrhaged the vast majority of the jobs in the manufacture of offshore wind projects to the rest of the world because we have not invested in our infrastructure and supply chains – and the public are footing this industrial failure through their bills.” (Readers might also remember the collapse of ‘flagship’ electric battery manufacturer, BritishVolt, which went into administration in January after the government refused to bring forward public funding and it failed to find a private investor to save it.)

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Catching up in the 'green arms race'. The UK’s drive for Net Zero is now taking place in a new context, where other nations are offering generous subsidies to develop their own green industries. What does this mean for UK policy? And can the UK really compete with the IRA? Luckily there are various lessons that the government can learn from this paradigm shift in global trade and green industrial strategy. 

• “This is not protectionism, is it patriotism”. Labour are now positioning their Green Prosperity Plan as a direct response to the IRA. Shadow Chancellor Rachel Reeves often justifies their £28bn a year green investment pledge as a way to compete with other nations which are “taking a punt on these jobs and industries of the future”. Labour’s plans for an initial £8bn National Wealth Fund to invest in the green economy also echoes the US’s ambition to redevelop domestic industries (“made in Britain”), and similarly aim to generate returns for taxpayers. Shadow Secretary for Climate Change and Net Zero Ed Miliband outlined Labour’s approach in a speech to Green Alliance last week: “those who say we can’t be winners in that global race are wrong. We should match the ambition of President Biden’s Inflation Reduction Act and stop moaning about it…this is the British version of the Inflation Reduction Act: 2030 zero carbon power. Action to break down the barriers in planning, grid, skills and supply chains. A new national wealth fund to invest in partnership with the private sector. And GB Energy, our new publicly-owned energy company.”‍
• Reindustrialisation and decarbonisation: lessons for the UK. IPPR’s Luke Murphy explains how the UK can use a wider policy toolkit than the US due to unique constraints within their political system, such as regulatory measures and public procurement, “but to reap the economic benefits of such measures the UK must learn from the US approach combining regulation with greater public investment and green industrial policy.” Some of the eight lessons include learning from the unprecedented certainty and policy stability that the IRA provides through its 10 year framework for tax credits (resembling the ‘critical decade’ for climate action), focusing climate action on creating good quality jobs, using conditionality to shape and bend corporate behaviour to socialise risks and rewards (e.g. through encouragements to sign collective bargaining deals with unions, offering affordable childcare for workers and ruling out share buybacks and sharing excess profits with the government), and that the UK should play a role in greening the global trade regime. (We will cover more on the international trade angle in a future Digest.)

Good Morning from New Economy Brief

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From Hayek to Marx, economic thinkers from across the political spectrum have long criticised the power of monopolies. But despite this consensus, are we at risk of sleep-walking into a new age of monopoly capitalism?

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This week’s Digest looks at the evidence about market concentration, its impacts, the emerging literature about the interaction between monopolies and inflation, and possible policy options to counter these effects.

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Monopoly money. “We’re now 40 years into the experiment of letting giant corporations accumulate more and more power...I believe that experiment failed.” These were the words of President Biden in 2021 announcing a new executive order on anti-trust (competition policy). It isn’t hard to see why he felt the need to sound the alarm. Researchers in the US have found that the top 0.1% of companies in America are responsible for a staggering 88% of corporate assets and 66% of sales. Campaigners Global Justice Now (GJN) argue in a new paper that this is part of a wider trend, where giant corporations have “captured the economy” through a series of mergers and acquisitions and are now exerting their power to warp global markets.

• Why does this matter? The concentration of corporate power has many warping effects. For example, concentration in the agrifood industry has led to a loss of biodiversity as giant businesses standardise crops across different regions. GJN also argue that lack of competition also creates other negative climate outcomes, for example by encouraging practices like built-in obsolescence. More profoundly, as the Balanced Economy Project put it: “Monopoly power corrupts politics, increases inequality, worsens political polarisation, stifles innovation, reduces economic growth, undermines truth and the media, benefits authoritarian rulers, and generally blocks the possibility of change.”
• Food for thought? Which markets are we talking about? Well, quite a lot of them. GJN point to Google’s 85% share of the global search engine market (93% in the UK) as an example, but draws the net more broadly, with Big Tech and Big Pharma in the spotlight. Perhaps most relevant given current economic concerns though is the global food market which has seen dramatic consolidation in recent years. The latest report from the ETC group on ‘food barons’ finds that many crucial agrifood sectors are controlled by just four to six dominant firms which “wield enormous power” over global food markets.
• Isn’t this regulated?  Not very well according to campaigners. New anti-monopoly outfit the Balanced Economy Project argue that neoliberal thought has evolved to prize ‘competitiveness’ over ‘competition’ and this has muddied the regulatory waters. For example, the government’s controversial Edinburgh Reforms embed the principle of ‘competitiveness’ in the mandate of financial regulators, which finance campaigners like the Finance Innovation Lab claim confuses the role of the regulator. In their paper, GJN also argue that regulators like the UK’s Competition and Markets Authority (CMA) have been too reluctant to block mergers and acquisitions - for example Google has acquired over 200 companies since 2001. Just last week, the CMA performed a surprise u-turn to remove barriers to the acquisition of video games company Activision Blizzard by Microsoft, further consolidating the rapidly growing video games sector.

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Competition and inflation. That’s a pretty long charge-sheet against monopolies, but of particular interest in the current economic climate in the interaction between monopoly capitalism and inflation. A common argument in the ‘wage-price spiral’ debate is that this bout of global inflation is unlike previous price surges because the power of organised labour has been much diminished since the 1970s, meaning that collective bargaining is unlikely to drive inflation in the same way. Another aspect that has changed in recent decades is the concentration of various vital global markets, which has consolidated price-setting power into the hands of a small number of mega-corporations. Shouldn’t we also expect this to have some interaction with inflation? 

• Systemically Significant Prices. That’s what the University of Massachusetts' Isabella Weber thinks. Weber and her colleagues have argued that the current inflation phenomenon cannot be explained simply as a macroeconomic phenomenon (too much money chasing too few goods) and instead is about how changes to ‘systemically significant prices’ (like energy) can ripple through an economy. In this model, changes to these prices (often resulting from external shocks) spark responses from other businesses who have to raise prices to account for the increasing input costs, and eventually trigger a response from workers who demand higher wages. By focusing mainly on the wage-bargaining aspect, policy-makers are neglecting to tackle the root cause of the inflation.
• What has this got to do with monopolies? The interaction with market concentration is critical to understanding this kind of inflation. When small groups of firms have incredibly high price-setting power, it allows them to exploit external shocks either to raise prices further than they need to, or to keep them high long after an economic shock has abated. When these are in systemically significant sectors, like oil or food, this then has a material impact on inflation throughout the economy. The evidence of massive recent profits for commodity traders, alongside research from IPPR/Commonwealth and Unite the Union on recent profiteering suggest that some firms have been able to leverage their power in this way to make vast sums and fuel the cost of living crisis.

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What can we do about it? As the old joke goes, I wouldn’t start from here. Unwinding market concentration is significantly more difficult than preventing it from emerging in the first place through effective competition policy (anti-trust for American readers). As previewed in the opening to this newsletter, the Biden administration has toughened its stance towards the enforcement of anti-trust laws, appointing serious regulators and signalling a change of approach from recent decades. But effective enforcement of existing laws is unlikely to make a dent in the current situation. GJN highlight a suite of bolder policy options, such as the enforced break-up of monopolistic companies, and constraining the role of the financial giants and investment funds which lie behind so much of this concentration.

• Natural monopolies? In some cases it is almost impossible to generate real competition, which begs the question over whether these natural monopolies should be run in the private sector at all. The recent fiascos with the UK’s railway franchising model are an example of just such a problem, and famously the most profitable sector of the UK economy are the privatised power networks which have a complete monopoly over their areas and are largely owned by overseas investment funds.‍
• A new stabilisation paradigm? In respect of inflation, Weber argues that a new policy suite is needed to respond to this kind of price rise, rather than reliance on the blunt macroeconomic tools of interest rates. Central to this is the use of strategic price controls, which she argues “have tended to work in highly concentrated markets”. Citing UK and European energy price controls as examples, Weber argues that this kind of tool - once regarded as economic heresy - should be more widely deployed, especially as climate change is likely to spark waves of inflation that are similar to the one we are currently experiencing.

Good morning from New Economy Brief. 

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On Thursday the Bank of England’s Monetary Policy Committee (MPC) will decide whether to continue raising interest rates or hit the pause button. Central banks have been increasing interest rates around the world in reaction to record inflation, but this blunt tool has consequences for other parts of the economy, perhaps most notable in contributing to the instability of financial institutions.

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In todays’ Digest we look at the debate around the MPC decision, the interaction between interest rates and other economic issues, and examine other tools which could be used to combat inflation that avoid such harmful effects.

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Have interest rates peaked? This Thursday the Bank of England’s Monetary Policy Committee (MPC) will vote on whether to increase, maintain or reduce interest rates. Many economists have debated about whether the MPC should keep interest rates at their current level of 4% after a particularly turbulent week in financial markets. The last few weeks have also seen a remarkable public debate between MPC members about the course they should take. 

• The hawks. The February meeting of the MPC concluded with a majority vote of 7-2 to increase the Bank Rate by 0.5% to 4%, with two members voting to maintain rates at 3.5%. The ‘hawkish’ members of the MPC expressed concern that a historically tight labour market and potentially ‘sticky’ private sector wage growth above 6% “risks of greater persistence in underlying inflation” which a 0.5% hike would help address a ‘second round’ of inflation. Catherine Mann has been clear in public that she feels that more rises are necessary.
• The doves. The ‘dovish’ members of the MPC (Silvia Tenreyro and Swati Dhingra) argued that the real economy remained weak as a result of falling real incomes, that the economic downturn was affecting the labour market, and that the impacts of previous hikes are yet to have their impact, so inflation is likely to reduce “well below” 2% in the medium term, even with interest rates remaining at 3.5%. 

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Are rate rises harming the economy? The debate has shone a light on the effect of contractionary monetary policy on the wider economy. Economists have long argued that using interest rates to combat inflation is an imprecise tool, particularly when price rises are mostly driven by external supply shocks rather than domestic demand. Increasing the cost of borrowing and voluntarily slowing down demand in the economy on the brink of recession has a variety of adverse impacts on public debt, mortgages and the housing market, international debt repayments, business lending, unemployment and financial instability.

• They increase costs of government debt servicing... Interest rates have massive political effects as they change the cost of servicing government debt which has implications for how much ‘fiscal space’ the Treasury has to meet the Chancellor’s (self-determined) fiscal rules. These may be more political constraints than real economic constraints, but if the government is determined to meet these rules then there are real consequences for raising rates on fiscal policy. The Office for Budget Responsibility’s (OBR) latest report noted (page 14, 1.24) that if interest rates were 1% higher (or lower) than assumed in their forecast, borrowing would cost the government £20bn (0.7% of GDP) more (or less) to service their debt in 2027-28, which “would wipe out headroom against debt falling in the higher rates scenario but would more than treble headroom in the lower rates scenario.” Thus the decision of the MPC will have a dramatic effect on the pre-election fiscal context and could scupper any government plans to ‘spend’ additional headroom on pre-election tax cuts. 
• …slow down economic growth... The OBR’s latest economic and fiscal outlook noted (page 6, paragraph 1.4) that the lower interest rate pathway was partly responsible for avoiding recession - another key factor determining the government’s narrative around the Budget. 
• …spark international debt crises... The 1980s was marked by a series of international debt crises in South America and Africa as developing economies struggled to service the higher cost of debt as creditor countries increased interest rates in response to rising inflation during the oil shocks of the 1970s. As central banks across the developed world hiked interest rates in response to recent inflation, a recent report from the International Panel of Experts on Sustainable Food Systems warns that 60% of low-income countries and 30% of middle-income countries are at high risk of (or already in) debt distress as government’s struggle to service higher debt. 

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…and have triggered a banking crisis. A new factor has been added to the mix in recent weeks as turbulence in global financial institutions has been traced back to rising rates, prompting calls for a pause. As debt gets increasingly expensive, companies and industries that flourished in the era of super-low interest rates are more likely to default, which can lead to bank collapses. Last week Silicon Valley Bank (SVB) collapsed as higher interest rates in the US left the bank increasingly exposed and eroded the value of its long-term bond portfolio, triggering a sell-off of stocks and an international banking crisis.  Commenting on the failure of SVB, a timely peer reviewed article explains how rising interest rates erode the value of bank assets and have put “almost 190 banks at potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk” in the US. Tulip Siddiq, Labour’s Shadow City Minister, wrote to the Chancellor earlier this week to call for a “systemic review of the impact of interest rate rises and the wider uncertainty in the global banking system on our financial sector and economy.”

• This is also a warning against financial deregulation. The situation is unfolding rapidly, but the Finance Innovation Lab’s Jesse Griffiths explains that the reaction of central banks “shows we have a real financial crisis on our hands…only powerful state intervention can prevent the crisis spreading across the whole system” and warns against further financial deregulation. The US’ Federal Reserve also provided more lending to banks through its emergency funding programme last week than at the 2008 crisis peak. Chatham House expert Creon Butler concurs that the episode teaches us a key lesson: “Governments and financial regulators should be very cautious about relaxing regulations put in place to protect the financial system after the global financial crisis. This is as true of the UK’s desire to take advantage of post-Brexit freedoms, as it is of those in the US who see ‘excessive’ financial regulation as a constraint on growth.” (See our previous Digest on the UK government’s plan to deregulate financial services.) 

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Are other central banks still increasing interest rates? The Guardian’s Richard Partington reports that the SVB collapse ‘could force central banks to stop interest rate rises’. Market expectations for where the US’ Federal Reserve will peak interest rates have also dramatically reduced since SVB’s collapse (Look out for their decision at 6pm tonight). Expectations for the European Central Bank (ECB) peak interest rate have also reduced, although their Governing Council still increased rates by 0.5% last week as “macroeconomic projections were finalised in early March before the recent emergence of financial market tensions”. The FT’s Delphine Strauss reviews the views of former central bankers in light of recent financial turmoil.

• Latest market projections for the UK interest rate. Even at the last MPC decision in February and before the emerging banking crisis, many brokers argued that the Bank of England shouldn’t increase UK interest rates further. Capital Economics’ Paul Dales notes that “The fact that problems in the banking system...can be traced back to the rises in global interest rates means it is natural for the MPC to become more wary about further tightening the screws.” The latest market expectations for UK interest rates have reduced since the collapse of SVB but now expect a further 0.25% rise tomorrow due to an increase in CPI to 10.4% in February (up from 10.1%) in ONS data published this morning.

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Reviewing the UK’s macroeconomic institutions. This is the first major inflation crisis since the Bank of England became independent in 1997, and it is reasonable to ask what lessons we can learn about the policy response to the inflation shock. Arguably, the whole episode has exposed the danger of relying almost exclusively on interest rate rises to combat inflation which is driven by external supply shocks. As economist James Meadway notes, “The primary function of a central bank… is to preserve financial stability. If this primary task conflicts with the demand that they must also try and keep inflation low, central banks should be focused on their primary function. This means, in practical terms, that the fairly useless programme of interest rate rises must be halted and support given to banks as needed.” But if we accept that aggressive rate rises have limited ability to control certain kinds of inflation, and have damaging consequences elsewhere, then what other options exist?

• Time for fiscal and monetary coordination? A working paper for CUSP explains that the current monetary and fiscal policy regime “is no longer fit for purpose and may end up hampering both the recovery from the pandemic and the transition to net zero”. They call for a greater degree of flexibility in the UK’s macroeconomic institutions (Page 22-25) so that fiscal policy can “take a more active role in managing economic activity, and for monetary policy to take consideration of public (and indeed private) debt sustainability issues when setting interest rates.”  Economists Jo Michell and Jan Toporowski argue that the Bank of England should be given an enhanced financial stability mandate requiring more explicit coordination with the Treasury, “but need not eliminate the independence of the Bank”. They argue that the pre-2008 crisis orthodoxy of inflation-targeting was “incorrectly credited for a period of macroeconomic stability that was subsequently shown to be illusory”, and review a variety of proposals for reforming monetary policy (Page 23-29) including replacing the Bank of England’s inflation targeting with a growth target, and more. The authors ultimately conclude that “the proper regulation of employment and investment in the economy is a matter of policy for Government, not the central bank.”

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Alternative ways of reducing inflation. The government can also reduce inflation through use of targeted fiscal policy and more active competition policy.

• Fiscal price caps. IPPR have outlined how “a less often discussed, but potentially hugely important, macro-economic policy lever is to use fiscal policy to reduce prices immediately”, such as freezing the energy price cap, which they calculated could drastically reduce inflation in the UK (written before the Truss administration implemented the Energy Price Guarantee). 
• Competition policy. Isabella Weber in the US and IPPR and Common Wealth in the UK have been problematising corporate concentration as an explanation of rising prices after the pandemic. In Prices and Profits after the Pandemic, Carsten Jung and Chris Hayes find that “While inflation is primarily being driven by global factors… surging profits by some companies could be a contributing factor to rising prices…[where] the market power of some firms could be exacerbating inflation.”IPPR’s Carys Roberts proposed the government should levy excess profit taxes to other sectors of the economy which have made windfall profits (beyond oil and gas) and use the receipts to support households and build more resilient supply chains to tackle external causes of inflation (e.g. for critical commodities). This could reduce inflationary pressure by discouraging profiteering, as research by IPPR and Commonwealth has observed.

Good morning from New Economy Brief. 

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Tomorrow the Chancellor will lay out his decisions on tax and spending for the coming year. 

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Commentators and think tanks have debated how much fiscal ‘headroom’ he has available against the fiscal rules he set himself in November, whilst pressure is mounting for additional spending across the board to help counter the effect inflation is having on household finances, wages, and departmental budgets.

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Can the Chancellor afford not to invest in structural solutions to the cost of living crisis? Read on for our analysis. 

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The ‘war chest’ replaces the ‘black hole’. The fiscal mood music around this budget is significantly more positive than it was in November for a number of reasons, with GDP more resilient than feared and positive signs that inflation is receding. This adds up to a £30bn ‘improvement’ in the public finances compared to November according to the ONS. Whereas the last fiscal event was preceded by frantic briefing about the size of the ‘fiscal black hole’, this one has been dominated by a very different kind of fiscal context. 

• How much ‘fiscal space’ does the Chancellor have? The £30bn improvement so far in 2022-23 is partly due to tax revenues being higher than expected, less borrowing by local authorities and nationalised industries, and the remainder from lower-than-anticipated government subsidies for household and company energy bills, net investment and debt interest payments. (For context, £30bn is more than enough to prevent inflation eroding the wages of every public sector worker). However an expected downward revision later in the forecast period means that, as the Institute for Fiscal Studies’s Paul Johnson argues, “Unless the [Office for Budget Responsibility (OBR)] springs a pretty big forecasting surprise”, there won’t be any “money kicking around to be spent on permanent tax cuts or spending increases”. A very different perspective on the debate on the size of fiscal space comes from the National Institute of Economic and Social Research (NIESR) who forecast the Chancellor’s fiscal space to be far higher at £166 billion to meet Hunt’s deficit target, and £97.5bn to meet his debt target.

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Important economic decisions should not be based on such uncertain forecasts. As right-wing economist Julian Jessop argued: “it’s bonkers that the Treasury places such weight on projections that are known to be unreliable. This leaves very little room for Chancellors to make their own judgements.”

• “Black holes” in the public finances appear and reappear with rounding errors. This was precisely the point made by economists in the run up to the Autumn Statement, where the Institute for Public Policy Research (IPPR) flagged that the government could actually afford to run a primary deficit of £49bn and still meet its self imposed fiscal rules (as public investment can avert a low-growth scenario and therefore reduce the government’s debt:GDP ratio), and the Progressive Economy Forum (PEF) argued that loosening the fiscal rules (as the Chancellor ended up doing) would eliminate any need to plug a “black hole” in the public finances. The idea of the ‘black hole’ set the context for the last budget in which the government announced a large programme of cuts, and yet mere months later the projections on which it was based are looking distinctly shaky.

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Spending pressures. Pressure is growing from Conservative voices to use the Treasury’s extra headroom to cut taxes, particularly to prevent the planned rise in corporation tax from 19% to 25% in April. The Institute for Fiscal Studies (IFS) notes that the long term economic outlook is “too ‘murky’ to wave through a bunch of tax cuts.” (Reminder: there is a lack of evidence that tax cuts generate economic growth.) However, many economists are arguing that there is a strong case for increasing government spending now in a variety of ways that could boost GDP growth and make the public finances even more resilient to future shocks. 

• The cost of living crisis is still eating away disposable incomes. The Bank of England expects inflation to fall to 4% by the end of the year, but even in this scenario, people will still be permanently poorer than last year as the cost of essentials like food (see last week’s Digest on food price inflation) and energy continues to rise faster than wages; the Energy Climate Intelligence Unit (ECIU) calculated that even if the government extends the Energy Price Guarantee, households will still be paying £285 more than last year. Real pay is falling steeply and in cash terms average real pay is still £110 a month below where it was in 2008. Trades Union Congress (TUC) General Secretary Paul Nowak argued the government “must put pay rises at the heart of next month’s budget” as this will increase disposable incomes and prop up demand for goods and services in the economy. They recommend giving all public service workers a real-terms pay rise, moving towards a £15 minimum wage “as soon as possible” and more. 
• Public services need investment. According to analysis by the New Economics Foundation (NEF), the government is hiding £28 billion of “stealth cuts” to public services, despite promising in the Autumn Statement to increase spending by 1% a year. This is because previous assumptions were based on low and even negative inflation in the years ahead, which seems to suggest that the Bank of England would not intervene to try and hit their 2% target. Alfie Stirling explains: “If inflation rests closer to 2% from 2024/25 onwards, the government will need to commit a further *£28bn/yr* (2022/23 prices) to preserve the real terms value of spending plans by 2027/28.” PEF recently calculated that more than half a trillion pounds have been taken out of public spending over 2010-19. A lack of investment in public services and public sector workforce that deliver them is driving workforce shortages, particularly in the NHS.
• Growing support for boosting investment. A recent editorial by the Financial Times argued that “It is time for a UK-wide growth strategy”, where “the government must boost public investment, which has proportionally been among the lowest in the OECD over the past two decades…Next week’s Budget is an opportunity to begin addressing these issues.” Various funding sources exist for ambitious plans to boost growth. Even former US Treasury Secretary Larry Summers now believes “There is capacity to raise revenue from the wealthy on a quite substantial scale – far more than is politically imaginable – without doing any appreciable damage to economic growth”. A new report and video from the Social Guarantee’s Isaac Stanley explains how £92.6bn can be raised from increasing tax on wealth and passive income, taxing big businesses (especially energy companies) and through progressive consumption taxes. They propose this can fund “a limited suite of universal basic services”.
• What is expected? The pre-briefed announcements from the Budget suggest that that it will be a relatively low-key affair, with some temporary help for households in the form of an extension of the Energy Price Guarantee, some action on childcare, a refreezing of the fuel duty permafrost, and some additional spending on defence to attempt to compensate for inflationary pressures.

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Choices and gambles. The government story around this budget is very much ‘steady as she goes’ with the improved public finances a vindication of prudence and a mark of restored ‘stability’. The assumption of many in Westminster is that the Chancellor will attempt to ‘bank’ his additional headroom and use it to store up a “war chest” for pre-election tax cuts. This would enable a narrative going into the election that ‘the plan had worked’. Taking this approach is a choice, and it is also a big political and economic gamble. The idea that the economy has returned to ‘stability’ might be true from the perspective of the bond markets, but seems tone deaf when millions of people are finding their personal finances more unstable than ever. When people’s incomes are so insecure, can the government really afford (politically, and economically) to avoid using the fiscal space to solve the cost of living crisis?

• Stagnation nation. There is a fine line between being stable and being rudderless. There is a real risk that an empty Budget red box this week will lead the public, and investors, to conclude that Britain is closer to the latter than the former. With the USA and EU embarking on new economic strategies based on encouraging public and private investment in the green transition, and the Labour Party echoing this rhetoric, the lack of a similar vision or strategy from the UK government is all the more striking. 
• No alternative? The government’s pre-budget briefing has been that they are unable to act because any additional spending would break fiscal rules or risk fuelling greater inflation. The Stop the Squeeze campaign have released a pre-budget briefing addressing these arguments head on, and conclude that they do not stand up to scrutiny.‍
• Broken Britain. More profoundly, there is a deep sense across the country that things are going in the wrong direction. Public services are at breaking point, strikes are continuing, energy bills are still sky high, and growth is nowhere to be seen. The public, unsurprisingly, continue to put the cost of living crisis at the top of their list of concerns. From an economic point of view, deciding not to act now risks prolonging economic stagnation, deepening the crisis in public services, and leaving the UK lagging behind on green investment. From a political point of view, it risks deepening the impression that the government lacks a plan to deal with the cost of living crisis or the economy - an impression that no amount of pre-election tax cuts will be able to shake.

Why is the UK running out of certain foods? Food insecurity has climbed up the political agenda in recent weeks as five of the six largest supermarkets have started rationing vegetables. Sustain’s Vicki Hird explains that the current shortages are exposing system issues in the UK’s unsustainable and unresilient food sector, as supply chains are threatened by a combination of poor weather conditions, trade frictions and higher costs of production for growers. Tim Benton, research director of emerging risks at Chatham House, has warned about the need to “de-risk” food supply chains in an increasingly insecure world.  

• Extreme weather is reducing harvests. Economist James Meadway explains how extreme weather events are reducing harvests across the world and continue to drive up food prices. Extreme heat in Europe last year reduced potato and sugar beet harvests by up to 50% in Britain. The supply of other home-grown vegetables are also being threatened as extreme weather reduced harvests of leeks by “between 15 and 30 per cent”. The President of the National Farmers’ Union warned the domestic farming sector will struggle to adapt to more extreme weather and higher input costs, leaving the UK more reliant on food imports and more vulnerable to supply chain disruption.

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Food supply shocks will exacerbate global hunger... The UN’s Intergovernmental Panel on Climate Change’s report on climate impacts explains how the climate crisis poses an acute threat to global food supplies, which has severe consequences for global hunger and security. The World Food Programme estimates that the number of people facing acute food insecurity more than doubled from 135 million people before the pandemic to 345 million, mostly in poorer countries.

• …worsen food poverty in the UK… In richer countries, populations will face rising prices with more instances of shortages. Increasing numbers of people are already struggling to put food on the table due to the rising cost of living. The Independent Food Aid Network is already reporting record increases in demand for UK food banks, with 80% of food aid providers reporting a “significant number of people needing help for the first time” and half of the organisations surveyed saying that “if demand increased, they would have to reduce the level of support they could provide or turn people away”.
• …and profiteers will generate windfalls. In this context, the spotlight is falling on those people and organisations within the food system who are benefitting from food inflation and shortages. Last year, Oxfam’s Profiting from Pain report found that “62 new food billionaires have been created” as the largest food corporations receive windfalls from a 30% increase in global food prices over the previous 2 years. Greenpeace’s new report on food profiteering since the pandemic has found that 20 of the world’s biggest food corporations (in the grain, fertiliser, meat and dairy sectors) gave $53.5bn to their shareholders in the last two financial years. The report shows how the 20 companies control supply chains for food itself, and information about those supplies, which fuels commodity speculation.

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Creating a sustainable, nutritious and resilient food supply. Just as energy inflation led to greater scrutiny of UK energy resilience, recent food shortages have prompted a wider debate about creating more nationally self-sufficient food supplies. The idea is that by restructuring the food system, it is possible to both keep food affordable whilst also ensuring better outcomes for farmers, the natural environment and public health. This will require moving away from the dominant globalised model that promotes vertically integrated monopolies which control most of the supply chain. In the current business model, UK farmers receive less than 1% of the profit made on key items like sliced bread, beef burgers, carrots and cheese, according to analysis from Sustain. Alongside strong regulation to stop abuse in supply chains, greater support is needed for domestic growers to be able to invest in agroecological production and new technologies to improve resilience and reduce exposure to import price shocks.

• Food sovereignty. Food sovereignty is an alternative to the export-led model of food production and consumption dominated by multinational corporations. Food sovereignty goes beyond food security and is underpinned by six principles: providing food for people; valuing food providers; localising food systems; centring local control; building knowledge and skills; and working with nature. The Landworkers’ Alliance (LWA) argue that a food sovereignty movement in the UK would allow for diversity of production rather than relying on ‘cash mono-crops’ and “offers an opportunity for us to restructure our food system from one which is profit-oriented to one which is designed to help both people and the natural environment.”
• Democratising ownership and taking back control of the food system. Rob Booth outlines an alternative future for agriculture in the UK and worldwide for Common Wealth. This redistributes power and “puts producers and citizens, rather than agri-business, in control of food systems”, by encouraging democratic ownership models such as cooperatives and community land trusts. The Welsh Government’s proposed changes to agricultural support after Brexit have the potential to encourage agroecological farming and increase food sovereignty by moving towards a more resilient system based on small and medium scale farms producing a wide diversity of food for domestic markets. (LWA and Shared Assets have outlined a series of case studies showcasing good practice in Wales.)
• Supporting growers through international, national and local policy change. Greenpeace, La Via Campesina and others call for “a legally binding global treaty coherent with the Articles of the UN Declaration on the Rights of Peasants and Other People Working in Rural Areas” to reduce the influence of agri-business models in the international trade order which exploit cheap labour and encourage profiteering. Common Wealth’s Rob Booth outlines the national level policies, local actions and legislative changes (a Right to Food) needed to transform food supply chains in the UK.

The five missions of a Labour government. Leader of the Opposition Sir Keir Starmer explained Labour’s “statement of intent to how we intend to govern” through five missions, which will likely form the backbone of their election manifesto. Their priorities are: securing the highest sustained growth in the G7, a zero-carbon electricity system in Britain by 2030, an NHS “fit for the future”, making Britain’s streets safe and breaking down barriers to opportunity (through childcare and education reform).

• Ending ‘sticking plaster politics’. Starmer argues that a “mission-driven government” is required to end what he called ‘sticking-plaster politics’ in his New Years speech; a term to describe the government’s consistent failure to solve complex challenges plaguing the UK economy due to being overly focused on short term solutions to neutralise immediate political challenges. For instance, Starmer quoted the energy price freeze as “an expensive, last-minute fix” for the cost of living crisis, “papering over cracks in our energy security that have been on display for years”.
• Light on detail? The speech has had a mixed reception, with some criticism that it is ‘light on detail’ or that it doesn’t constitute a ‘retail offer’ for voters at the next election. In fairness to Labour, they have said that they will be fleshing out these missions between now and the election, and as former Labour advisor Tom Hamilton argues, the missions will not necessarily form the basis of the ‘pledge card’. 
• The benefits of a ‘mission-led’ approach. IPPR’s George Dibb explains why we need ‘missions’ to drive the UK’s economic renewal: “A mission should provide a clear and measurable goal that shapes the action of a government. It should be an ambition that different parts of government can align around and provide a clear steer for collaboration and partnership between business and government.” 

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Clarifying Labour’s new role for the state. The mission-led approach has received some criticism for being ambiguous about the role of state intervention in markets, which some argue risks an overreliance on private sector delivery. Starmer said he is “not concerned about whether investment or expertise comes from the public or private sector - I just want to get the job done…Mission-driven government is a different way altogether. Not state control or pure free markets, but a genuine partnership”. Interestingly, the refrain of “get the job done” seems to echo the New Labour slogan“what matters is what works”, but with an important difference: in the late 1990s this apparent ambivalence between public and private sectors was used to justify more market involvement in public services, whereas Starmer is using the phrase to justify more state involvement in markets.

• Concerns about a ‘partnership approach’. Private Eye’s Solomon Hughes questioned whether Starmer’s approach goes far enough to ensure the state has a “firm element of control, so public investment doesn’t just flow into private profit” IPPR’s George Dibb argued that “putting in place structures to guarantee public return on public investment is essential” through policies such as a citizen’s wealth fund, state purchasing of equity stakes in businesses through a British Business Bank or UK Investment Bank type structure, or public ownership of public intellectual property. 
• Ensuring government shapes (and doesn’t just serve) markets. To be fair to Starmer, his speech argued that “there is a massive role for the private sector in mission-driven government but if the aspiration is merely to replace the public sector while extracting a rent to privatise the profits, while socialising the risk, that takes us nowhere”. Labour has also already announced policies like a citizens’ wealth fund and a publicly-owned energy generator, but Global Justice Now’s Nick Dearden argues “Starmer will need to go much further…state support must require business to behave very differently” through stronger use of conditionality, pointing to the Inflation Reduction Act in the US as an example of good practice in market shaping. IPPR’s George Dibb also argued that government support should also depend on firms' tax affairs, union recognition, dividends and share buybacks policy and more, as, ultimately “missions are an important part of the puzzle but can't do it alone. Missions have little to say to questions of ownership and power. That's why they have to be combined with other structural & institutional reform”, such as strong competition policy to avoid rent extraction.

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The transformative potential of a mission-oriented government. Missing from much of the commentary around the speech has been a sense of what it means for Labour to be thinking and talking in the language of ‘missions’- with little distinction being drawn between Labour’s ‘missions’ and the government’s five targets. But missions are much more than just targets. A mission-oriented approach to solve ‘grand challenges’ such as climate change is a seminal part of new economic thinking. The idea of using government to explicitly steer the direction of economic activity to achieve ‘missions’ was popularised by Mariana Mazzucato, founder and Director of the UCL Institute for Innovation and Public Purpose. By making strategic investments in particular sectors, such as green industries, an active industrial strategy from an ‘entrepreneurial state’ can kick-start the development and take-up of new technologies, develop new markets for UK companies, trigger greater private sector investment, and tackle major environmental challenges. 

• Labour is tapping into the new global consensus. The ‘Asian Tiger’ experience is often referred to as an example of how governments can steer the direction of growth and technological development to support domestic competitive sectors in the direction of desired goals, e.g. the Tiawanese government directly steered universities and firms R&D processes to become a global hub for computer chip exporting. Moving away from a laissez faire approach to economic development has been an emerging global consensus for years: 84 countries (accounting for 90% of global GDP) adopted formal industrial policies between 2013-2018. It is also important to note that the recent Conservative government has had a stop-start relationship with industrial policy, including policies such as the National Security and Investment Act, the British Business Bank’s Future Fund and the Advanced Research and Invention Agency. 
• Giving business what they want? While some might suggest that this emphasis on the role of the state to design economic objectives might be unwelcome to businesses- in fact this is exactly what many business leaders have been calling for. The CBI’s Tony Danker has been vocal in criticising the lack of economic direction from recent governments and the absence of a sense of partnership between state and private sector on joint challenges. Danker’s call for a long-term ‘economic vision’ isn’t a million miles away from the ‘missions’ approach Labour has set out.‍
• “Seize the interventionist moment”. The FT’s Martin Wolf recently warned that “the new interventionism could pose a threat to global trade”, referencing how Joe Biden’s plan for creating a domestic green industrial base centred around electric vehicle manufacturing has put the US at the centre of a major trade dispute with the EU and UK. However, Global Justice Now’s Nick Dearden argues “we should defend policies that allow all countries to develop their own industrial strategies to build fairer, more sustainable economies…it is the trade rules that need to give”. Economist James Meadway also notes that the EU’s “decades of dogged commitment to free-market rules are being shredded with surprising speed” and state-aid rules are “on the verge of being weakened” to allow more government subsidies and public ownership in the single market. It is in this context that “Labour has an important political opportunity to seize the interventionist moment and define its terms for Britain”.

‍More workers are leaving the workforce since the pandemic. The Chancellor is reportedly focussing the March 15th Budget on reducing the amount of people on sickness related benefits and boosting employment, amid growing concern about record numbers of people on long-term sickness and the effect of declining labour force participation on economic growth.