The Conservatives' economic programme

Four principles structuring the Chancellor’s speech. Chancellor Rishi Sunak gave his first speech to the Conservative Party Conference this week (video here), structured around four overarching principles: a “pragmatic” approach to economic policy, a commitment to fiscal responsibility, a focus on jobs as a poverty alleviation strategy, and an “unshakable optimism” about the economic opportunities provided by technological progress.

Fiscal responsibility. Sunak argued that “there can be no prosperous future unless it is built on the foundation of strong public finances”, counterposing Labour’s proposals as fiscally irresponsible.

Debt as % of GDP. The Chancellor warned that public debt was approaching 100% of GDP. A decade ago many macroeconomists believed such a level to be damaging to economic growth. But at today’s ultra-low interest rates the cost of servicing that debt is at historic lows (Twitter thread explainer by UWE economist Jo Michell here.) So the idea that a debt level of 100% of GDP is unsustainable is now widely regarded as arbitrary and outdated. The IMF argues that fiscal rules limiting debt to GDP ratios are inappropriate in today’s conditions and should be abandoned.
Public investment is fiscally responsible. Cambridge economist Dimitri Zenghelis and the LSE’s Nicholas Stern explain why public investment in economic growth is key to debt sustainability: “G7 countries should increase post-pandemic public investment...recognise the potential economic and social returns to increasing public debt for the purpose of investment…[and wait] to pay off the public debt until the economy is undergoing robust growth.”
International comparisons. Sunak boasted that the UK has “one of the fastest recoveries of any major economy in the world”. But as noted by BBC Newsnight’s economics editor Ben Chu, this is largely because UK GDP fell much more than other G7 countries during the pandemic. In terms of GDP levels, the UK has reached a level relative to its pre-crisis peak roughly equal with Italy, France and Germany. Responding to the Biden administration’s larger stimulus package, the US has now surpassed that level. (For an analysis of the US economy’s recovery, see this article from the Brookings Institution.)

Plan for Jobs. With the furlough scheme having ended on 30 September, the Chancellor said the Government would be judged on how many good jobs it creates. He pledged more than £500 million in new funding to extend the Kickstart Scheme for young people until March 2022, as well as to support workers leaving the furlough scheme and unemployed over-50s back into work. A £3,000 incentive to businesses to take on apprentices has also been extended until February 2022. Sunak promised to create 2,000 “elite ArtificiaI Intelligence scholarships” for disadvantaged young people and to double the number of Turing AI World-Leading Research Fellows “to ensure that the most exciting industries and opportunities are open to all parts of our society’.

Alternative support schemes. NEF estimates that the end of the furlough scheme puts over 700,000 jobs at risk of redundancy, loss of hours or loss of pay. In her response to the speech, NEF’s CEO Miatta Fahnbulleh called for a “part-work, part-train scheme” to help people in declining sectors acquire new skills for sectors that are creating jobs. The TUC has proposed a permanent short-time work scheme to limit job losses in future periods of economic turbulence, such as climate change or global financial instabilities.

Job creation and UC. Sunak defended his much-criticised refusal to keep the £20 per week uplift to Universal Credit (UC), arguing that dependency on benefits was the wrong approach to reducing poverty. He emphasised instead the government’s commitment to providing jobs.

In-work poverty. The Resolution Foundation’s Torsten Bell explained why cutting Universal Credit will not boost job creation or incentivise those 2.3 million claimants already looking for work. NEF’s Living Income campaign found that 32% of the UK population (21.4 million people) will be living below a needs-based ‘minimum income standard’ by 2022 if the government doesn’t change its policy. (See their recent blog on options for reforming UC). The IPPR documented the “continued rise in working poverty since the beginning of this century”, and argued that “the promise of social mobility through ‘hard work’ as a route out of poverty alone is failing to deliver”.
Industrial strategy to boost wages. IPPR’s George Dibb explains why addressing stagnant pay and insecurity will require public investment in green job creation to increase demand in the economy and “a return to sectoral bargaining delivered through Plan for Growth sector deals and unions”, referencing their recent report Prosperity and justice after the pandemic.

The “transition to a new economy”. The Chancellor argued that beyond the measures it has taken (such as issuing temporary visas for HGV drivers) it is not the government’s responsibility to sort out labour shortages; this should be left to the market. Boris Johnson and other ministers have been arguing that today’s labour shortages are the growing pains of an economy which is transitioning, after Brexit, to a high-wage, high-productivity state no longer reliant on immigrant labour.

Supply chain issues. Sunak claimed the problems in UK supply chains are being experienced “right around the world”. A global survey by the Guardian confirmed that supply chain problems are occurring in most major economies as economies expand rapidly after the pandemic. But the specific impact of Brexit in the UK is widely noted in the European and US media. Larry Elliott puts much of the blame on the UK’s “just-in-time” economic model. The Institute of Government has offered an analysis of the multiple causes of the UK’s current shortages. ‍
Labour shortages. Oxford economist Simon-Wren Lewis explains why creating “labour shortages among workers deemed to be unskilled by this government are damaging to the majority of workers in the UK”, as well as damaging to those overseas who are prevented from filling the shortages by immigration rules. Economist and former adviser to Theresa May Giles Wilkes suggests that “running the economy hot by raising demand” is a better way to raise wages than cutting labour supply.

Weekly Updates

Poverty and climate change

Rising energy costs and the cost of living crisis. As rising gas prices lead to higher energy bills, Joe Tetlow, Green Alliance’s Senior Political Adviser, explains why accelerating the rollout of cheap renewables and reducing demand for energy through better insulation can reduce dependence on fossil fuels.

Fuel poverty. Analysis by Citizens Advice showed that 1.7 million households will face higher energy prices as their suppliers fail, with those on the lowest incomes facing larger shocks. ECIU analysis found that “families that live in homes with lower energy efficiency ratings are suffering the most financially from global gas price increases, paying up to the equivalent of £246 more on their annual gas bills”.
Government policy. The Government has announced a £500 million Household Support Fund to give local authorities emergency funding (calculated through the Barnett formula) to distribute small grants for meeting food, clothing and utility needs. IPPR’s Henry Parkes referred to this as a “dire substitute for keeping the £20 uplift”. NEF’s Alfie Stirling calculated that it would replace less than 18p for every £1 cut from Universal Credit. ECIU’s Simon Cran-McGreehin called for the Government’s forthcoming Heat and Buildings Strategy to properly address the issue. The Financial Times reported that the government may announce a green energy tax surcharge to incentivise households to switch to low carbon heating. The Telegraph warned that this may increase household bills further.
A national retrofit programme. At Labour’s conference last week Keir Starmer pledged £6bn a year for a decade to improve the energy efficiency of homes and cut energy bills. Polling from NEF showed that 65% of people in the UK support a large-scale government investment in low carbon heating and insulation. There was support for a “retrofitting taskforce” in all regions and across the political spectrum. ‍
Great Homes Upgrade. NEF launches its campaign for a Great Homes Upgrade to retrofit 19 million homes by 2030 on Wednesday, when Boris Johnson will be speaking at the Conservative Party Conference. They are asking people to sign up to the campaign by calling on Johnson to support the Upgrade ahead of the autumn budget. They have created a share pack of resources to use and distribute to others.

Local economies

Defining ‘levelling up’. Speaking at the Conservative Party conference Michael Gove set out four aspects to “levelling up”: strengthening local leadership, raising living standards, improving public services and enhancing people’s pride in place. But his speech was widely criticised for lacking in clarity.

Community wealth building as levelling up. CLES’s Sarah Longlands wrote an open letter to Michael Gove proposing three ways to bring wealth back to local areas: challenge perceptions of the local state, pass power down to level up, and provide long term funding, not piecemeal pots. Longlands explained “what a real levelling up strategy would look like” in an article for the New Statesman, which must include “difficult questions about how wealth and power really operates” as well as “a new and much improved relationship with combined and local authorities”.
Government adviser calls for devolution and decentralisation of funding. Sir John Armitt, chair of the UK’s National Infrastructure Commission (an executive arm of the Treasury), called for a radical change to the “inefficient and ineffective” system where council’s “plead on bended knee” for centralised and competitive pots of funding.

Alternative funding options for local authorities. The Green Finance Institute announced the first 5 councils signing up to the Local Climate Bonds campaign. Community Municipal Investments are a way for local authorities to raise green finance using crowdfunding-related methods.

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West Yorkshire Mayor calls for greater devolution. Tracy Brabin, Mayor of West Yorkshire, wrote to the Chancellor calling for the upcoming Spending Review to include greater devolution of funding and powers so local governments can help achieve national priorities more effectively, for example through delivering employment and skills training and helping to address climate change.

Tax

Pandora papers and offshore tax havens. The International Consortium of Investigative Journalists leaked the Pandora Papers, “the largest trove of leaked offshore data in history” mapping the exponential growth of offshore tax havens and the true ownership of shell companies. The data reveals how a variety of politicians and wealthy people hide their wealth and avoid tax by using offshore companies. Tax Justice Network’s Alex Cobham collated the global media response.

How should governments respond? Responding to the revelations, Tax Justice UK called for closing tax loopholes for the rich and powerful. This should include a “law creating a public register of who really owns UK property through offshore arrangements'', properly enforcing regulation of professionals who enable abuse, and increasing the funding and power of HMRC to clamp down on evasion. Economist Gary Stevenson spoke to talkRADIO explaining the effect of tax avoidance and evasion on the government’s tax take. Political economist Erasmum Corlin Christensen collected resources outlining the underlying dynamics behind the Pandora Papers and what governments can do in response.

Industrial strategy and work

Artificial Intelligence (AI) strategy. This week the Government released its long-awaited National AI Strategy, a ten-year plan to make the UK a “global AI superpower”. The Institute for the Future of Work’s Anna Thomas welcomed the document, but warned that the Government “must swiftly develop proposals for an overarching, principles-led regime to promote accountability [of AI] in the public interest… The AI Strategy should go hand in hand with an Accountability for Algorithms Act to address the risks and harms of algorithmic systems for work, workers and the workplace.” She discussed this further with Ed Miliband and Geoff Lloyd on their ‘Reasons to be Cheerful’ podcast on the Rise of Robo-Bosses.

AI in the workplace. The podcast explores California’s landmark bill regulating the use of AI in the workplace. It is a response to Amazon’s algorithm-driven rules by requiring warehouses to disclose the quotas and metrics used to track workers. IFOW has researched similar trends in algorithmic management in UK warehouses in its report The Amazonian Era: How algorithmic systems are eroding good work.