Good afternoon from New Economy Brief.

Is ‘de-dollarization’ on the horizon, and what could it mean for the global economy?

The second Trump administration’s erratic economic policies have reignited debates about the future of the US dollar, and whether its role as the international reserve currency – and the enormous power it gives to the US – is under threat.

So, is ‘de-dollarization’ underway? And if so, does it pose a risk to global stability, or could it pave the way for a fairer international economy?

This week’s briefing asks if the dominance of the dollar is really in decline, and what a shifting monetary system might mean for creating a fairer global economy.

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What does it mean to be the global reserve currency? 

The US dollar is central to the workings of the international economy. It’s estimated that dollars are used for almost half of all global trade transactions and a whopping 89% of foreign exchange (buying and selling of currencies). This helps explain why dollars also account for almost 60% of all central banks’ and governments’ foreign exchange reserves – stocks of foreign currencies they hold to ensure countries can keep paying for imports and making debt payments in times of crisis. 

Impacts on the US. Being the issuer of the world’s reserve currency gives the US particular advantages, sometimes termed an ‘exorbitant privilege’. Essentially, demand for dollars lets it run large trade deficits without much risk of its currency dropping in value, while continuing to borrow huge amounts from the rest of the world, cheaply and in its own currency. 

Impacts on the rest of the world. Crucially, the flip side of the privilege the US enjoys from the dollar’s reserve currency status is the financial subordination of developing and emerging economies. Dollar-denominated debts, and the need to pay for essential imports in dollars, leaves many global south countries are vulnerable to exchange rate volatility. Countries also suffer knock-on effects from US monetary policy. If the US Federal Reserve raises interest rates, debt costs rise regardless of a country’s internal economic state, and the value of its currency comes under pressure. 

Meanwhile the need to accumulate dollars limits room for spending on domestic priorities, and contributes to locking countries into extractive export industries. Developing countries spent a record $1.4 trillion on servicing foreign debt in 2023, with severe human costs. In Sri Lanka, spiralling debt costs led the country to default. This left it highly exposed to the ongoing rise in global prices for food and fuel following the US-Israel war on Iran, and led to shortages and rationing.

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Why is the dollar now under threat?

Weaponisation of money and payments. The dollar, and accompanying US-owned international payments system, also give the US a powerful economic weapon. The US exercised this in response to Russia’s invasion of Ukraine in 2022, taking the unprecedented step of freezing the assets of Russia’s Central Bank. Some argued that the move would spark serious efforts from other countries to reduce dollar dependency and so mitigate risks from future US sanctions.

Trust and Trump. Political economists Tobias Pforro, Johannes Petry and Fabian Pape argue, however, that “nothing has been as disorientating to the global role of the dollar as the second Trump administration’s overt attacks on the liberal international economic order”. They argue that tariffs, surging US sovereign debt, and the undermining of economic institutions are threatening the foundation of trust  - crucially, that the US will be the international lender of last resort when crisis hits - that underpins the system. 

Strikingly, even JP Morgan has suggested that increased US political polarization, "jeopardiz[ing] its governance”, is a key risk to the dollar’s status as a reserve currency. It is also possible that some of this is happening on purpose, as influential Trumpworld figures like Stephen Miran and JD Vance have suggested (following Michael Pettis) that reserve currency status is a burden, because a strong dollar harms US exporters.

Currency colonialism. The de-dollarization debate is by no means new. A report from Positive Money describes how the hierarchical international monetary system is a “direct legacy of the colonial era” that reproduces colonial dynamics. Many global south countries have been pursuing strategies to reduce dollar reliance for years. Coordinated efforts through groups such as the BRICS and the ASEAN have become increasingly sophisticated, particularly due to the development of new payment technologies. 

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What are the alternatives? 

As well as heightened politicisation, the rising viability of potential alternatives has contributed to doubts about the dollar’s future being taken increasingly seriously.

Will another currency take the dollar’s place? The euro and China’s renminbi are the two currencies most often posited as potential direct challengers to the dollar. European Central Bank president Christine Lagarde has said there is an opportunity for a “global euro moment”, and the ECB is actively taking steps to make the euro more attractive as a key international currency. China’s Xi Jinping has also expressed ambitions for the renminbi to become a global reserve currency.

Brazilian President Lula championed the idea of a common BRICS currency at the group’s 2023 summit, and the rise of the BRICS states means a shared currency could potentially be a contender– particularly if it were to become the de facto currency for international pricing of oil and gas. However, the deep economic integration required means a shared currency faces major political challenges.

Towards a multipolar monetary system. Perhaps more likely than the wholesale replacement of the dollar is a shift towards a more diverse monetary system. Some have proposed a tokenised unit of account, used for settling international payments. This echoes Keynes’ proposal for an international currency called the ‘bancor’, put forward at Bretton Woods in recognition of the risks and inequities of a single dominant currency. Central Bank Digital Currencies (CBDCs) could also be designed to be ‘interoperable’ between different countries. This would support increased trade in sovereign currencies without the need for a common digital asset, making it politically easier. Project mBridge is one of the most developed examples – a platform enabling cross-border payments using respective countries’ CBDCs. A pilot was developed with the support of the Bank for International Settlements and a commercial launch is expected soon.

Some of these shifts are already appearing in the data. The dollar’s share of foreign reserves has steadily declined over the past two decades, and those of a range of non-traditional reserve currencies have increased. However, even if new tech does turbocharge efforts at de-dollarization, it’s unlikely that dollar hegemony will be toppled quickly. As Adam Tooze recently argued, the dollar’s strength is not solely upheld by other states holding it as foreign exchange reserves. Increasingly, demand for dollars comes from financial markets – private investors buying US assets to reap returns from the profit-driven US economy. The key question, therefore, might be whether Trump will put even that at risk.

Good afternoon from New Economy Brief, and welcome back from the Summer break.

Cafes, pubs, clubs, restaurants and hotels are at the heart of the places we live. But with as many as one in six at risk of closure amid mounting global and national pressures on supply chains and the cost of running a business, the sector is seriously struggling. Early business rates offerings from Andy Burnham show some promise for the sector, and have doubled optimism that the government can benefit hospitality, but going beyond piecemeal interventions will be needed.

There are more than  175,000 UK hospitality businesses, over 99% of which are small and medium-sized enterprises. These businesses are both socially and economically important in all our lives. Research from UKHospitality finds two thirds of people think hospitality plays an important role in their community, and the sector’s economic output was around £63bn in 2025. 

A cost of business crisis. But the sector itself isn’t in a healthy position; four hospitality businesses a day were closing down at the end of 2025 and earlier this year as many as one in six were at risk of closure. In a sector made up of everything from small businesses to global chains, these risks aren’t evenly felt; according to CLES, half of all food and drink hospitality turnover in the North East comes through the 25 most profitable companies.

According to NEF the sector faces major challenges in the form of “higher labour and supply costs, unfair taxation and falling household purchasing power” in recent decades. 

On the first of these, with one in five employees in the sector paid minimum wage, recent increases have had to be accounted for. So too have hikes to employer national insurance contributions alongside a lower threshold at which employers have to pay to start paying them. Hospitality businesses are also twice as likely as others to report business rates as a main concern.

Employees bearing the brunt. Keeping the wage bill low has a human cost. The sector employs over 2.6 million people, around 1 in 14 of all jobs, but pay is low and the conditions can be demanding. Over half of hospitality jobs are categorised as low paid – the worst of any UK sector. Research from the Poverty Alliance in Scotland finds that managing around fluctuating incomes, zero-hours contracts and seasonal work can be complex for individual workers. For example, some felt Universal Credit was too confusing or not worth applying for, leaving them exposed to the volatility in their work.

The new government’s in-tray. Whilst there are reports of a ‘Burnham bounce’ as confidence in a new Prime Minister boosted optimism in the sector, there are still major challenges the government needs to tackle head on. So far, announcements have focused mostly on tax reform – a cut to business rates for pubs, clubs and live music and then a Treasury review into pub and hotel business rates – alongside policies like the £2 bus fare cap aimed at supporting the whole high street.

Demand for hospitality wide support Whilst these interventions have been well received by those benefiting, they limit the types of business that can access support, so those who don’t qualify will still struggle. Restaurants, local shops, gyms and others have called for the support to be extended.

Across the sector there are also calls to go further through the ‘VAT’s the problem’ campaign calling for VAT on hospitality to be cut from 20% to 10%. The campaign argues that the UK is out of step with our European counterparts where hospitality VAT falls as low as 7% in Germany. More than 350,000 have signed a petition supporting the change. 

Over the summer the government’s Great British Summer Savings has cut VAT on kid’s meals and attractions to 5%, but the government has signalled that it is unlikely to support all the petition’s demands.

Elsewhere, the campaign’s recommendations have support from Reform. As part of divisive proposals for wider tax reform, halving hospitality VAT would be matched with savings from  welfare and reinstating the controversial two-child limit. Even aside from the moral question of whether it can be right to fund support for hospitality by plunging some hundreds of thousands of children back into poverty, IPPR has argued that the numbers just ‘don’t add up’. 

Others argue for much broader reform. For smaller, VAT-exempt businesses Alex Chapman, Head of Economic and Environmental Policy at NEF, argues that changes to business rates and VAT aren’t enough, and that we need to consider more radical ideas on property and land tax.

The future of hospitality in an era of heatwaves. There are more storms ahead for the sector after the hottest summer on record. Restaurant suppliers are reporting low yields and destroyed crops after successive heatwaves, and there are fears of growing volatility in food prices. And heatwaves themselves have an uneven impact on hospitality; whilst more traditional holiday destinations in the South West have reported higher visitor numbers, unsafe working temperatures have forced some businesses to close.

Global pressures and local businesses. Beyond the impact of heatwaves in the UK, global pressures on energy will also buffet the sector in the coming months. Hospitality businesses are four times more likely than other businesses to report energy prices as a main concern, and more likely to cut trading as a result. As NEF argues, energy price volatility isn’t new and is only likely to continue, so hospitality businesses will need support to navigate the shocks yet to come.

Meeting the scale of the problem. In the midst of the Covid-19 pandemic, the Conservative government published the first ever Hospitality Strategy five years ago, focusing on recovery and resilience as the pandemic restrictions eased. But since then there has been little dedicated policy agenda for the sector. A more joined-up approach might benefit not only the businesses themselves but also the government’s agenda around high streets and supporting young people into employment. 

The Federation for Small Business has produced a ‘sunshine list’ of priorities to boost tourism, which calls for interventions on everything from VAT to parking to place-making. A more systemic approach including transport, energy costs, the cost of premises and local partnerships is ambitious. But this may be the only way to build the infrastructure in which hospitality businesses can thrive as part of a diverse economy, offering good jobs and benefits for communities too.

Good morning from New Economy Brief. 

1 million. That's how many young people are currently not in education, employment or training (NEET), the highest level since 2013 and the aftermath of the financial crisis. A decade ago, the UK's percentage of NEETs was near the EU average. Last year, only Romania's was higher.

The last government tasked former Secretary of State for Health Alan Milburn with getting to the bottom of this trend. In May this year, he released the interim report of his review into the drivers behind the rise in NEETs, with a further report due later this year setting out recommendations for tackling it.

This is a highly emotive topic, and one of the biggest challenges facing the new government, with plenty of noise and opinion on all sides. At the heart of it are some of the most vulnerable young people in the country: those with Special Educational Needs and Disabilities (SEND), low educational attainment, experience of care, or a mental health condition are all disproportionately likely to be NEET. It's essential we get the reasons behind this rise straight, and ensure these young people get the support they need.

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What's happening?

Not so NEET. Current NEET rates aren't unprecedented over the last 25 years. The periods before and after the financial crash both saw similar or higher rates. What has changed is why young people are out of work. Previously, unemployment was the main reason; now just 39% of NEETs are unemployed, with the remaining 61% "inactive." Poor health is a major factor, with the rate of young people out of work due to poor health more than doubling since 2010. 

The kids will be alright? Being NEET comes at an enormous cost. It can harm both physical and mental health, and carries higher risk of unemployment, low wages, or low-quality work later in life. IPPR research with young people describes the toll on their self-worth, their fears of being left behind, and their delayed independence. On a fiscal level, the Milburn Report puts the cost of these scarring experiences at £125bn a year, from lost economic potential, lost tax revenue and higher welfare spending.

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Why is this happening?

The Labour Market. As Milburn points out, "Saturday jobs" (flexible work in pubs, restaurants, warehouses, retail) have dried up due to wider changes in the economy and employer behaviour. Today, 60% of young NEETs have never had a job, up from 40% in 2005. The jobs that remain come with a brutal, dispiriting application process: vacancies are at a five-year low, leaving entry-level jobs oversubscribed. Many applicants describe never receiving feedback or human contact, with applications sifted by AI. Still, Resolution Foundation analysis suggests the tight job market explains only half the rise in NEETs.

Health and Welfare. The UK has the highest rates of anxiety and depressive disorders among young people in the OECD. But high rates of mental ill health doesn't automatically translate into high NEET rates. The Netherlands has similarly high anxiety rates among young people, but a lower NEET rate. One explanation is that our welfare system doesn't support sick young people into work. Half of those claiming a health or disability benefit aged 16–24, still aren’t in work or education a decade later. Many young people in the system fear that trying work, even temporarily, will lead to their support being permanently cut. Finally, an increasing share of incapacity claimants have also been placed in the "limited capability for work-related activity" group (40% in 2017 versus 81% in 2025), which means many now face no engagement requirements. 

Quick fire myth-busting. This is a complex issue with many different factors playing a role. Local access to public transport, unaffordable housing, the long tail of austerity cuts to youth services, and lingering pandemic disruption all matter. However, there are plenty of misconceptions around this area. The rise in NEETs has nothing to do with benefit generosity. This generation gets less welfare support than previous ones. The IFS found no clear link between rising youth minimum wage and rising NEETs. Employers are exempt from NICs for under-21s, so contribution increases shouldn't affect this group (though a recent Select Committee paper calls for extending that exemption to under-25s). Nor is there evidence this generation lacks basic skills for work. As Milburn put it: "Young people are different from those who came before them. Not worse. Not lazier. Not less intelligent."

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How we solve the NEET crisis

The youth guarantee. The government has invested over £1bn in "trailblazer areas", offering training, apprenticeships and other support. Anyone living in those areas, aged 18–21, unemployed or claiming benefits for 18 months or longer will get six months of paid work through the Jobs Guarantee, while a Youth Guarantee Gateway will give Universal Credit claimants aged 16–24 four weeks of intensive employment support. However, while the Work and Pensions Select Committee calls this "a good offer," it warns eligibility is too tight, and that an 18-month wait risks too much damage before support kicks in.

Greening young jobs. The New Economics Foundation recommends linking the Green Jobs Strategy to youth employment schemes. It also argues for boosting takeup by covering extra costs related to training, for offering more mentoring, and for reviewing how benefits interact with apprenticeships so young people keep more of what they earn.

Preventative state. The Resolution Foundation calls for more early intervention: better mental health provision in schools and colleges, and getting more young people into education, since lower-NEET countries tend to have higher educational participation. They recommend stronger enforcement to keep 16- and 17-year-olds in school or training, and better vocational pathways.

We're still waiting on Milburn's recommendations, due in Autumn 2026. He's already signalled a shift away from "supply-side" fixes and toward structural drivers like the labour market. The proposal announced on Tuesday to align school curriculums with local economic needs, firmly focused on equipping students with more employable skills, won’t address the wider issues. It does at least at least avoid the kind of fiscally-driven cuts that failed under the Starmer government, but will do little to help the current crop of NEETs, focusing instead on “the next generation”. If the government doesn’t show real ambition to tackle the challenges facing young people today, it risks presiding over a lost generation.

Good afternoon from New Economy Brief.

As schools break up for the summer this week, many families will be heading abroad for summer holidays. Meanwhile, Andy Burnham has taken office as Prime Minister and put a pledge to radically rebalance the UK’s deeply London-centric economy at the centre of his offer to the country. 

For this week’s New Economy Brief, we take a deep dive into the challenges facing Britain’s seaside towns and villages, and ask whether revitalising domestic tourism is a route to restoring some of Britain’s most deprived areas.

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A short history of Britain’s coastal economies 

A major 2019 House of Lords report on the future of seaside towns detailed the state of former holiday hotspots. It showed that though each area is different, many of these towns share complex challenges produced by the decline of core industries over several decades, that has been compounded by underinvestment.

Many areas were developed in the late 19th century with the growth of domestic tourism, which fuelled strong hospitality and tourism industries that diminished with the rise of cheap overseas holidays since the 1970s. Other traditional industries such as ports, shipbuilding and fishing have also declined. Relative geographical isolation and lack of funding for transport and digital connectivity has made it harder for economies to diversify, and many areas are now dominated by low wage, seasonal, and precarious work. 

These issues have been compounded by a severe housing crisis. Ballooning numbers of second homes and short-term lets have pushed up rents, whilst many former hotels and bed and breakfasts have been converted into poor-quality Houses in Multiple Occupation (HMOs). The Lords concluded that the proliferation of these substandard HMOs, which often house vulnerable tenants, is one of the most urgent challenges seaside communities face. 

The levels of deprivation are devastating. Home to around 15% of the population of England and Wales, nine out of 10 of England’s most deprived neighbourhoods are in seaside towns and villages, and levels of deprivation are similarly high in Welsh coastal towns. Health outcomes are some of the worst in the country, as are numbers of deaths from avoidable causes.  

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Is revitalising domestic tourism the answer?

A key question is whether strategies should focus on revitalising tourism, or diversifying local economies. For some, efforts to bring back the domestic seaside holiday look like a no-brainer – it would both cut aviation emissions and boost coastal economies. 

Analysis from the New Economics Foundation (NEF) found that after a brief post-pandemic revival, a 21% drop in spending on domestic holidays from 2022 to 2024 meant spending in coastal regions fell almost a third over the same period. 

Further NEF analysis found that domestic tourism spending kept falling throughout 2025, with coastal areas suffering while spending in cities increased. NEF’s Alex Chapman argues that this doesn’t reflect changing preferences, but “years of government neglect” of the industry. He cites the tax system favouring air travel over hospitality and leisure, as well as rising ground transport costs and a lack of investment in domestic destinations. According to NEF’s estimates, taxing ‘ultra-frequent flyers’ more fairly could discourage overseas travel while bringing in £6 billion in revenues that could be used to make UK holidaying cheaper.

However, though the climate crisis provides a clear rationale for boosting domestic tourism, it poses a whole other set of challenges. Coastal areas are particularly exposed to climate change, and many areas are already suffering catastrophic impacts from coastal erosion. As sea levels rise and flood defences crumble, options under consideration for classic holiday destinations like Mablethorpe or Skegness include a ‘managed retreat’ from the current coastline. 

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Reaching breaking point. 

Cambridge University’s Stefania Fiorentino instead points to the need to go beyond tourism and put what communities need at the fore. She argues that attempts at tourism-based regeneration are too often shallow – according to Fiorentino, what’s needed is “coordinated action at national, regional and local levels, alongside tailored measures that rebuild institutional trust, restore basic services and meet everyday needs.”

This sentiment echoes previous calls for greater community ownership and empowerment. Back in 2016, NEF argued for a ‘Blue New Deal’ for coastal communities, with putting local people in control a key pillar of any programme to guard against communities being priced out and not seeing the benefits of investment. Similarly, CLES argued that community wealth building should be at the heart of revitalisation efforts so that “income is recirculated, communities are put first and people are provided with opportunity, dignity and well-being.”

A decade on, it is striking how little progress has been made. A 2023 follow-up on the Lords’ report concluded that coastal communities continue to experience a “persistent sense of disconnect” in the face of little progress – a disconnect that is now playing out electorally. Though Labour won 63 of 105 ‘Sea Wall’ constituencies in 2024, support for Reform is high. The far-right party won three of its five seats in coastal constituencies, and polls suggest it could win 76 Sea Wall seats at the next election. 

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Can Burnham turn the tide? 

Some changes under Labour have already been substantial. Reforms to the Treasury’s Green Book to rebalance spending in favour of places that need it most have been celebrated as a “game-changer” by MPs representing coastal constituencies. But Labour’s flagship programme of community-driven investment, Pride in Place, still misses out many coastal towns in dire need. 

What is clear is that a step change is needed. Boosting domestic tourism may help, but it’s clear that it won’t be enough to achieve the locally-rooted, diverse economies that areas need to thrive in the long term. And with devolution at the centre of the new Prime Minister’s policy offer, a key question will be how an agenda so often framed in terms of a ‘North-South divide’ can deliver for coastal areas and tackle the rise of the far right.

Good morning from New Economy Brief.

It's World Cup Final week. Maybe you’re mourning last night’s England defeat, or still worrying how you'll fill your time after Sunday's final. Maybe you're looking forward to catching up on some sleep after staying up until 5am to watch Austria v Jordan. Maybe you're hoping your favourite weekly economics newsletter will just leave football well alone.

No such luck, New Economy Brief is here to pick apart the world's biggest sporting event. And let's be clear on just how massive this year's competition is. 48 teams, three countries, 16 stadiums, 104 matches, 39 days. Over this tournament cycle (the four years leading up to a tournament), FIFA is predicting it'll make $13bn in revenue, compared to "just" $5.24bn from the 2024 Paris Olympics. More than a billion people are likely to tune into the final on Sunday, and 4.6m fans have attended matches so far. 

This week, we take a dive into the numbers behind the sporting colossus. And, leaving the competition to one side, ask who are World Cup’s economic winners and losers?

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World Cup-onomics

The Costs. While Qatar spent an eye-watering $220bn hosting the 2022 tournament (the most expensive sporting event in history), this year's World Cup will set the US, Canada and Mexico back a much more reasonable $13.9bn. Three main costs make up this number. First, hosts must provide at least 12 stadiums, each capable of hosting 40,000 fans. For comparison, England has just 10 such stadiums. Second, general infrastructure for tourists, transport, accommodation, and so on. Third, the costs of actually running the event, including housing and transporting players and their entourages.

The benefits. Helpfully, FIFA puts together a socio-economic report which estimates the World Cup will contribute $41bn to global GDP, with the US alone in line for a $17bn boost through spending at hotels, restaurants, bars and shops. FIFA also expects more than 800,000 extra jobs created globally. In the UK, pubs are praying England's run continues, with the extra revenue propping up an ailing hospitality sector.

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The World Cup losers

Host nations. Host cities invest a huge amount in making the tournament happen. However, despite the impressive headline estimates, research from American academic Victor Matheson questions whether hosts actually see these benefits. He argues FIFA's estimates don't account for the "crowding out" effect (people who'd otherwise have visited but stay away to avoid the football crowds) and understate how much would have been spent on hospitality anyway. The data backs this up: a Canadian payments company found restaurant and bar spending in Toronto only marginally higher than last year once you account for inflation.

Workers. While some local businesses, particularly those near stadiums, can expect to benefit, workers won't necessarily share in the windfall. Bosses are unlikely to raise wages during the World Cup, any benefits will probably be temporary, and minimum-wage workers in the US report that visiting fans tip less generously than locals normally would. It's also always worth remembering the enormous exploitation of migrant workers behind the 2022 Qatar World Cup, with huge numbers injured or killed during stadium construction.

Taxpayers. Ultimately, the cost of hosting a World Cup lands on the public purse. Stadiums, transport, extra security – these largely come from tax receipts, and the financial risk sits with the host country, not FIFA. And with ticket prices reaching more than $10,000, many local residents who paid to put on the tournament will find themselves excluded from proceedings. One stark example: Brazil spent roughly $11.6bn in 2014 on stadiums, transport and airport upgrades, but as it raced to meet the deadline, promised mass transit improvements were sidelined in favour of finishing stadiums. Brazil was left with stadiums of limited long-term value, from funds that could have been better spent elsewhere, and little wider infrastructure improvement. Unsurprisingly, Brazilians took to the streets in the hundreds of thousands to protest the World Cup-induced austerity imposed on education and healthcare budgets.

The environment. The World Cup always takes an environmental toll, but 2026 is on track to be the "most polluting ever", with emissions nearly twice as high as usual around 9m tons of CO2e. That's partly down to the expansion to 48 teams, and partly the spread across Canada, Mexico and the US, with few alternatives to flying between venues.

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The winners

It's coming home (if your home is Switzerland). There's one clear economic winner: FIFA. The 2026 cycle is expected to bring in $13bn, including $3.9bn from broadcasting rights, $3bn from ticketing and hospitality and $2.8bn from sponsorships, all tax-free thanks to longstanding exemptions. FIFA claims that as a non-profit it reinvests much of this into the sport, but, but its balance sheet shows an ever-expanding pot of reserves. Meanwhile, CEO Gianni Infantino's annual bonus increased from $2m to $3m last year for total pay of $6m.

Also Cabo Verde. Which is set to enjoy a tourism spike after a mega world cup run. So while the expanded tournament has been highly controversial (as have FIFA’s plans to explore an even bigger 64-team format in 2030), it does provide a platform for smaller countries to perform a bit of David-and-Goliath magic that captures the world’s attention.

The policy bit. That doesn't mean we can't make it work a bit better. Matheson suggests the cost, limited benefit, and social and environmental downsides can be mitigated. He argues the World Cup should focus on countries with existing infrastructure, keeping financial outlays down. Further, while this year's continent-spanning format may be a step too far, the move towards multi-country hosting may help spread risk for taxpayers and bring in smaller countries. Finally, the Overseas Development Institute points to the ‘elitism’ reinforced by the current flows in World Cup revenues - a more equitable distribution would help host nations with costs and avoid them bearing all the risks.

And for all its flaws, the World Cup has still brought joy to fans around the world (you didn't think we'd be a downer for the whole newsletter, did you?) It is a near-unique moment of global connection, bringing together billions of people. It brings pride, excitement and community to host countries, and a sense of unity that runs against the grain of current political and social divisions. Ultimately, it makes people happy. As Professor Michael Edwards puts it, it could be "a valuable shared experience, without being a successful economic-development strategy." For all the claims of football being about the money, in the end it might really be about the football. 

Good morning from New Economy Brief.

With Andy Burnham expected to take over as Prime Minister in the coming weeks, attention is turning to what his economic agenda might mean in practice. Much of the discussion has centred on "Manchesterism": an approach that argues the government should move beyond regulating markets and towards directly owning the essential services that underpin everyday life and reducing their cost.

Thames Water could be the first real test of that agenda. Its future is still uncertain, and ministers may soon have to decide whether to keep searching for another private-sector rescue, or instead bring England's largest water company under public control.

Critics argue that public ownership is unaffordable. Supporters counter that Britain's existing model imposes enormous costs on households, the public finances and economic growth. This week we explore the case for incremental public ownership  – and how a government committed to fiscal discipline could still expand public control of essential infrastructure.

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The first test of Manchesterism in action?

Manchesterism begins from a simple proposition: ownership and control of essential services is a key determinant for the cost of living. Rather than relying only on markets coordinated by regulators, or redistribution after the event, it argues for a more active "Productive State" that owns, builds and coordinates strategic assets.

As Mainstream’s The Productive State: A Framework for Manchesterism paper argues, government should intervene "by investing public money into public assets for public provision of the essentials required for a dignified life." The priorities are sectors in which private markets have consistently failed: where monopoly infrastructure encourages rent extraction, where prices have macroeconomic importance, and where private capital systematically underinvests.

The obvious question is how that translates into practice. Thames Water may provide the answer.

Thames Water: a brief history of privatisation and extraction. With the company's finances still precarious, ministers may soon have the opportunity to invoke the Special Administration Regime. Unlike wholesale nationalisation, Special Administration already exists in legislation to ensure continuity of essential services where licensed utilities become insolvent or can’t fulfil their statutory obligations. 

Few companies better illustrate the extractive model critics associate with Britain's privatised utilities. Since privatisation in 1989, English water companies have accumulated more than £80 billion of debt while paying out over £85 billion in dividends. Thames Water alone distributed at least £7.2 billion to shareholders while accumulating almost £20 billion of debt.

The company has also failed to invest enough to maintain the water system. The consequences have become increasingly visible: illegal sewage discharges, record leakage, deteriorating infrastructure and repeated environmental failures. Meanwhile, almost 28% of the average English water bill now goes towards debt servicing and shareholder returns, compared with around 10% under publicly owned Scottish Water.

The 2025 Cunliffe Review acknowledged many of the sector's regulatory failures, recommending a new single regulator and stronger consumer protections. But as New Economy Brief explained last year, critics - including 24 campaign groups, trade unions and community organisations - argue it largely sidestepped the structural problem. It failed to address the financial engineering that loaded companies with debt, and continued to assume that better regulation alone could solve problems rooted in ownership. It even recommended waiving environmental fines in some circumstances.

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Incremental nationalisation within fiscal constraints.

Opponents of public ownership often claim bringing water companies into public ownership would cost taxpayers around £100 billion. But that figure rests on highly contestable assumptions – and was based on work commissioned by water industry interests. As our previous briefing argued, legal analyses suggest compensation based on "appropriate value" could be far lower where there have been clear breaches of the public interest.

The greater obstacle is the fiscal framework. Concern about adverse bond market reactions has encouraged the incoming government to retain the current fiscal rules, making large-scale public ownership of essentials harder in the short term.

Charting a path through PSNFL and the bond market. Under current fiscal rules, Public Sector Net Financial Liabilities (PSNFL) must fall, and day-to-day spending must be financed from tax revenues, by 2029/30. Some – like IPPR and the IFS – argue that meeting these rules will create a "position of strength" from which the government could reform the fiscal framework in the next Parliament.

There is, however, some flexibility within PSNFL to enable a more incremental approach to public ownership of essentials within this Parliament. Because it recognises financial assets as well as liabilities, the government can borrow to acquire minority stakes in private companies without worsening the headline fiscal measure, provided the ONS still classifies those companies as private. This creates a route towards gradual public ownership through strategic investment rather than wholesale acquisition.

Tweaks to the fiscal rules? Common Wealth's Chris Hayes explains how Burnham can do public ownership without scaring the bond markets: the government should use “cheap public finance to build up ownership stakes over time…these stakes should sit within a public corporation, not within Whitehall. Designated public financial institutions like the National Wealth Fund can be enlisted to support the process.” As set out above, this would let the government take minority stakes in water companies without compromising the PSNFL rule.  

Accelerating the Manchesterism agenda would likely require further reforms. One option would be to exempt commercially operating public corporations—such as the National Wealth Fund, Great British Energy and others—from the investment rule, as many European countries already do, allowing them to borrow independently of the state balance sheet.

As Mainstream’s The Productive State argues: "The vehicle for change is the public corporation. Operationally independent, commercially mandated, and borrowing in its own name, public corporations are able to deliver patient investment at lower cost, price fairly, and can eliminate the privatisation premium…without sovereign borrowing implications." Former Transport Secretary and Burnham ally Louise Haigh has argued for this approach in her Tribune essay, while insurers and institutional investors have made comparable cases for a National Housing Bank.

A further step would be moving from PSNFL to Public Sector Net Worth (PSNW), allowing productive physical assets as well as financial ones to be classed as fiscally neutral when calculating national debt. (Reported Burnham advisers Lord Jim O’Neill, Andy Haldane and Richard Hughes have all been advocates of PSNW in recent years.) Such reforms could come later in the Parliament, or after a renewed electoral mandate, or after achieving a predefined ‘position of strength’ and credibility. The answer may determine how quickly a Burnham government can put its commitment to greater public control of essential services into practice.

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Threading the needle.

Water bills aren't the only cause of the cost of living crisis. But water companies have become symbols of something larger: an economic model in which households face rising bills while monopoly providers accumulate debt, extract dividends and underinvest in essential infrastructure, adding to a growing sense of impotence and distrust of state capacity.

That diagnosis increasingly cuts across Labour's intellectual traditions. Whether from the Tribune Group, Labour Growth Group, Mainstream or ThinkLabour, there is growing agreement that Britain's model of privatised essentials creates both an economic and a political problem.

Combining ‘cost of living populism’ with fiscal sustainability. Recent Persuasion UK polling suggests there is substantial electoral potential in a coherent policy platform centred on a ‘cost of living populism’, and particularly on making essentials like water, food, rent, and energy cheaper.  Steve Akehurst explained that “the thread here is control: short-term relief on essentials…paired with longer-term control over them.”

Voters want to see politicians taking on sources of economic unfairness and showing they are prepared to intervene on behalf of ordinary households. That does not necessarily require sweeping nationalisation overnight. It needs visible examples that government will act where markets have failed.

Thames Water therefore represents something much larger than one troubled utility. It will test whether public ownership of essentials can help the government out of a political and economic morass, while remaining within fiscal constraints. If Manchesterism is to become more than an intellectual framework, Thames Water is likely to be the new government’s proof of concept.

Good afternoon from New Economy Brief.

In his first speech on economic policy since he emerged as the likely next Prime Minister, outgoing Greater Manchester Mayor Andy Burnham put boosting devolution and tackling regional inequality at the heart of his vision for reordering the UK economy. 

But while the rhetorical emphasis and radicalism was new, much of the diagnosis was not. Successive governments have set out plans to boost investment in the communities and parts of the country that need it most. In this week’s New Economy Brief, we dive into Pride in Place, the outgoing Starmer government’s contribution to tackling this most deep-rooted of issues.

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A long-term investment in communities.

‍In September 2025 the government published the strategy for its new Pride in Place Programme, widely seen as the successor to the previous government’s Levelling Up strategy. With an initial budget of £5bn (increased this year to £5.8bn), the programme will give hundreds of UK areas up to £20 million of funding over the next 10 years. The government says this has three core objectives: to build stronger communities, create thriving places and empower people to take back control of their communities. 

Transparent selection. Neighbourhoods were selected for the programme using a published, quantitative methodology primarily based on deprivation (using the government’s Index of Multiple Deprivation) and community need (using the Community Needs Index), rather than through a competitive bidding process. This aims to direct funds towards the country’s most socially and economically disadvantaged areas. This is different from the last government’s Towns Fund, which involved competitive bidding and opaque decision-making by civil servants and ministers – a selection process which the Housing, Communities and Local Government Committee concluded was “not impartial” in a highly critical inquiry in 2020. Analysis of the Towns Fund found that Conservative-held areas, particularly marginals, were much likelier to be selected. 

Putting communities in the driving seat. Pride in Place stems from the idea that the decline many places have suffered as a result of de-industrialisation and austerity is corrosive to UK society, responsible for dividing communities and reducing trust in public institutions. And behind all this, according to the minister in charge of the programme, Secretary of State for Housing, Communities and Local Government Steve Reed, is “a style of government which deprived people of control”. So to reverse this trend, the Pride in Place strategy centres local residents' control over what happens where they live. 

For example, how local areas spend the funding they receive will be decided by Neighbourhood Boards, made up of residents, businesses and others in partnership with local authorities. This is seen as a rebuttal to the more top-down approach of the Johnson Government’s Levelling Up funding which saw £2.5bn unspent in the four years after its launch. Community-powered neighbourhood governance campaigners We’re Right Here say this design “recognises that the power to shape thriving neighbourhoods lies with the people who live there”.

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Early optimism from local areas making the cut.

‍This approach is winning plaudits from recipients, with the Chair of one newly formed Neighbourhood Board reflecting that the fund is a ‘once in a generation chance to make a huge difference’ to their area. Initial consultations suggest that there is strong local appetite for a partnership model, rather than a one-size-fits-all approach imposed by central government. This builds on evidence from the Blair-era New Deal for Communities that long-term local investment can narrow the gap in deprivation and that felt experiences – like pride and belonging – are an important and underused source of social cohesion.

But millions will be left out. Analysis from JRF suggests that there are up to 3.5m people, across 430 neighbourhoods of high deprivation and community need – the conditions for funding allocations – who are not due to receive any Pride in Place funding. These gaps are because only one neighbourhood per constituency can receive funding. This approach leaves a risk of cliff-edges between neighbouring communities with and without funding, as there is no requirement to engage residents in adjacent areas even if they are also experiencing high levels of deprivation.

A drop in the ocean. This patchwork has led some to question whether the Pride in Place strategy can deliver truly transformative change. From a Scottish perspective, JRF argues that the level of funding is “a drop in the ocean compared to the scale of need”. This is partly due to those missed neighbourhoods, and partly to the lack of coordination across national, devolved and local governments. There are some fears this is political, with the Bennett School of Public Policy noting ‘the government might be going big on community funding to avoid other, more expensive, options’, including more traditional infrastructure investment. 

From Neighbourhood Boards to genuine power. Back to the fund itself, there is potential for more meaningful power transfer within the design of the fund. Donna Hall and Andrew Laird have made the case that “involving just funded community organisations in a Neighbourhood Board isn’t a meaningful shift of power to people.” The long-term nature of Pride In Place funding means it has the potential to genuinely give power away through approaches like community-led delivery and capacity building, but this needs to be embedded from the beginning.

‍Meaningfully backing community wealth building. Elsewhere, organisations focused on local empowerment have suggested that the fund needs to embed support for more transformative approaches. The Centre for Local Economies (CLES) argues for a focus on community wealth-building, while Shared Future CIC calls for a shift to participatory budgeting. Although the approved ways to spend the funding include community ownership, community-led housing and other wealth-building activities, CLES argue these simply won’t happen without strategic support from central government.

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A place-based rebuttal to the far-right.

Zooming out to the national political landscape, commentators have seen all this as a pillar of Labour’s response to Reform. In announcing the fund Secretary of State for Housing, Communities and Local Government Steve Reed positioned the strategy as “our alternative to the forces trying to pull us apart”, and Keir Starmer has said the fund supports “true patriots”. But there are fears the strategy could fail to deliver on community cohesion before it's even begun, smothered by local problems like chronically underfunded councils and the major reforms to local government that are currently underway.

Burnham’s Manchesterism agenda could shape the fund’s future. In setting out his vision for the UK this week, Andy Burnham has centred the role of local and devolved power in driving growth. If he succeeds in becoming Prime Minister, he has made commitments to “the biggest rebalancing of power our country has seen”, arguing that “growth cannot be ordered from the top down.” On paper at least, his view of ‘Manchesterism’ – in his own words a rejection of “the old trickle down model” – suggests he may want to go a lot further in the direction set by the Pride in Place programme.

Good morning from New Economy Brief.

Ten years, six (soon to be seven) prime ministers, one global pandemic, war in Europe, and a new monarch. A lot has changed since the UK voted to leave the EU, and yet the ongoing arguments over the UK-EU relationship show no sign of fading.

A fractious US relationship under a second Trump term is forcing a reckoning with our European neighbours, while a change in the Labour leadership threatens to drag the question back into the spotlight. A decade on from the seismic result, this week we ask: did we take back control? Or was Project Fear right all along?

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Britain's Economy: Unleashed

It's been a tough decade. Unpicking Brexit's economic impact is not straightforward. Political upheaval, the continuing effects of austerity, a pandemic, Liz Truss's "fiscal event," and an ongoing conflict-driven energy crisis all make it hard to pin changes in the national economy on any single factor. And through it all, the UK has just about kept growing, around 13% since 2016.

Fortunately, economists love a challenge. It's clear that George Osbourne's prediction of an immediate recession was off the mark. However, long-term forecasts did seem correct that, long-term, the economy would suffer. The OBR has estimated that lost growth caused by Brexit – about 4% – works out at roughly £100bn a year, or nearly £1tr over the last decade. New research, comparing the UK economy to 33 comparable countries, thinks this could even have been optimistic. They put the hit to UK GDP at a much more significant 6–8% below where it might have been by early 2025.

Goods, not so good. Goods trade is where the damage is clearest. UK goods exports to the EU stood at £184bn in 2025, down 14% from their 2019 level of £215bn. Exclusion from the single market has also locked British firms out of European supply chains. New trade deals with Australia, New Zealand, and India have done little to fill the gap: their combined benefit is roughly a tenth of what's been lost from reduced EU trade, even according to the government’s most optimistic impact assessments. Further, NIESR estimates business investment is 12.4% lower in 2023 than under a Remain scenario. 

It's not all doom and gloom. UK services have performed better. In 2025, exports of services to the EU were 28% above their pre-Brexit peak in 2019, while exports to non-EU countries were 26% higher. A Remainer-predicted exodus from the City of London never happened. But regulated sectors like financial and legal services still face meaningful barriers under the UK-EU Trade and Cooperation Agreement, so activity may still be below a Remain scenario.

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Living standards

Every little doesn't help. Similarly, it can be hard to unpick Brexit's impact at a micro level, alongside soaring energy prices and stagnant incomes. However, research finds that UK prices rose 7% more than comparable economies between 2016 and 2024, driven by sterling's devaluation and reduced trade. The first of these alone has cost households around £870 a year. Meanwhile, Professor Jonathan Portes argues losing access to a flexible EU labour supply has pushed up prices, rather than wages, in hospitality, agriculture, logistics, and food processing. Real wages are expected to be 1.8% lower by the end of the decade than under a Remain scenario, equivalent to around £470 per worker annually. All taken together, and combined with the other economic headwinds Britain is facing, it's expected that by the end of the decade, average living standards in Britain and Poland will have converged. 

Levelling Down. Meanwhile, a smaller economy also means lower tax revenues, which limits the fiscal room for investing in public services or reducing taxes. Far from matching regional and local funding from the EU, successive UK schemes have offered substantially less. EU investment worth roughly £1.7bn a year in today's money has been replaced by just £687m a year. 

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...and the rest

Migration. Rather than the drop in migration promised by many of its advocates, Brexit has precipitated a sharp rise. EU arrivals collapsed from over half a million in 2016 to just 76,000 in 2025 as political uncertainty rose and UK jobs became less attractive. However, overall net migration hit an all-time high of 944,000 in the year ending March 2023, with increases driven by the Skilled Worker visa and international student recruitment, mostly from non-EU countries. While the net migration figure has since fallen sharply, to less than 200,000 in 2025, it certainly has not been put to bed as a political issue.  

The Environment. Stringent EU regulation provided strong environmental protections. Unfortunately, the Office for Environmental Protection, intended to replace EU oversight, found that many regulations carried across from European Law aren't being implemented or enforced. As just one example, water cleanliness has deteriorated markedly, with British swimming waters now five times more likely to be polluted than in the EU. 

Regulation. The promised competitive dividend from regulatory freedom hasn't arrived, and the boon that some economists are promising from regulatory divergence (read: deregulation) on technologies like AI could come with significant social and economic costs of its own. HMRC estimates the number of customs forms businesses must complete has quadrupled, costing an extra £7.5bn a year – a burden that falls especially hard on smaller firms. And the sovereignty gains have been limited: nearly 7,000 EU-derived laws remain on the UK statute book.

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What now?

What the public thinks. Over half of Brits (51%) consider Brexit 'more of a failure', while only 13% would call it a success. In a recent YouGov poll from, 60% would now vote Remain, while 56% actively support rejoining, and 51% want another referendum within five years. However, it's worth noting 74% of Reform voters think it could have been a success, if politicians hadn’t messed it up. 

Labour's plan? Despite lots of warm words, so far the Starmer government has chosen a cautious 'reset' with the EU over anything more full-throated. Their reforms have focussed mainly on food and energy, adding an estimated 0.3%–0.7% to GDP. A further 'reset' summit on 22nd July (now delayed in light of Starmer’s resignation) could implement a new youth mobility scheme, along with further alignment on veterinary regulation. However, the Resolution Foundation is clear that bigger gains would require political engagement with the single market, customs union and freedom of movement. Frontier Economics estimates that rejoining the customs union alone could add over 2% to GDP in the long run. 

Burnham & Brexit. Despite Wes Streeting’s early attempts to bring Brexit back into public debate by declaring his intention to rejoin the EU, Makerfield's new MP has kept his own counsel on the issue. Historically a strong voice for Remain, he’s maintained that he would like to see the UK rejoin the EU in his lifetime, but is currently not keen to "re-run" Brexit arguments. However, as economic pressures keep building and the race to re-arm Europe continues apace, Burnham may not have the luxury of sitting on the fence indefinitely should he become Prime Minister. Already, campaign groups are lobbying, with research suggesting the UK could recover up to 90% of Brexit’s economic hit to UK GDP by rejoining. 

A decade years well spent? Ten years on, the Brexit ledger may not be as catastrophic as its fiercest opponents predicted, but nonetheless looks pretty unremittingly negative – and falls far short of the ‘sunlit uplands’ promised by its champions. The economic costs are real and accumulating. But as the Institute for Government points out, many of the failures that have been left to fester didn't start with Brexit: social care, a housing shortage, a crumbling healthcare system. Brexit cannot carry the can for all of our political and economic ills, though it may have exacerbated them. This decade has undoubtedly been tough. In the next, we’ll find out if the UK can find a lasting settlement to the European question that works both economically and politically.

Good afternoon from New Economy Brief.

Renters have been squeezed by high rents for decades, and with 45% of private tenants now facing unaffordable housing costs it’s little surprise that rent controls are moving up the political agenda. The government’s new Renters’ Rights Act marks a major advance for renters’ security – including the long-awaited abolition of no-fault evictions – but it leaves the question of affordability largely untouched.

In the long run, building more new homes can ease pressure on rents. But this takes time, and the UK’s recent building record is hardly encouraging (as we explored recently). With the cost-of-living crisis persisting and housing still many people’s largest expense, interest in ways to make renting more affordable has intensified. Recent reports from IPPR, NEF and JRF are the latest signs of that growing momentum.

This week we examine the case for rent controls: their benefits, their limitations, and how they could look in the UK in practice.
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Why rent controls are back on the agenda

Exorbitant rents have been well documented in recent years, with particularly eye-watering hikes during the cost of living crisis. But the private rental sector (PRS) has been like this for decades. Since rents were deregulated in the late 1980s, they have risen steadily, and by 2024/25 private renters spent an average of 34% of household income on rent – versus just over 10% in the early 1980s. (30% is considered the threshold for unaffordability.)

Widespread unaffordability. The PRS has doubled since the late 1990s and now houses one in five households. IPPR finds 2.4 million of these – almost half – now face unaffordable housing costs – and projects this will keep rising if nothing is done. The pressure is most acute for low-income renters, but it’s felt right up the income scale: over a fifth of those in the top 20% of incomes report difficulty covering their rent. 

Cuts to social security support. Local Housing Allowance (LHA) is no longer doing its job for low-income tenants. It is meant to cover the cheapest 30% of rents in a local area, but periodic freezes even as rents soar have eroded its value. Fewer than 3% of homes would be affordable to move into today for people relying on housing benefit. There is broad consensus that at the very least LHA should be unfrozen and annually uprated to cover the bottom 30% of rents, if not more.      

But unaffordable rent does harm further up the income distribution than the benefit system is designed to reach. And that means looking beyond the social security system for a solution.

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The case for rent controls

Rent controls – capping rents so they can’t increase faster than inflation or wage growth – could bring meaningful, relatively quick relief for tenants. They could save renters hundreds of pounds within a few years, as well as helping control spending on housing benefits. 

Controls can also help rectify the structural power imbalance between landlords and tenants, particularly in tight rental markets. They give the latter greater certainty about how often and how much their rent can change, and enable rents to fall relative to incomes over time. 

And combined with other interventions, they can contribute to reshaping the housing market in more fundamental ways, with homes gradually moving from private landlords into social or community ownership, or to homeowners.

Public support is strong, too. Polling by More in Common from early 2026 finds 67% of the public backs stopping rents from rising faster than wages, with majority support across most voting segments. Even 44% of landlords support the idea.

International comparisons. Rent controls are mainstream policy across Europe, found in Germany, France, Spain, Ireland, Scotland, the Netherlands and many others. NEF thinks Ireland and Spain are among the most successful examples. In Ireland, Rent Pressure Zones, where annual increases are capped in areas of concern, have slowed rent increases meaningfully. Controls also reduced rents in Catalonia, without reducing the supply of rental properties. The most comprehensive overview of international studies on rent controls found they reduced rents in most cases. 

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Criticisms and mitigations 

However, rent controls are hotly contested. The central argument against them is that their benefits are outweighed by the harm they can cause in the wider housing system. These can include reducing rental supply and housebuilding, as well as pushing up rents in non-controlled properties. They can also discourage people from moving (e.g. for work), and lead to housing being poorly allocated or deteriorating through neglect.

A landlord sell-off? By reducing profits, rent controls could also cause landlords to sell en masse or convert properties to short lets – harming lower-income tenants who can’t access homeownership or social housing. 

Proponents of rent controls say careful design can mitigate this. JRF's new analysis argues that landlord profitability can be protected by pairing rent controls with tax reforms that redistribute more of the tax burden towards the most profitable landlords. NEF says conversion of homes to short-lets can be addressed with stronger regulation and tax disincentives, making more homes available for residential use.

A smaller PRS. Some proponents of controls argue that shrinking the PRS is actually a good thing, too – if it’s done right.

Impact on new supply? IPPR argues that evidence is inconclusive that rent controls reduce construction of new homes, but that risks can be managed with wider support for housebuilding, which is crucial to improving affordability in the longer term. These levers include planning reform, creating more social housing, and carefully designed, time-limited exemptions from rent controls for some new builds. 

Safeguarding quality. There is some evidence that rent-controlled homes get less maintenance. Stronger regulation can mitigate this, and the extension of the Decent Homes Standards to the PRS as part of the new Renters’ Rights Act is a big step forward. Tying rent increases to landlords making improvements can also help.  

Mobility and misallocation. Where rent caps apply only to sitting tenants but reset when a property changes hands, tenants are discouraged from moving out. This can lock up larger homes with fewer occupants, making it harder for newcomers to find homes and to relocate for work. Capping rent increases both within and between tenancies, as supporters advocate, would narrow this gap and reduce incentives to stay in an unsuitable home. 

The cost of inaction. It’s important to take concerns about the potential downsides of rent controls seriously, and any system would need careful design to deal with them. But proponents argue that the risks of inaction – entrenched unaffordability, rising poverty, a generation locked out of secure housing and significant structural economic costs – are greater than the risks of a well-designed system, making it a worthwhile trade-off.

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What could rent controls look like in the UK?

So how could rent controls bring down rents in England without creating the problems critics foresee? IPPR, NEF and JRF offer different models but share a common approach: limiting rent increases and applying controls both within and between tenancies. 

IPPR proposes a “double lock”, capping annual rent increases at the lower of inflation or earnings growth. It notes that if this had been in place since 2020, rents would be at least 7% lower by 2030 – saving the average renter £850 a year across England and over £1,700 in London.

NEF advocates immediately capping annual rent increases at 2% or inflation, whichever is lower, before moving to a new “fair rents” system.

JRF has modelled a system linking increases to inflation (alongside the tax reforms mentioned above), which would leave renting households around £1,200 a year better off within six years.

All three organisations argue for rent controls as part of a wider package of reforms. This includes permanently relinking Local Housing Allowance to local rents; JRF argues rent controls would pay for annual uprating and reduce the housing benefit bill. 

The package also includes improved collection of rental data and enforcement (IPPR and NEF), and exemptions from rent controls for substantial quality improvements and some new-build homes (IPPR). Among the other proposals are stronger regulation of short-lets (IPPR and NEF) and transferring homes into owner occupation, social housing or community ownership where landlords choose to sell (NEF). All three support measures to increase housing supply, particularly of social homes. 

The (un)affordability question isn’t going away 

The Renters' Rights Act has made renters more secure, while doing little to address affordability. Ministers argue that building more homes will ease pressure on rents over time. That may be true, but new homes take years to deliver, and the government's housebuilding programme is falling short of its ambitions. For renters struggling today, future supply is not enough. 

Rent controls are not without risks. But a growing body of evidence suggests that, if well designed, they can improve affordability while limiting many of the downsides critics fear. Inaction carries risks of its own, too: for renters, the economy, and society more broadly. As long as rents remain unaffordable, the debate over controls is unlikely to go away – nor should it.

Good afternoon from New Economy Brief.

The government has put housing at the heart of its political offer – pledging a new target of 1.5 million new homes by the end of this Parliament. Increasing supply is a key part of tackling the UK’s long-running and multi-faceted housing crisis. But there is growing scepticism that the target will be met. 

This week we’re taking a closer look at the government’s housing target, how progress is going, and what really needs to happen to build more homes across the UK.

What is Labour’s housing target?

1.5 million new homes. In its 2024 manifesto Labour promised to deliver 1.5 million new homes over the parliament. This averages out at 300,000 homes a year, but with delivery expected to build gradually over the Parliament, the target implies England would need to reach 370,000 homes a year by 2029.

And with over 130,000 households living in temporary accommodation, years-long waiting lists for social housing and house prices still out of reach for many, a significant increase in new homes is sorely needed. Well-designed new housing brings many other benefits: it can improve health, strengthen communities and make homes more energy efficient.  

Binding local targets are back. Alongside the national objective, the government moved quickly post-election to bring back binding housebuilding targets for local authorities. The Conservatives had effectively scrapped these in 2022, demoting them to advisory status following a backbench revolt.

A significant increase – if achieved. The last time 300,000 homes were built a year in England was in 1969. That rate was not sustained, and we have not come close to matching it since. On average, building around 300-370,000 homes a year would be 80-150,000 more than we’re currently managing.

Is the government on track to hit its target?

In short: no. In fact, housebuilding has dropped in recent years. In the decade up to the 2024 election, England added around 223,000 new homes a year. By contrast, in the first year of the Government’s new housebuilding target (2024-25), this fell by 6% to less than 209,000 – a drop of 14,000.

Housebuilding is notoriously hard to measure, but other indicators back up this story. After the election, data on housing starts (how many houses begin construction in a period) fell by 43,000 relative to the previous ten-year average. Data on applications for planning permission show a similar drop off in activity.

Signs of recovery? There are signs the market is picking up again, but it’s not settling at levels anywhere near the government’s target. Savills finds that rates of construction are slightly turning upward and that housebuilding is stable at around 200,000 units a year - a very long way from where the Government needs it to be. 

Why is housebuilding faltering?

Macroeconomic factors. The drop in housebuilding is driven by changes in the wider economy that the government inherited; in particular, low effective demand, with high interest rates weighing heavily on several kinds of buyers including residential buyers, private landlords and social housing providers. 

High mortgage costs. Increases in the Bank of England base rate in response to high inflation in recent years have raised mortgage costs. In turn, this has constrained households’ ability and willingness to buy new homes. Output of new housing has dropped to reflect this lower demand.

Building costs. Depressed demand has softened house prices. But at the same time, the cost of housebuilding has increased due to the rising cost of labour and building materials. Behind this are the long-run effects of shortages caused by Covid-19 and Brexit, and by the global energy price crisis which has made it more expensive to manufacture certain materials. This is causing a pressure on the viability of building new homes in many areas, with modelling from Zoopla suggesting that across much of the country, build costs now exceed sale prices.

England is particularly exposed to these issues given its reliance on a small number of speculative housebuilders whose business model makes them highly vulnerable to changes in prices and costs. 

Constrained capacity in the social housing sector. Historically, councils built around half of all homes, and the social housing sector has helped keep housebuilding going when private construction slumps.

However, social housing providers currently have limited ability to do this. They are also facing higher interest costs, and rent cuts in recent years have reduced their rental income. They also have to find the money to make their existing stock better and more energy efficient, and to undertake remediation work to meet post-Grenfell building safety requirements. Recent policy on funding and a new rent settlement have eased this pressure, but the sector is not currently in a position to significantly increase its building beyond recent averages.

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What more could be done to build more?

If the government wants to build more homes, it needs to think more about who builds them. This means diversifying the building sector so we are not so reliant on a small number of speculative housebuilders and their boom-and-bust cycles.

Letting the public sector play a bigger role in land assembly and master planning. The government could adopt an approach to development commonly found in other European countries and partner with developers to assemble and build out sites, using the profits from rising land values to pay for infrastructure. Doing so could support smaller or more specialist housebuilders, which can deliver faster build out of homes (as they are less reliant on booms in the market).

The government has shown positive steps with its New Towns programme, which it describes as “the most ambitious town-building effort ever undertaken in the UK.” The programme could pay for itself if it follows a similar approach to that used for historic new towns through the creation of Development Corporations. These could use compulsory purchase powers to acquire land at agricultural value, then capture the uplift in land values that planning permission generates – using this to pay for building homes and providing infrastructure. However, it will be important to ensure that Development Corporations have access to the funding they need – either by providing them with loans from the Treasury or allowing them to raise their own finance through issuing bonds.

Properly resourcing housing associations and (particularly) councils to build. This could be done with additional grant funding and support to cover other costs, such as decarbonising existing housing stock, and would free up their financial capacity to invest in new homes.

Councils are particularly constrained, as the budgets they use to collect rents and to invest in old and new homes (their housing revenue accounts) are near breaking point. This is because the previous government cut their incomes and increased costs. Either injecting cash into or lifting debt from these accounts could boost councils’ capacity to build much-needed new housing.

The wider fiscal context is undeniably challenging. But building more social housing is a strong candidate for further public spending because it attracts additional private investment, creates economic growth through construction activity, and reduces other public spending such as on housing benefit and temporary accommodation.

There is no silver bullet to increasing housing supply. But focusing on who builds homes and how could go a long way towards helping the government reach its 1.5 million target. Ultimately, success should be measured not just by how many are built, but by whether they are right homes, being delivered in the right places for the people who need them most.

Good morning from New Economy Brief.

On 31 May, Colombians will go to the polls facing a fiscal crisis, an energy shock, and a question that goes to the heart of development economics: is there a way out of commodity dependency, or do you just keep digging?

 What's Happening?

As Colombians prepare to head to the polls for the first round of the 2026 presidential election, voters face a variety of candidates proposing very different visions for the country. With imported inflation driven by the US-Israeli war on Iran — reminiscent of the energy shock that defined the last election cycle when Russia invaded Ukraine — the economic question on the ballot is:  how to break out of a cycle of commodity trade dependency that has defined, and to a large extent crippled, the country's economy for the past 50 years.

Clashes over the minimum wage

Compounding this external shock is a fierce domestic argument over the current government’s decision to raise the minimum wage by 23.7% earlier this year, significantly boosting the share of GDP that goes to workers. This increase is framed by some as a reckless inflation trigger that will push inflation to 6.5% by the end of the year.  

Yet from a post-Keynesian perspective, this critique misses the forest for the trees. Heterodox economists argue that in an economy like Colombia’s where demand is chronically suppressed due to extreme income inequality and structural labour informality, higher wages aren't just a social "gift" — they are a macroeconomic necessity to drive growth. Colombia’s own data support this: inflation plummeted from 13.3% in 2023 to 5.1% by late 2025, even as the government pursued aggressive, above-inflation wage hikes. There was no ‘wage-price spiral’: the idea that higher prices lead to higher wage demands, which then push prices higher and so on. 

In fact, the real problem is a productive structure so hollowed out that any increase in domestic demand — whether from higher wages or public spending — leaks straight into imports rather than circulating at home. The money leaves the country instead of staying in it. That is the external ceiling Colombia keeps hitting, which reflects a symptom of an economy that doesn't produce enough of what its people consume. In this light, the inflation isn't a sign of an 'overheated' economy, but of a 'broken' one.

The Central Bank’s response

In April, faced with the collision of global shocks and domestic wage pressures, Colombia’s central bank, the Banco de la República, voted unanimously to hold its benchmark interest rate at 11.25% — one of the highest real rates in Latin America. These high rates do not just slow down growth; they act as a massive transfer of public wealth toward debt servicing. Colombia's 2026 domestic debt bill will hit a record COP$130 trillion, with COP$51 trillion in non-rollable interest payments. This means roughly one in every three pesos of tax revenue now goes straight to creditors rather than schools or infrastructure.  

Why Does it Matter?

Here is the central trap: Colombia's fiscal crisis is not simply the result of spending too much. It is the consequence of building a state whose revenues depend on selling oil and coal into global markets that — as the Iran war is now demonstrating in real time — can convulse without warning. As former finance minister Antonio Ocampo has noted, progressive taxation is insufficient if the structural engine of the economy remains unchanged. 

This is echoed even by credit rating agencies who contest that Colombia's economy is constrained by a high dependence on commodities. This vulnerability spurred by global price volatility forces the central bank to maintain high rates, which in turn widens the deficit, triggering austerity, and hence prevents the very investment needed to escape the dependency. It is a vicious cycle. And the three candidates leading recent polling offer three very different versions on how to escape it.

The Extractivist Gamble: De la Espriella’s Vision

Far-right Abelardo de la Espriella represents a gamble on the "old economy," proposing to solve the fiscal crisis by doubling down on extraction. His programme advocates for a total opening of the energy sector, including fracking. By accelerating licenses for unconventional reservoirs — deep rock formations, such as shale, that require hydraulic fracturing or "fracking" to extract oil and gas — he aims to lock Colombia into a 20th-century path that has historically failed to deliver structural change. Doubling down on fossil fuels means betting the nation's future on the continued volatility of the very markets currently strangling it. 

The Uribista Restoration: Valencia’s Hardcore Austerity

Paloma Valencia seeks to resurrect the economic vision of right-wing former president Alvaro Uribe, who led Colombia from 2002 - 2010: a leaner state and strict compliance with the fiscal rule. Her gamble is that bond markets will respond positively to austerity, eventually freeing up fiscal capacity. However, with fixed investment already well below pre-pandemic levels, compressing public spending risks the "paradox of consolidation"—austerity that suppresses the growth needed to actually reduce debt. Given Colombia's inequality, that is not just a social risk: it is a macroeconomic one.

The Mission-Oriented Structuralist: Cepeda’s Transformation

Iván Cepeda's answer is structural: break the dependency itself. The left-wing candidate's programme — mission-oriented industrial policy built around food sovereignty, agrarian reform, and a just energy transition — is routinely caricatured in the Colombian political debate as reheated communism, a shadow that follows him from his political past in the Communist Party. 

The caricature is politically convenient but economically illiterate. Communist central planning sought to abolish markets and subordinate private enterprise to state control. What Cepeda is proposing is categorically different: a state that sets strategic objectives — food security, energy independence, industrial diversification — and then uses public investment, procurement and regulation to create markets and pull private capital in that direction. 

Thus, his economic programme reads less like Marx and more like Mariana Mazzucato. Mazzucato’s central argument is that the state's role is not to replace private investment but to actively create and shape markets to achieve the conditions under which private capital will go where markets alone never would. It echoes Ha-Joon Chang's argument that states every rich country industrialised through strategic state intervention. And it carries the warning of Thomas Piketty: that without deliberate redistribution and public investment, returns to capital will simply compound inequality faster than growth can address it. Cepeda's economic policies argue for the need for green industrial inclusive growth that can make Global South countries ready for the challenges of the 21^st century.

According to this theory, if the country can build food sovereignty — reducing dependence on imported agricultural inputs whose prices spike every time a conflict disrupts global energy markets — it becomes structurally less exposed to the inflation shocks now being driven by the Iran war. The same applies for renewable energy, so the next geopolitically-driven energy shock does not become a national fiscal emergency. The challenge is how to sequence these transitions in a credible way. 

What Next?

The first round takes place on 31 May. A runoff is widely expected in June, between Cepeda and Valencia or Cepeda and de la Espriella. The new president takes office in August.

For the incoming administration, three imperatives will define the first year:

• Tax reform is non-negotiable. The fiscal gap cannot be closed without new revenue. The design of that reform — whether it targets wealth and commodity rents or shifts the burden to consumption — will be the first real signal of who this government is building the economy for.
• Restoring fiscal credibility without killing growth. Fitch has warned that the lack of detailed consolidation measures in current fiscal plans makes implementation prospects highly uncertain — and subsequently downgraded Colombia from BB+ to BB in December 2025, citing the absence of a credible fiscal anchor. 
• The structural question cannot be deferred. Colombia has managed commodity dependency through multiple crises. The Iran conflict is a reminder that the next shock is always coming. The 2026 election is the moment to decide whether the country begins building an economy that can withstand it, or waits for the next crisis to ask the same question again.

Good afternoon from New Economy Brief.

The Sunday Times has been publishing its “Rich List” for almost 40 years, tracking the wealth of the richest people and families in Britain.

This week’s New Economy Brief unpacks what the latest Rich List tells us about wealth in Britain today, and looks at how we can tackle excess wealth and inequality.

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The rich are getting richer

What cost of living crisis? 2026’s edition of the annual Sunday Times Rich List shows just how much of Britain’s wealth is held in the hands of a tiny minority of people. In fact, just 350 individuals and families own wealth totalling £784 billion, up 1.4% from last year. 

£784 billion is an almost incomprehensible amount of money to most people. It’s larger than the annual GDP of Belgium, three times larger than the UK’s entire annual healthcare budget, or around eight times greater than all government spending on education.

You’re having a half. Clearly, this is a lot of wealth. Research from the Equality Trust on this year’s list found that the richest 50 families have accumulated more than the bottom half of the entire country – 34 million people – painting a stark picture of a deeply unequal country. 

Patriotic Millionaires UK, an organisation of millionaires who advocate for higher taxes on wealth, regularly comments on the Rich List. One member, Phil White, said “Right now, it feels like the Rich List is a running total of everything that is wrong in our society—a handful of people counting obscene amounts of wealth while everyone else scrapes by…Rich people like me, and those on the Rich List, should be paying more tax…”

Missing in taxation. But despite that call, there’s a staggering lack of crossover between the Rich List and the ‘Tax List’, also published by the Sunday Times, which shows the country’s top taxpayers. In fact, fewer than a handful of names make the top 100 of both lists. There are some clear reasons for this, such as the choice of country of domicile for tax purposes. And then there are others who, whether or not they reside in the UK, hold their wealth in overseas businesses and interests that don’t pay UK taxes. There’s also the fact that wealth, and the income it produces, is taxed at far lower rates in Britain than income from work. 

Patriotic Millionaires and Tax Justice UK have outlined a policy platform that raises taxes on income from wealth to match those on income from work. Both organisations, alongside a growing number of civil society organisations, unions, economists and politicians, also advocate for an annual wealth tax. One popular proposal is a 2% wealth tax on assets over £10 million, which campaigners say would raise around £24 billion a year from the country’s 22,000 richest people. 

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The consequences of inequality 

The ghost of GDP past. Among the Rich List’s 350 people and families are 157 billionaires. When the List was first published in 1989, the Equality Trust calculated that its 15 billionaires held about £27bn in wealth, equivalent to 4p in every £1 of GDP at the time. Today, the 157 billionaires on the list hold just under £670bn, equivalent to 22p in every £1 of GDP. It’s one of the reasons why the economy doesn’t feel like it’s working for most people – especially alongside the stagnant wage growth UK workers have experienced since the 2008 Global Financial Crisis. 

And while those at the very top are still enjoying a bonanza of accumulation, millions of people are struggling with an affordability crisis on multiple fronts. Energy costs are 35% higher than they were before the Russian invasion of Ukraine in early 2022. So it’s no surprise that the cost of living was a top concern for 90% of respondents to a survey commissioned by PwC last week. Yet analysis from Share the Wealth found that a 2% wealth tax on just the UK’s 15 richest families could raise enough revenue to cut household energy bills by an average of £150 a year.

Wealth inequality is increasingly being understood as bad for economic growth. In the last 20 years, inequality in OECD countries has risen by an average of 3 Gini points (a measure of economic inequality across a population) – and this has cost them an estimated 8.5% of GDP. 

Furthermore, researchers analysing wealth inequality data from the World Inequality Database found a negative and statistically significant relationship between wealth inequality and economic growth.

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Fixing our tax system

Same pound, same value. As we explored last week, Starmer and Reeves’s economic approach is under huge scrutiny after a devastating set of local election results, with backbench Labour MPs lining up to set out alternatives. The Labour Growth Group proposes making Capital Gains Tax (CGT) rates the same as income tax bands. It has also suggested removing some CGT loopholes. The report also makes the case for using the proceeds to cut workers’ National Insurance Contributions by up to 2p to shift the onus of tax contributions toward the wealthiest.

Keys, Passport, Tax Bill. The Labour Tribune group also set out their taxation vision last week. Noah Law, MP for St Austell and Newquay, writes that “any tax on wealth must be levied in a manner that is efficient, pro-growth, and most importantly achievable, bearing in mind that the means to identify and value assets – and actually collect wealth taxes – are substantially underdeveloped.” From this, a proposal for properly equipping the tax authority with the resources it needs to assess and tax wealth emerges. The law also calls for an ‘exit tax’ to ensure that wealthy people choosing to leave the UK pay their fair share of tax on their way out.

Open goal. Recent polling of millionaires found that 75% would be willing to pay more tax in order to help protect and strengthen the social, cultural and economic foundations they value in Britain. At the same time 55% support taxing wealth the same as work, and 59% support a “settling-up fee” for people who use the UK’s  infrastructure and services to build personal wealth before leaving the country. 

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Looking forward…

The Rich List exposes the UK’s inequality problem – one brought into even sharper relief by a deep and enduring cost of living crisis. And increasingly millions of people who are struggling to get by believe – with good reason – that the economy is rigged in favour of the wealthy and powerful. 

This sense of unfairness, and the lack of answers from successive governments, is a powerful current that both the Green Party and Reform UK have tapped into through very different political visions. Recent interventions from the Labour Growth Group and Tribune show that parts of the Labour Party are grappling with this too. 

Whoever is Prime Minister in a few months’ time will need to reckon with the same reality: voters increasingly feel the economy no longer works for them, and demand a credible plan to change it. 

Good morning from New Economy Brief.

The government suffered a bruising set of local election results last week, losing almost 1,500 council seats across England. Welsh Labour lost control of the Senedd – with leader Eluned Morgan losing her own seat – and Scottish Labour lost ground at Holyrood too.

Labour's 2024 coalition is fragmenting in multiple directions. As the dust settles, the party's economic approach is under growing scrutiny – including from its own MPs. This week, two backbench groups, Tribune and the Labour Growth Group, set out their proposals for a new strategy. Meanwhile the embattled Prime Minister laid out his vision in an address on Monday, followed by the King's Speech two days later.

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Huge local election losses provoke debate about policy change

In what many saw as a last-chance pitch for survival, Keir Starmer's speech on Monday argued the government needs a "bigger response" on "growth, defence, Europe and energy" than anticipated in 2024. Policy announcements were limited but included bringing forward legislation to allow "full national ownership of British Steel" and a "more ambitious" youth mobility scheme with Europe. He promised a "complete break" from previous responses to crises which he suggested would be reflected in Wednesday’s King’s Speech – but the Guardian noted "few surprises" there, the BBC's Faisal Islam called it "emblematic of Starmerism", and many MPs remain unconvinced.

Since the elections, MPs have openly questioned Starmer's future while backbenchers have advanced alternative economic agendas. The most prominent interventions so far have come from the Tribune Group and Labour Growth Group (LGG), whose proposals overlap significantly despite factional differences.

Tribune – associated with figures close to Andy Burnham, Angela Rayner and Ed Miliband – published an essay collection featuring MPs Louise Haigh, Yuan Yang, Jeevun Sandher and others. LGG - previously strong supporters of Starmer’s agenda - released their own proposals. Though media coverage has framed these as ‘competing visions’, there is substantial common ground – as Haigh and LGG co-chair Chris Curtis signalled at a recent Good Growth Foundation event, where they said they were working towards a programme that could unite Labour's wings.

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A pro-growth turn in fiscal policy?

Both documents include pro-growth tax reforms that would begin to bring taxes on assets closer to taxes on work. Haigh proposes replacing Stamp Duty with a national property and land tax, as well as reforming business rates, closing inheritance tax loopholes, and raising capital gains tax closer to income tax. The LGG similarly supports capital gains tax equalisation – protecting investment through allowances – using the revenue this brings in to fund cuts to employee National Insurance.

On fiscal frameworks, Haigh proposes allowing the National Wealth Fund and other development corporations to borrow for themselves without bringing the government closer to breaching its fiscal rules to turbocharge investment, similar to what Labour Together has recommended in the Oxford-Cambridge arc. 

She also suggests the fiscal rules should look at the benefits of investment over a longer time horizon, reducing the current system's bias against borrowing to invest. But crucially, only after achieving a budget surplus to build credibility with bond markets. This nuance has been widely overlooked: as ex-IFS economist Ben Zaranko noted, ‘the "Tribune position" isn’t quite so fiscally expansionary’ as coverage has suggested, and aligns with IFS recommendations to wait for a "position of strength" before making changes.

Likewise, the LGG notes that "capability and infrastructure investment would be separately prioritised within the capital framework, with the Treasury required to score the cost of inaction as well as the cost of action." Both groups also back fiscal devolution – giving mayors and local leaders real control over economic levers, including business rates and borrowing for investment.

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Reshaping the state

The groups share the view – subject to growing cross-party consensus – that the UK state needs fundamental rewiring, beginning at the centre. Haigh proposes removing the growth mandate from the Treasury, creating an economic development ministry to coordinate across Whitehall, and passing the public budgeting function to a strengthened Number 10. While such ideas have been debated since the 1960s, they are gaining momentum – including a recent endorsement from the Liberal Democrats.

The LGG takes a similar line on diluting ‘Treasury brain’. It recommends breaking up the Cabinet Office and building a "real Department of the Prime Minister" as a "command centre for the Government's core priorities." As author Mark McVitie puts it: "A government that promises transformation cannot run from a No. 10 built for firefighting, a Cabinet Office built for coordination, and a Treasury not built to find solutions."

One area of divergence is the LGG's stronger emphasis on removing barriers to growth through planning reform. McVitie proposes fast-tracking nationally significant infrastructure – national grid, reservoirs, transport, energy, defence production – to prevent major projects being "slowly strangled by overlapping consents, tactical litigation and institutional vetoes." A note of caution: recent governments have often blamed the "blob" for economic underperformance, with mixed results.

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And what about the public’s number one issue?

Both groups identify tackling the cost of living as critical – and both focus on structural drivers, not just symptoms.

Reducing costs for households. Tribune’s Yuan Yang focuses on fiscally (or close to) neutral policies which could start making life cheaper within months. She advocates for a rising block tariff for energy, in which everyone would be guaranteed a certain amount of cheap energy but buying more would become increasingly expensive. Yang also calls for capping bus fares, childcare costs and property service charges – also noting that the cost of some essential items, such as food, are contributing to the UK’s persistently high inflation. Similarly, the LGG names “bringing down the cost of essentials” as one of its ‘five hard rules’ for government.

Utilities and regulation. Both groups single out the privatised water sector – and Thames Water in particular – as emblematic of the economy's broader failures. They blame high bills and pollution on under-regulation and massive investor dividends at the expense of investment in infrastructure. Yang criticises the toothless regulation of the water industry; McVitie argues Thames Water should be allowed to fail. The LGG goes further, proposing an "essential services accountability regime" to curb rent extraction across water, care and other public-good sectors.

This shared focus on regulation is notable for several reasons. It taps into widespread public anger that the economy is rigged and consumers aren't being protected from excessive corporate profiteering. It runs counter to Chancellor Rachel Reeves's framing of regulation as "a boot on the neck" of business (which we covered last summer). And it reflects a growing body of evidence that strong regulation is actually good for economic performance.

It all comes back to macro. Several Tribune essays touch on fiscal policy's role in tackling inflation. Haigh recommends improving coordination between monetary and fiscal policy, examining the Bank of England's mandate to stop it working at cross-purposes to the Treasury  – a recommendation also made last week by Gita Gopinath, the IMF's former chief economist. Yang also noted that “governments need to step up and take an active role in price stabilisation”. (For example, IPPR’s recent research shows how capping energy prices could reduce inflation, interest rates and borrowing costs whilst remaining fiscally neutral.) Jeevun Sandher advocates a "whole-economy approach to affordability", arguing that pro-growth, anti-inflation investments in clean energy and social housing – alongside windfall tax-funded affordability payments – can both improve living standards and reduce the debt burden.

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A shift in economic strategy?

Whatever happens to Starmer's leadership, many Labour MPs are now openly arguing for a substantial change in economic direction. A broad consensus is emerging across the backbenches around a more interventionist model: using the state to shape markets, curbing extraction in essential services, taxing wealth more fairly, empowering No. 10 over the Treasury, prioritising public investment, and reducing essential household costs – while recognising the constraints that high borrowing costs pose in the near term.

Good afternoon from New Economy Brief.

As the US-Israel war in the Gulf continues to cause devastation for civilians across Iran and the wider region, its economic consequences are being felt increasingly keenly around the world. 

This week we’re analysing what the war means for food prices, what policymakers could do to cushion the blow, and what the crisis teaches us about the consequences of fragile food systems.

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Why the war is creating a food crisis

A compounding energy and fertiliser crisis. As attacks on energy infrastructure and drastically reduced oil shipments through the Strait of Hormuz push up energy prices, the impacts cascade along food supply chains that are deeply integrated with fossil fuels. 

There are also unprecedented disruptions to supplies of fertiliser. As well as fossil fuels being a key feedstock for many fertilisers, around a third of global shipping of fertiliser passes through the Strait. These flows have all but halted since February. Gulf countries themselves are also major fertiliser exporters, and the conflict has hit some production facilities hard. This all adds up to rising prices and shortages for growers, at the key time in the year for sowing crops. 

Concentrated markets amplify shocks. When just a few companies dominate industries that are a crucial link in global supply chains, shortages give them an opportunity to hike prices. Fertiliser is one such industry - so much so that the OECD have likened it to the oil industry. When the last energy shock reduced supplies, the profits of the nine biggest fertiliser companies quadrupled in just two years.

Catastrophic consequences for poorer countries. Farmers in many low-income economies will be unable to buy fertiliser at higher prices. This will mean food shortages that cause millions to suffer. African countries will be particularly badly affected, with many depending heavily on fertiliser imports, a large proportion of them direct from the Gulf. Meanwhile, farmers in Southeast Asia are suffering after China halted fertiliser exports in response to the war. The injustices built into the global economy are stark – in a bidding war over critical goods, poorer nations lose out. 

In the UK, prices are set to rise. Though not as directly dependent on the Gulf as some countries, the UK still imports about 70% of its fertiliser, as well as around 40% of its food, whose costs will also increase with rising energy and fertiliser prices.

Industry body the Food and Drink Foundation estimates that the first month of the war alone has baked in food inflation reaching “at least” 9% by the end of 2026. At 10%, this could add £32.80 to the average household’s monthly food bill.

These impacts come after five years of continued food price inflation that has outpaced the rate of average price increases. This has been driven by repeated fossil fuel price shocks as well as the intensifying impacts of climate change and nature loss on agricultural production. And when costs rise for essential items, low-income households – one in five of which already face food insecurity – will be hit the hardest.

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The political and economic fallout

In the UK, warnings of looming hikes to grocery bills are landing at the worst possible time. The cost of living crisis remains the top concern for voters heading to polls for this week’s local elections. Polling from IPPR before the war found the weekly food shop was second only to energy bills as a source of financial stress, and Which? found that over 4 in 5 people are concerned about rising food prices.

How will central banks respond? Though monetary policy cannot bring down energy and fertiliser prices, central bankers’ concern is that people come to expect price rises to continue, feeding into higher ‘inflation expectations’. The theory goes that workers will negotiate higher wages, and firms will respond by raising prices further. Food prices are key to this theory. Bank of England research has found they “matter significantly more for inflation expectations” than other spending, even including energy. Prior to the outbreak of war in Iran, central banks were gradually cutting interest rates as inflation slowly declined – but cuts have now paused, and hikes are a distinct possibility.

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What can be done?

Rate cuts, not rises. UCL’s Josh Ryan-Collins argues that the Bank of England should “hold its nerve and continue on the path of lowering rates”. He says the weakened power of workers in today’s economy means there is “virtually no evidence” of a wage-price spiral driving inflation after the last crisis. Instead, lowering rates would reduce government borrowing costs, making it easier to take measures to target inflation at its source – like weaning us off fossil fuels by investing in clean energy and keeping prices under control through public ownership.

Crucially, the impacts of Global North rate hikes are not contained, but have global, unequal effects. When Global North central banks (particularly the US Federal Reserve) raise rates, the cost of Global South debt balloons, and Global South central banks are forced to follow suit to protect the value of their currencies. For countries already burdened by debt distress and facing food insecurity, the consequences would be severe.

Controlling price hikes. The government has some options in the short-term – such as pressuring supermarkets to keep prices low, or reforms to increase competition from budget retailers. Greece’s ‘household basket’ programme, which requires supermarkets to keep prices low and cap profit margins on over 50 essential items, has successfully lowered prices by up to 35% for some items – a useful example of how price caps on food could work in practice. The SNP have placed a similar scheme at the centre of their policy offer for this week’s Holyrood election.

But preventing firms in key parts of supply chains – like fertiliser – from unduly benefiting from shortages requires more international coordination to ensure measures are effective. That could look like coordinated windfall taxes to prevent profits shifting to elsewhere in the system, and in the long-term, building up buffer stocks that can be released into markets during crises to mitigate speculation driving prices higher. 

Fixing our ‘Just in Time’ food system. Tim Lang, author of a major National Preparedness Commission report on the topic, says politicians need to “get real about food security” to address rising prices. That means investing in more domestic growing, more sustainable diets, national stocks of essentials, and a plan for rationing. The Autonomy Institute has proposed some creative options for publicly-supplied food, arguing that a basket of basic essentials should be provided to every UK household, along with subsidised ‘public diners’. 

Crucially, actions to protect the poorest should be the most urgent global priority. As Adam Haneih has put it, the reality of famine facing global south countries “ought to weigh heavily on a world that has largely understood this war through the narrow lens of oil-price instability”. It is a sad reality that in times of crisis, if leaders do not ration fairly, markets will do it for us and the results will be far from fair.

Good afternoon from New Economy Brief.

Next week, Scotland will go to the polls to elect the 129 members of the Scottish Parliament and decide who will lead the next government in Holyrood. After 19 years in power, the Scottish National Party (SNP) leads the polls, with Scottish Labour and Reform UK vying for second place. However, Scotland’s more proportional electoral system means the outcome remains highly uncertain, and smaller parties could end up holding the balance of power. 

This week, we explore the economic backdrop to the Scottish election, and examine the policy platforms of the major parties contesting it. 

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What issues are driving the election?

After a parliamentary term marked by the legacy of Covid-19, inflation, and geopolitical turmoil, polling consistently shows Scottish voters prioritising three issues above all others:

Cost of living: Like the rest of the UK, Scotland has faced a prolonged squeeze on living standards, with rising prices for essentials compounded by nearly two decades of weak wage growth. Recent analysis by Future Economy Scotland finds that average real earnings grew by just 0.13% per year over the last parliament – the worst performance since devolution, apart from the immediate aftermath of the 2008 financial crisis. Unsurprisingly, polling consistently ranks the cost of living, and the state of the economy more broadly, as together voters' top concern. 

Healthcare: The state of the National Health Service (NHS) remains the other big issue, with long waiting times and pressure on services driving voter concern across all demographics. Although long waits are now declining, and Scotland outperforms England and Wales on A&E waits, performance across most measures is still considerably worse than before the pandemic.

Immigration: While historically less salient in Scotland than in England, concern about immigration has risen substantially, and it is now voters’ third priority. Two years ago, around 10% of Scots cited it as a top-three issue; recent polling suggests this has increased to around 23%. 

The future of North Sea oil and gas has also featured heavily in the debate. Although licensing is reserved to the UK Government, parties are sharply divided over new fossil fuel extraction and Scotland’s 2045 net zero target. As IPPR Scotland has highlighted, climate targets feature far less prominently in manifestos than in 2021, even among parties that support them.

While the debate over Scotland’s constitutional future continues to loom large, polling suggests it is less of an immediate priority for voters than in previous elections.

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What are parties proposing for the economy?

The manifestos Scotland's political parties have published in recent weeks set out starkly different visions for the future of the economy. 

The SNP has placed tackling the cost of living at the centre of its platform, with a headline proposal to cap prices on 20 to 50 “essential” food items. Other priorities include expanding free childcare, investing in public services and the NHS, and delivering Scotland’s 2045 net zero target. While not proposing major new tax changes, the party defends the more progressive income tax system it has set up over the last decade.  Yet some experts question whether its spending plans add up without further tax rises.

The Scottish Conservatives’ manifesto focuses on cutting income tax to realign rates with the rest of the UK, funded by public spending cuts. This includes introducing a two-child cap to the Scottish Child Payment, and slashing disability benefits – as well as savings on “administration costs”. However, economists have challenged the credibility of these plans. The party has also pledged to scrap the net zero target and support new oil and gas developments.

Scottish Labour emphasises economic growth, with pledges to remove Scotland’s opposition to nuclear power, overhaul the planning system, and create a new industrial strategy. The party also highlights policies to raise workforce participation, including expanded childcare and skills provision. On tax, the party has ruled out immediate changes but has signalled it would reduce income tax in future when it is “affordable”.  However, some economists have warned that the manifesto relies on optimistic assumptions about GDP growth to fund future improvements.

The Scottish Greens present the most expansive programme, with a strong focus on tackling the climate emergency, creating green jobs and reducing inequality. This includes higher public spending, large-scale investment in green energy and infrastructure, and a faster transition away from fossil fuels – alongside proposals to replace council tax and explore new wealth taxes. Yet as with other parties, the fiscal feasibility of the package has come into question -  economic analysts have suggested that the scale of spending may not be credible without broader-based tax rises.  

The Scottish Liberal Democrats focus on targeted tax reform and investment in public services, including proposals to replace council tax and increase  support for small businesses. They also propose more spending on health and social care, alongside investment in education, skills and net zero. While they support higher spending on frontline services, their fiscal stance is cautious compared to other parties, emphasising balanced and deliverable plans.

Finally, Reform UK’s manifesto advocates lower taxes and a smaller state, centred on £4bn of income tax cuts, which it argues would be partly self-financing through higher economic growth. The party also proposes substantial reductions in public spending and a smaller welfare state, though again economists have described its fiscal plans as “not credible”. Reform UK also calls for scrapping net zero targets and all related spending, in favour of expanding domestic oil and gas production.

Overall, the manifestos diverge more widely on economic policy than at any election since devolution, offering voters a stark set of choices on tax, spending, and the role of the state in Scotland’s economy.

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What next?

Polling day is 6 May. Under Scotland’s proportional Additional Member System, it is difficult – but not impossible – for any single party to secure an outright majority. This means the final shape of the government may take days or weeks to resolve, and smaller parties could end up holding significant influence over key decisions on tax, spending and climate policy.

Polling suggests the likeliest outcome is another SNP-led government, either alone or dependent on support from a smaller party like the Scottish Greens. This would represent continuity, rather than a dramatic break with Scotland’s existing economic model. Yet such a government would still have to wrestle with fundamental challenges. Will a more interventionist approach on the cost of living – especially the intractable issue of food prices – bear fruit, and could it provide a model for other critically important sectors or for the rest of the UK? Tight public finances and weak growth will present difficult choices. As Future Economy Scotland has highlighted, no party is being fully honest about the scale of Scotland's fiscal challenges and how they will respond – as in the run-up to the 2024 UK general election. How the government navigates these issues won't just shape Scotland's economic direction over the coming years – it may also provide lessons for progressives facing similar constraints elsewhere.

Good morning from New Economy Brief.

Here's a fun fact: buses are the most used form of public transport in England. But all is not fine for the nation's buses. Despite their long reign, bus ridership has taken a huge and sustained drop recently, down from 4.6 billion journeys in 2009 to 3.6 billion in 2024. 

So that's why it's worth paying attention to the Bus Services Act, which became law last October. The government says it heralds a "new era of better buses" by enabling councils to run their own bus services for the first time in forty years.

Liverpool will be the first city to put the new legislation to the test, with more regions set to follow. They are hoping to repeat the success of the Manchester Bee Network. However, nothing is ever simple and questions remain around funding, capacity and political will.

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A brief history of UK bus policy

Another Thatcher legacy… With the Transport Act 1985, the Conservative government privatised and deregulated buses across Britain. The theory was typical Thatcherism: competition would keep costs down, lower fares and give customers more choice. While buses in Scotland and Wales are now a devolved issue, they share England’s legacy of deregulation – now widely recognised as a failure. In 2019, the Transport Select Committee concluded it had "at best, done little more than slow the decline in bus use." 

Value-extraction. Common Wealth puts it more starkly: "Since then, communities and passengers have paid the price while shareholders have benefitted." Since the pandemic, bus companies paid out £135m to their owners despite losing £43m before tax and receiving huge public subsidies. The National Audit Office recently found that half of all bus operator income now comes from public subsidy, worth £1.8bn in 2023-24, warning that buses face a "cycle of decline" as service cuts drive people into cars, further reducing demand.

Better Buses. Labour has fulfilled its manifesto pledge by removing the ban on local authority-owned bus companies and expanding powers to franchise services. Under franchising, local and regional authorities specify routes, frequencies and fares through contracts with operators, rather than letting them set their own. This is how Transport for London runs its buses (where ridership hasn’t declined, but increased) and how Manchester's Bee Network now operates. Another £3bn of multi-year funding will help councils use their new powers.

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Why all this fuss about the bus? 

Left behind communities. Buses disproportionately serve groups whose access to public services has been cut. Women make a third more bus journeys than men, and more often make care-related trips that are badly served by bus systems designed for commuters. Meanwhile, young people (aged between 17 to 20) ride buses more regularly than anyone else – mostly because two thirds of them don't have access to a car. Meanwhile, low-income households are two and a half times more likely to use buses than wealthier counterparts, while bus provision in more deprived areas has been cut hardest. Disabled people are 20% more likely to use the bus than the general population, but face huge barriers including step-free access, space for wheelchairs and unreliable services. 

These groups bear the brunt of forty years of cuts that have closed 4,000 routes and reduced services by more than 60% since 2008 in 80 areas. Rural communities have been particularly affected, with bus companies cancelling 21% of their rural routes since 2019 alone. These cuts have a real economic cost: 19% of workers said they had turned down a job due to poor bus services, with young people particularly affected.

How much for a single?! Bus fares have risen over 500% since 1987, versus 397% for rail and just 246% for motoring. The lowest-income households, as the heaviest users, have taken the biggest hit. KCL research shows homeless mothers spend up to £300 a month on buses just to get their children to school. This is why the £2 cap on single fares that the Conservatives introduced in 2023 was so popular, and why raising it to £3 went down so badly – particularly with potential Reform voters. Even people not typically plugged into policy noticed it. It's part of the reason some Labour metro mayors have committed their own budgets to maintaining the original cap.

Green buses. Transport accounts for 26% of UK emissions, and pollution from cars and vans costs the NHS around £6bn a year. As the Campaign for Better Transport notes, more bus use would cut those emissions – especially since the Act bans new non-electric buses from 2030. Further, the new legislation sets out a framework which will ban new non-zero-emission buses from 2030.

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The future of buses

The bees’ knees. The Bee Network is the success story the new legislation rests on. Fully franchised as of January 2025, its passenger numbers have grown 14%, with punctuality up from 66% to over 80%, average fares down 15%, and the £2 cap retained. Liverpool will launch its own franchise this autumn, and West and South Yorkshire will follow in 2027. The prize is significant: KPMG analysis finds that every £1 invested in buses creates economic benefits worth £4.55 to £5.

More ambition. There are real concerns, though. Centre for Cities warns that without political support for fully integrated transport systems that connect different modes of travel, buses alone can't fix our transport problems. But this might just be on the way at last, with the English Devolution Bill and Railway Bill both currently passing through parliament (see our NEB here for more on the latter). IPPR, meanwhile, argues for national targets for modal shift (getting people out of cars and onto public transport) so we can hold ministers to account. 

Beyond franchising. Franchising isn't a silver bullet: it involves significant financial risk for local authorities that, after decades of deregulation, often lack the commercial and operational capacity to run a bus network. Nearly half rate their transport delivery capacity as either fairly or very poor. If they don’t get this right, services will remain expensive to run, fares will stay unaffordable, and people simply won't ride the bus. The government’s plans to reorganise local government are another complication, as boundary and staff changes make introducing franchising more challenging. 

Ownership. While the legislation is a good start, the RMT argues franchising still leaks profit to private operators. Common Wealth recommends rolling out municipal or regional public bus companies, which would eliminate profit extraction entirely while delivering comprehensive low-carbon coverage and affordable fares. And the Centre for Local Economic Strategies points to investing in transport hubs, as Transport for Greater Manchester has done, incorporating public art, green space and community services. This can deepen local ownership and pride, turning bus infrastructure into a form of community wealth building.

Funding. A perennial problem with this government is ambition constrained by funding. Investing £1bn a year isn't nothing, but IPPR's modelling suggests total government funding needs to reach £3.1bn a year to deliver the Act’s promised transformation. The Campaign for Better Transport argues that reallocating funds away from private cars could help plug the gap. Fuel duty freezes have cost the Treasury £133bn since 2011 – money that could have transformed the bus network, and a lot more besides.

How to keep the wheels on the bus going round and round… As NEF tells us, buses are the best opportunity for transforming public transport at speed and scale. Bringing local authorities back into the picture is a genuine first step. But to deliver true change, the government needs to go further: public ownership, a modal shift target, and fares that make buses a real alternative to cars would give them a true future on our roads.

Good afternoon from New Economy Brief.

Last month Baroness Louise Casey said that the UK is facing “a moment of reckoning” on adult social care. She is chairing an independent commission into the sector, and will make her first formal report later this year. The government is hoping it will make recommendations for both medium and long-term changes – in particular on how to implement the national care service Labour promised in its 2024 general election manifesto. After years of inaction and stymied progress from successive governments, this week’s New Economy Brief asks – will this be enough to finally deliver the systemic change we need?

A system created to enable us all to live well. Adult social care sprang from the post-war creation of the welfare state and the NHS, designed to enable us all to live well, including in ill health, old age or if living with a disability.  Historically, adult social care (which supports those over the age of 18) has provided many different services, both institutional and in the community, including  day centres, residential homes, domiciliary services, support workers and a vast range of social activities. 

In 2023/24 around 2 million requests for support were made to that system, and almost a million people received long-term care at some point in the year. Though around two thirds of those requesting social care support are over 65 years old, evidence from the NHS shows the number of younger people asking for support is growing more rapidly. 

But the model isn’t delivering on its promise. Progressive visions of adult social care, such as Social Care Future’s, are grounded in the idea that ‘we all want to live in the place we call home, with the people and things we love, in communities where we look out for each other, doing the things that matter to us’. But as funding has shrunk over the long term, this is far from the reality for many. Nearly 100,000 people have been denied government-funded care because it is limited to those with less than £23,250 in savings or assets, a threshold frozen since 2010. Costs can be eye-watering for those who have to pay themselves – averaging £1,000 a week for residential care in England and Wales. 

The situation is compounded by overstretched workers, with research from Homecare Voices identifying a range of substandard employment practices – including long hours, low wages and pressure to work – with a knock-on effect on the quality of care people are receiving and that care workers can provide themselves with.

Millions more aren’t supported at all. A failure to keep up with increasing demand has left an estimated 3.5 million people without the care they need and almost 5 million unpaid carers in England, some recipients of care themselves. There are significant inequalities in access to care too: unmet need is twice as high in the most deprived areas as in the least deprived.

Previous attempts at reform haven’t been seen through. Recent attempts to reform adult social care include the Dilnot Commission in 2011, focused on delivering a fair, affordable and sustainable funding system, and the Care Act 2014, which gave local authorities new duties and changed how care is delivered. But austerity and overreliance on local taxation and on one-off cash injections rather than sustained funding over time hampered the impact of the Care Act. According to the Social Care Institute for Excellence, this left it incomplete.

Cautious optimism about the new commission. According to the terms of reference for Baroness Casey’s commission, it aims to make adult social care “more productive, preventative and to give people who draw on care, and their families and carers, more power in the system”. And Casey’s initial reflections have offered tentative hope, with positive reactions across the sector. Particularly interesting was her assertion that if William Beveridge were alive today he’d add “how we support and care for an older, sicker population and greater levels of disability” to his famous list of “five giants” – idleness, ignorance, disease, squalor and want – social ills that needed to be tackled for British society to improve. 

Focus on a national care service The first phase of the Casey Commission, due to report later this year, focuses on implementing Labour's commitment to create a national care service. Its manifesto envisioned this as “a universally-available service, with personal care provided free at the point of use, and that all who need it can access it”. A range of experts have endorsed the idea. Women’s Budget Group and the New Economics Foundation have called for such a shift and the Fabian Society and Unison have also supported a national care service that is for everyone and with choice and control for individuals embedded in it. But with no consensus on exactly what such a service should look like, there are challenges ahead.The way Scotland’s plans were watered down should serve as a warning of how hard it is to create such a major new system. 

Funding is essential, but won’t be enough by itself. Whatever route is taken, one thing is clear: a new funding deal will be needed. The Health Foundation estimates that just keeping up with growing demand will cost £8.3bn by 2032/33, and that doing so while also improving access and covering the full cost of care would bring that figure to £18.4bn. This is on top of existing pressures on local authorities, who have a statutory duty to provide adult social care but whose budgets are ‘buckling under the pressure’ of delivering it, making them increasingly dependent on emergency funding. 

Commercialising care has consequences. Adult social care has become increasingly commercialised since the 1980s and as research from both Common Wealth and CLES has shown, extraction and private equity are ingrained in the current system. With money flooding out of the system as profit to enrich a handful of people, this model is a bad deal for both individuals and the state. There are many ways to reverse this trend, from increasing regulation of private providers to bringing services back into public ownership. 

‍Wider transformation is possible – and necessary. A national care service would be a vital step forward, but we also need to fundamentally reimagine how care is valued, delivered and supported across society. Without that wider shift, this “moment of reckoning” risks becoming another missed chance for meaningful change.

Good afternoon from New Economy Brief.

After months of defending the embattled student loans system  – even calling it "fair and reasonable" – Rachel Reeves finally acknowledged at last week's Mais Lecture that there are issues. But if desperate grads, a core voting bloc for Labour, were hoping this signalled a U-turn, they were quickly disabused: the problem isn't "front of the queue" for the Chancellor.

As Labour backbench MPs (many now student loan recipients themselves) ramp up pressure on the Chancellor and the Treasury Committee launches an inquiry, the economic impacts of the current approach are also in question. This week, we ask: is fixing the student loan system fundamental not just to fairness for a whole generation, but to economic growth and aspiration more broadly?

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A Brief History of Student Loans

The good old days. Until the 90s, higher education in England was effectively free; the state paid fees and offered living cost grants. In 1998 fees were introduced at £1,000 under Plan 1, rising up to £3,000 in 2006. Interest was charged at RPI or Bank Rate +1% (whichever is lower), repayments were income-based, and loans would be written off after 25 years.

A broken system. The current furore is mainly around Plan 2 loans, introduced in 2012. The tuition fee cap rose to £9,000, interest was set at RPI + up to 3%, and the write-off period became 30 years. In 2016, the Conservatives abolished means-tested grants for living costs, ensuring students from low-income families took on the most debt, before raising fees further to £9,250 in 2017. Plan 5 loans, introduced in 2023, re-pegged interest to RPI, but this cohort faces a 40-year wait for write-off. Postgraduate borrowers pay even more – 6% on top of any undergraduate loans.

Eye-watering debt. Roughly £21bn is loaned annually to 1.5 million students. Student loans are now worth £267bn, forecast to reach £500bn by the late 2040s. The average English student leaves with £53,000 of debt, the highest in the OECD, including the US. Meanwhile, Scottish students finish with just £17,000 in government loans, those in Northern Ireland £28,000, and Wales £39,000.

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Why Does it Matter?

Graduate gripes. Graduates have many reasons to be unhappy. First, interest rates. RPI, an outdated measure, runs consistently higher than CPI. Plan 2 borrowers pay a further 3% on top, meaning 2.7 million graduates accumulated more interest than they repaid in 2024-25. Second, repayment at 9% of all earnings above the threshold means graduates on salaries over £30,000 face a marginal tax rate of 37%. Those earning £50k or more with a postgraduate loan face 57%.

Finally there’s simple fairness: graduates and campaigners have accused the government of mis-selling loans by changing terms after they were taken out. The scheme is also regressive, with many of the richest opting out or paying off loans early, while lower-earning graduates will pay more over their loan lifetime. Meanwhile the graduate pay premium is shrinking as the cost of living skyrockets. 

Universities hollowed out. Frozen fees have cut universities’ income from domestic students by a third in real terms since 2016. Meanwhile, government grants have collapsed from 30% of university income in the late 90s to under 5% in 2018. 40% of universities now run a deficit, up from 21% in 2020-21, while academia becomes an increasingly insecure and underpaid career path. International student income, which historically plugged the gap, is waning as the government’s immigration policy pushes students away. These are existential challenges for a sector that is structurally important for the UK economy, both in its own right and to underpin competitiveness in other high-skilled, knowledge-based sectors.

Students stretched thin. Students rely on maintenance loans that now cover on average just half their actual living costs; 68% now work while studying, versus under 50% three years ago.

Labour market effects. This doesn’t only damage individual graduates. It also undermines young people’s ability to afford housing, suppresses their consumption and harms both saving and eventual retirement. There may also be unintended consequences for the labour market – some tax experts suggest that very high marginal tax rates discourage graduates from taking promotions because so much of the pay rise goes straight to loan repayments. 

Fiscal framework says no? Freezing the threshold gave the Chancellor a bit more so-called headroom within her fiscal rules because of how national accounting rules treat student loans. Any change to improve the system for graduates is likely to butt up against those self-imposed rules – and Reeves has repeatedly said breaking them is off the table. And as the Institute for Fiscal Studies notes, the relationship between the public finances and student loans “is complex and can be counter-intuitive” because of the interactions between interest rates, levels of repayment and the overall value of the student loan book. This all creates uncertainty about how changes would show up in the National Accounts. As a result, the IFS has warned against making the accounting treatment of student loans the basis of policy decisions about how they are structured and repaid. 

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What Next?

Tweaks to the system. Several campaigns have sprung up recently, and public opinion is on their side with 76% of Britons now worrying students are too indebted. Rethink Repayment wants to cut the repayment rate to 5% and cap interest at CPI. However, the IFS reckons these relatively modest changes could cost tens of billions to deliver just for Plan 2 borrowers. Meanwhile, the Good Growth Foundation, reportedly working with Labour MPs, would raise the threshold to £33k and cut repayment rates, imposing a 40-year term to pay for it. IPPR modelled a stepped approach, starting at 4.5% and rising to 9% above £50k, to protect lower-income graduates.

A graduate tax? MillionPlus, the member body for post-1992 universities,  previously proposed a fully stepped graduate tax peaking at 3.5% above £42k, making the current system less regressive. However, NIESR raised several concerns with graduate taxes, including overseas enforcement, ringfencing of funding and potential unpopularity.

Britain's Most Trusted Man™. Martin Lewis has thrown his weight behind reversing the threshold freeze. He criticised Conservative leader Kemi Badenoch, suggesting that changing repayment thresholds would be fairer than her idea of capping Plan 2 interest at RPI, mostly benefitting higher earners. 

I agree with Nick. The Lib Dems have plans to unfreeze thresholds, restore maintenance grants and write off loans for workers like nurses, doctors and teachers after 10 years of public service. One especially eyebrow-raising intervention came from former Lib Dem leader and infamous tuition fee promise-breaker Nick Clegg, who declared student loans “a mess”. 

Goodbye to fees? Zack Polanski, speaking at the New Economics Foundation last week, said he would scrap fees entirely and write off existing debt, but conceded work is still needed on how to fund it, saying he'll look to think tanks to work out the details. Reform, meanwhile, would end interest on loans, but extend repayment to 45 years.

As Rachel Reeves says, the Government has no firm plans aside from reintroducing limited maintenance grants which would support students from low-income households studying specific subjects. With rising political pressure both from partisan rivals and within Labour reflecting the real-world harms the current mode inflicts, this issue isn’t going anywhere. Can the government get ahead of the public mood on this, or does it have the makings of another damaging U-turn?

Good morning from New Economy Brief.

The US–Israel war on Iran has already been termed “the biggest energy supply/logistics crisis… in modern history”, with warnings that stagflation could “bring down the economies of the world”.

The scale of impacts remains highly uncertain – one key dependency is how long oil supply chains in the Strait of Hormuz remain disrupted and the extent of damage to regional energy infrastructure. But even if the war ends now, recovery will take “weeks to months”. 

This week’s New Economy Brief assesses the implications of the crisis for the UK economy, and looks at what can be learned from the last energy shock after Russia’s invasion of Ukraine.

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Energy price shocks and their effects

Oil has risen from $60 to around $100 per barrel, with Iranian officials threatening to drive prices to $200 to pressure Western governments into encouraging the US and Israel to stop the war. Geopolitical analysts see a 70% chance of prolonged disruption. Goldman Sachs warns the impacts could be 17 times worse than the last shock and oil prices could reach ~$150 per barrel. Meanwhile Oxford Economics warns that oil reaching $140 per barrel could trigger global recession.

Energy costs increase the price of other goods. The Resolution Foundation warns sustained disruption could raise bills by £500 this year. Ofgem’s price cap will cushion most households until at least the end of June, but bills will probably rise from there. However, firms renewing energy contracts will face immediate increases. Fuel prices are already rising and companies are passing increased costs on to consumers: the trade body Make UK says orders are falling, input costs are rising and confidence is weakening across manufacturers, while firms are raising prices at the fastest pace since 2023. 

Price spikes in other imports. Energy costs drive up to 50% of food price inflation, so we are likely to see increased food prices. The war has also disrupted trade of other goods, such as fertilisers – which UK farmers are wholly depending on importing. The Strait of Hormuz is a critical chokepoint for food (in)security; Chatham House experts warn that any disruption risks shortages and price spikes. 

Overall, stagflation risks are rising. Are we going to see another period of low growth and high inflation – stagflation? The OBR has estimated elevated energy prices could increase inflation by 1%, and markets now think the Bank of England will increase interest rates, rather than the gradual cuts over the year they previously expected. Recession was already a risk, but higher interest rates are likely to slow growth even further, eating into the government’s fiscal space - and that is before considering the costs of any crisis response.

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Learning from the last energy price shock

Inflation reached over 10% in late 2022, under the last government. And while rising inflation was a global trend, the UK fared worst in the G7 for much of this period. 

The Bank of England found that companies protecting their margins by passing on higher costs to their customers accounted for around 75% of UK inflation at its peak. IPPR and Common Wealth research argued that this is because energy, food and commodities giants have the monopoly power 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.”

The last energy crisis undid many governments. The impact on lower income states was particularly acute, as they were priced out of energy markets as richer states outbid them for scarce supplies. Higher global interest rates also deepened the international sovereign debt crisis by increasing indebted countries’ borrowing costs. 

In the UK, it has been argued - for example by IPPR and NEF - that interest rates remained too high for too long. This dragged growth down, and led to increased borrowing costs that are still constraining the government’s fiscal options even now. How can stagflation be avoided this time?

The economic case for ‘unconventional fiscal policy’ to limit inflation. The Bank of England is bound by its current mandate to focus on targeting 2% inflation, and setting interest rates is its main tool to do this. Yet Monetary Policy Committee member Swati Dhingra has warned of monetary policy’s limitations in countering supply-side inflation: "even outside of extreme scenarios, monetary policy action alone… is not well-suited to address systemic price shocks in key sectors such as energy and food. It may even be counterproductive, as it could constrain investment that would enhance supply resilience and exacerbate future vulnerabilities."

Countering profiteering. The previous government allowed inflation to rise beyond 10%, in part because it was too slow to prevent rising energy prices from spreading into other parts of the economy via “pass the parcel inflation”. Other governments singled-out firms that they judged to be exploiting the crisis. Examples include the Australian government's targeting of supermarkets over rising food prices and Spain's windfall tax on banks to subsidise public transport and use of rent controls to protect renters. It's worth noting that both governments are rare political survivors of the last energy price crisis, suggesting that there are political as well as economic benefits to such policies.

Windfall and excess profit taxes? In 2022, IPPR proposed the Competition and Markets Authority should launch “pre-emptive investigations into the potential for excess profits in the most concentrated sectors of the economy” and tax excess profits in sectors beyond oil and gas. For example, Positive Money calculated that replicating Spain’s windfall tax on banks to recoup unearned profits from higher interest rates could have raised £12.5bn last year. Excess profit taxes don’t just deter companies in many sectors from passing inflation on to consumers; they also raise funds to provide the most vulnerable with extra support.

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UK government’s short-term response (so far)

Chancellor Rachel Reeves said “nothing is off the table” to help households and businesses cope with energy bills. Energy Secretary Ed Miliband also warned “this government will not tolerate price gouging”, while the Prime Minister Keir Starmer has announced a ‘legal direction’ for energy firms to pass on £150 in savings from the 2025 Budget and pledged to protect “working people” from rising energy costs.

Early signals suggest more targeted support than the universal price caps used last time. The Financial Times’ Stephen Bush suggests cash transfers for vulnerable households could both be cheaper and include incentives to switch to lower-carbon options. Proposals like NEF’s National Energy Guarantee aim to focus support where it’s needed most and encourage home decarbonisation.

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Building long-term resilience

Three lessons emerge.

First, the crisis reinforces the government’s case for clean energy to reduce exposure to volatile fossil fuels. While the UK is already moving at pace towards a largely renewables-based electricity system, further efforts are needed to electrify the wider economy - especially to accelerate the process of getting homes off gas heating. 

Second, greater resilience is needed to cope with price shocks in an increasingly volatile global economy. The International Energy Agency has now agreed to the biggest release from its strategic oil reserves in history to stabilise prices in the short term. The government could also consider building up stocks of fertiliser like Finland and Switzerland do, or buffer stocks of other essentials to control inflation when trade shocks inevitably arise.  

Third, the UK’s monetary policy framework was built for a different economic context. The government could consider using dual mandates or green credit guidance to reduce the cost of capital for investments that enhance resilience, and ‘adaptive inflation targeting’ and other forms of monetary and fiscal coordination against supply-side inflation. Last reviewed in 2013, the framework predates Brexit, Covid, Ukraine, and Iran. In an economy that is ever-more prone to crisis, a reassessment seems well overdue.

Good morning from New Economy Brief.

The climate crisis is getting harder to ignore. Though the UK will be far from the worst-affected country, last year’s hottest summer on record, and this year’s warmer and wetter winter, are stark reminders that life is becoming increasingly unstable everywhere.

This week’s New Economy Brief explores how damage to homes from extreme weather is turning climate change into a lived reality, and linking these everyday experiences to systemic risks to the financial and economic system.

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Extreme weather is putting homes at risk.

According to UK government estimates, over 6 million homes are at risk of flooding, and hotter, drier summers are leading to increased damage from subsidence. These impacts are set to increase. Insurer Aviva projects that UK properties at risk of flooding will reach 8 million by 2050, whilst those facing subsidence risk could rise from 5 to 6.45 million.

All this is adding to costs for insurers, whose weather-related damage payouts for 2025 are expected to be more than double the 2017-21 average. 

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More damages mean rising premiums, and even withdrawal of cover. 

This leads to rising insurance prices, and in some cases, withdrawal of coverage altogether. 

The Bank of England has estimated that by 2050 2 million UK homes could be uninsurable due to flood risk, and premium prices are already rising, with home insurance costing around 30% more on average in 2025 than in 2022. 

Though rising labour and materials costs have contributed to higher premiums, the rising frequency of extreme weather is also a key factor, and there have been reports that whole towns may be abandoned due to regular severe flooding. 

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Who bears the costs? 

Insurers are profit-making entities – they withdraw coverage or raise premiums to protect their own bottom lines, which means the impacts of extreme weather ultimately fall on individuals and the state. Low-income homeowners are hit hardest, according to researchers at Bayes Business School, as rising climate costs add to the higher prices they are already charged – an issue that’s dubbed the ‘poverty premium’.

In several countries, state-backed reinsurance schemes help to shield consumers in high-risk areas. The UK’s Flood Re lowers prices by reinsuring the flooding component of private contracts. Home insurers pay for this through a regular levy. They can then offload risk onto Flood Re, which covers any claims they face for flood damage. 

However, Flood Re’s future is uncertain, with the scheme due to be wound down by 2039. This is by design – it was intended to be a temporary measure, lowering prices in the short term while supporting the transition to a ‘free market’ for insurance. The theory was that premiums would fall once insurers, households and developers have more information on weather risks, enabling them to invest in defenses or leave riskier areas. 

But as political economist Brett Christophers has argued, there is a tension between affordability and the market mechanism. Rising premiums are the market forces intended to discourage owning and building in high-risk areas, but they also hit low-income households the hardest. In any case, such a transition has failed to take place. A decade since its inception, Flood Re has warned that the affordability problem is getting worse, and the proportion of new homes built in high risk areas continues to climb. 

Ultimately, even if insurance is available, it can’t prevent the human devastation caused by severe weather. And when there’s lasting damage, individuals and governments are the ones left holding the can, as seen just last month when a south Wales council bought out the residents of a row of 16 homes deemed undefendable from further flooding. 

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What are the impacts for the wider economy?

Insurance acts as a ‘shock absorber’ for the wider economy. Declining protection leaves individuals and businesses more vulnerable when shocks hit, and the effects can cascade throughout the financial system and wider economy. It also constrains investment in resilience, creating a ‘doom loop’ of rising insurance costs leading to spending cuts, which increase vulnerability still further and feeds into even higher premiums.

For years, experts have been raising the alarm that the  threat to housing markets from climate change could spark a financial crisis. A key trigger would be uninsurability leading to rapid declines in house values, which would reverberate throughout the financial system because of how much debt is ultimately secured on people’s homes. 

Perhaps unsurprisingly, insurers have warned us vocally about these risks. The industry has ranked climate change as the biggest threat it faces for five years running. A board member at major insurer Allianz even made waves last year by warning that the climate crisis is ‘on track to destroy capitalism’.

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What can be done about it?

Prevention is the best cure. Most obviously, all this underscores the need for rapid action to halt global heating and nature loss. But with the impacts already with us, investment in adaptation is critical. This includes flood defenses, water systems and housing retrofits, as well as restoring the natural environments that provide some of the best forms of defence.

Planning regulation. Though the Government has put planning deregulation at the heart of its housing strategy, the increasing harm climate change is doing provides another example of why rolling back regulation is unlikely to solve the UK’s housing woes. Just this week, both insurers and campaigners warned of the risks of government plans to loosen existing restrictions on building in flood-prone areas. Louis Ramirez, director of the campaign group Flooded People UK, said that weakening the rules would mean that if flooding happens, home owners “will struggle to secure insurance, plunging them into an unending financial and emotional nightmare.”

Insurers of last resort. Schemes like Flood Re can make insurance cheaper and more available. But they do this by letting the private insurance industry offload risk onto to the government. The danger is that they end up privatising rewards and socialising losses - they can even expose those in flood-prone areas to profiteering, according to the US-based Climate and Community Institute (CCI).

CCI argues the best solution to private insurers' inherent conflict between profits and protection is for the state to provide insurance directly. The US already has a public provider – the National Flood Insurance Programme – giving it a strong foundation to build upon.

Ultimately, there’s no silver bullet. But it’s clear that market-based approaches aren’t giving us enough resilience in an increasingly volatile world – in fact, they seem to be making things worse. The deep interlinkages between seemingly disparate areas like planning, housing, climate adaptation and the financial system call for a coordinated approach that only governments can deliver.

Good morning from New Economy Brief.

Earlier this year at the World Economic Forum, Reform UK’s leader Nigel Farage said the party should “challenge every single tenet” of UK economic policy. He also warned that a Reform government could abolish the OBR and limit the Bank of England’s independence.

Since then, however, Reform has sought to shore up its reputation for economic competence and has rowed back on some of its earlier ideas. Former senior Conservatives have defected, with ex-Cabinet minister Robert Jenrick appointed as Treasury spokesperson.

What does Reform’s economic platform look like now? This week’s bumper New Economy Brief digests what we know so far – and what happens when rhetoric meets the realities of governing.

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Tax cuts, at some point

A central offer in Reform’s 2024 manifesto was around £90bn of tax cuts: raising the inheritance tax threshold to £2m, lifting the personal allowance to £20,000 and the higher rate threshold to £70,000, cutting corporation tax to 15%, offering tax relief on private school fees and reducing fuel duty.

By early 2026, these have been downgraded to an “aspiration”. Reform is keen to calm financial markets about the risks of an untested party. Farage said last week that taxes would only be cut once spending savings are found, explicitly to avoid a repeat of the market turmoil triggered by the unfunded tax cuts in Liz Truss’s 2022 mini-budget. (Notably, the Reform-aligned Centre For A Better Britain think tank’s first paper was titled What to do if the UK faces a sovereign debt crisis.)

For example, tax cuts on pubs would be fully funded by welfare cuts. Reform proposes cutting beer duty and hospitality VAT by 10%, estimating a £3bn annual cost by 2029, funded by reinstating the two-child benefit limit (with exemptions for working UK-national parents). In short, it is under greater pressure to show its sums add up – though IPPR analysis warns the tax cuts would “dwarf” any savings.

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Spending cuts first, to build credibility

RUK’s national tax-cutting programme rests on the claim that large amounts of wasteful spending – on welfare, net zero and the civil service – can be cut. Farage has previously suggested £350bn of savings over a parliament, equivalent to eliminating the entire schools budget each year or roughly a third of NHS funding.

It makes headlines, but the rhetoric is likely to collide with the reality of a public sector that has struggled to deliver savings for 15 years, while still feeling threadbare.

Reform meets reality in local government. While untested nationally, Reform has pursued spending reductions in local government via its “Doge” cost-cutting units, inspired by Elon Musk’s Department for Government Efficiency in the US, aiming to cut ‘waste’ in Diversity, Equity and Inclusion and other so-called ‘woke agendas’.

The highest-profile case so far has been Kent County Council. Council member leader Paul Chamberlain admitted: “We made some assumptions that we would come in here and find some of the craziness that Doge found in America … and that was wrong.” Services had already been cut back heavily. 

Nevertheless, Reform claims more than £300m in savings have been found so far across 10 councils it controls – although the Guardian disputes this. Far from delivering the tax cuts they promise nationally, financial pressures have instead driven roughly £250m in council tax rises in Reform-run areas, alongside unpopular decisions, rows, resignations and U-turns, according to the FT’s Jennifer Williams. Reform-controlled councils will raise council tax by an average 4.3% in April.

The Institute for Government’s Stuart Hoddinott says the past nine months have been a reality check: “The whole story has been the populist rhetoric butting up against the reality” – namely that councils must raise tax to meet rising social care costs.

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A ‘Great Repeal Act’ to deregulate the economy and scrap net zero 

This tension between rhetoric and reality appears throughout Reform’s programme. More proposed savings come from reversing climate policy via a “Great Repeal Act” to scrap regulations that “kill jobs, hinder growth, investment and prosperity”.

The plan includes scrapping net zero targets and imposing a windfall tax on renewables. Reform also wants to expand public investment and ownership in nuclear, fracking and fossil fuels by consolidating public-sector pension schemes into a new Sovereign Wealth Fund. 

Reform plans to extend this deregulatory agenda to the housing and the labour markets by repealing the popular New Deal for Workers, the Renters Rights Act, and other financial and business regulations, arguing this will lower inflation and household bills.

Zooming in on climate policy. Reform claims scrapping net zero could raise £45bn–£225bn, though the higher figure is widely considered misleading because it counts private investment, and cancelling this doesn’t save the government money, according to the Institute for Government.

Lord Nick Stern has argued that climate action is the “only growth opportunity of the 21st century”; pursuing fossil-fuel-led growth instead is “futile because the damage it causes ends in self-destruction”.

Inaction costs far more than action.  Reform's planned savings from abandoning net zero also ignore the reality of huge long-term costs of inaction. Climate change could slash global economic output by a third to a half, with inflation spiking, productivity and whole industries collapsing as supply chains stretch and break.

 On energy specifically, NEF estimates that, if implemented in 2026, Reform’s proposed taxes on renewables, removal of subsidies and wider anti-environmental policies could cost the UK £92bn in lost revenue and eliminate more than 60,000 jobs by 2030.

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The tension between immigration plans and fiscal sustainability

Reform would abolish Indefinite Leave to Remain (ILR), which allows migrants to qualify for rights and access to benefits. It claims this would save £234bn over several decades, with policy chief Zia Yusuf asserting that many of those affected are “entirely dependent on the welfare state” and will either voluntarily leave the UK or be deported. 

Reform also plans an Illegal Migration (Mass Deportation) Bill to remove up to 600,000 irregular migrants by expanding detention capacity twelvefold and running daily chartered flights. It estimates a £10bn cost over five years but claims larger long-term savings from reduced asylum spending on hotels and elsewhere.

Lost income, lower labour supply, higher borrowing. This Guardian explainer questions the costings of Reform’s plan. But even if it could succeed operationally, there are wider economic impacts from reduced legal migration. 

Migrants fill one in five jobs, have higher employment rates, pay about £19,500 per adult annually in tax, generate £4.1bn a year in visa fees and are less likely to claim benefits. The OBR estimates that cutting net migration by 200,000 would reduce GDP by about 1.5% and increase borrowing by nearly £20bn within five years.

Lower migration typically means lower growth and so less fiscal headroom to tackle cost-of-living pressures or restore public services. As King’s College London Professor Jonathan Portes argues: “The risk is the emergence of a migration doom loop, in which political pressure to reduce migration leads to policy choices that weaken economic performance and public services, thereby intensifying the very discontent that fuels anti-immigration sentiment.” 

That is not to mention the moral and legal issues. Laura Smith of the Joint Council for the Welfare of Immigrants (JCWI) describes this as a “Rubicon moment,” arguing: “This isn’t about migration policy any more, it’s about whether we still value the basic human rights and freedoms that define a democratic society.”

Reform’s response: reform the OBR. Reform argues OBR forecasts fail to capture migrants’ long-term fiscal costs as they age, have children and draw pensions. Farage previously suggested abolishing the OBR, but in a bid to boost market credibility, Robert Jenrick has softened the position. Reform now says the OBR (like the Bank of England) would remain independent, but would be required to “open itself up to more outside, proven forecasting expertise” via a rotating expert panel to diversify views on the Budget Responsibility Committee. 

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Is this economic approach a winning formula?

Significant parts of Reform’s economic policy platform arguably resemble a typical pro-business, free-market approach. This is likely to lead to tensions amongst Reform’s current and target voter base, who hold a mixture of views about the economy. 

The party is moving towards a deregulatory agenda that weakens workers’ and renters’ rights, despite workplace and housing protections being popular with its own voter base and with the public as a whole. Polling from the Trades Union Congress found strong majorities of Reform voters are in favour of banning zero hours contracts, giving all workers a right to sick pay and protection against unfair dismissal from day one, and making flexible working easier. Likewise, a majority of 2024 Reform voters support banning no-fault evictions. 

And while Reform 2024 voters do tend to hold more right-wing opinions about the economy than the national average, Reform-curious Labour voters have very different views. According to research from Persuasion UK, majorities of this group think employers and landlords have too much power over workers and tenants, and that more business regulation is in the interests of ordinary people. This suggests that Reform’s economic platform lacks appeal for large swathes of its target voters, and the public at large. 

Reform’s economic offer rests on the idea that deep cuts, deregulation and deportations can deliver growth without painful consequences. The workability of this philosophy has already butted up against reality in local government. It remains to be seen whether voters will have the appetite to repeat this experiment at the national level, or whether other parties will be able to summon up more compelling visions for the UK economy. 

Good morning from the New Economy Brief.

On 1st February, services run by West Midlands Trains officially transferred into public ownership. More than half of the UK's train operating companies are now back in public hands, with the rest due to follow by the end of 2027. It's enough to have even the most hard hearted policy wonk feeling like Francis Bourgeois at the sight of a Pendolino. 

But how's it actually going? Is Labour making a success of rail renationalisation? Will this electrify the role of public ownership in our economic model, or is the government stuck at the barriers?

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A brief history of rail in Britain

Public ownership and decline. From 1948 until the 1990s, the UK rail system was fully nationalised. It was run by British Rail, the state body that owned and operated both rail networks and trains. However, a policy focus on investing in roads, not tracks, meant rail declined during that period: the annual number of rail journeys fell from 1bn in 1950 to 600m in 1982. 

Privatisation. In 1993, John Major's government passed the Railways Act, transferring the trains, their operation and even the tracks into private hands. After privatisation, rail travel’s popularity bounced back, peaking in 2017 with 1.7bn journeys made. This recovery is often pointed to as an iron-clad defence of privatisation; however there's evidence it began long before and stems from wider trends such as urbanisation and lifestyle choices. 

Trouble in free market paradise. While passenger numbers climbed, customer satisfaction crumbled. This came to a head in May 2018, when new timetables triggered widespread disruption and cancellations, as anyone travelling on Southern or Northern Rail probably remembers. Then, during Covid, passenger numbers plummeted by 94%. The government stepped in to underwrite losses and the Conservative government turned to nationalisation, notably taking over TransPennine Express after passengers regularly saw a quarter of services cancelled with little notice. 

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Labour's Renationalisation

Low-cost rail (contracts). In 2024, Labour ran on a manifesto commitment to bring rail back into public ownership. Reliability had hit record lows, with around 4% of services being cancelled, double their 2015 rate. In November 2025, legislation was passed to bring rail firms into public ownership as their contracts expire, rather than mid-contract, meaning the government wouldn’t have to compensate private operators. 

A simpler system. The Railways Bill, currently making its way through Parliament, will allow the government to set up Great British Railways. GBR will not own the trains themselves (more on that in a moment), but it will be a single "guiding mind" for the network, which the government hopes will be more efficient and improve accountability. 

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Can renationalisation work?

It works for the Swiss. Advocates for renationalisation point to how well public rail systems work abroad. Switzerland is routinely cited as having Europe’s best rail system. Its publicly owned, fully integrated network connects even small villages efficiently. Unsurprisingly, the Swiss use trains more per capita than any other European nation.

Publicly owned (just not by us). Also, as Common Wealth pointed out in 2020, foreign governments, including the Netherlands, France, Germany, Italy and Hong Kong, have outright control of or significant stakes in more rail franchises than the UK government does. 

Popular support. Public opinion is firmly on the side of change. Polling shows roughly two thirds of the country is regularly in favour of nationalising train operators. However research for YouGov shows this support is is contingent on taxes and fares not increasing as a result  

Rail (report) card So far, the data on nationalised operators is mixed. Some operators have increased punctuality and reduced cancellations, but others have struggled. As We Own It argue, public ownership alone is not enough. To succeed, it also needs increased investment.  

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Will my train ticket get cheaper?

How much for a peak train?! The first thing the public wants to see from nationalisation is lower ticket prices. The UK has the highest rail fares in Europe, and TUC research found that fares for commuters rose 46% from 2009 to 2019, twice as fast as wages. 

Don't get your hopes up. Current renationalisation plans will not cut ticket prices. Instead, the government has promised a “best fare guarantee”, designed to simplify the ridiculously complex ticketing system which forces the British public to navigate 55 million different fares. However, there are concerns that simplifying tickets could cost passengers more, with a pilot by LNER making many journeys more expensive by removing some current super off-peak and advance fares. There is one concrete shift though, with regulated fares being frozen for the first time since the mid-1990s. So while prices aren’t coming down, at least for now the vast majority aren't going up.

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What next?

Labour's plans are an important victory for anyone arguing that public ownership is a viable economic model. However, to really make a difference, owning the operating companies is not enough. 

Investment If we want Swiss-level services, we need to be willing to pay for them. In 2024, Switzerland invested €477 per capita in its rail system; Britain just €116. The economic case is strong. Every £1 invested in rail is estimated to generate £2.50 in economic activity. London’s Elizabeth line demonstrates what strategic investment can achieve, accounting for 1 in 6 UK rail journeys.

Profiteering. While Great British Railways is a good start, major parts of the system will remain in private hands, including the trains themselves. The current plans would leave the Rolling Stock Companies (ROSCOs) that own the trains untouched, likely because of the significant upfront cost of procuring trains. RMT research found ROSCOs paid out almost £1bn in dividends in 2020-21, half the fares passengers paid over the same period. Ticket purchasing, cleaning, catering and engineering will also still be run by private companies. Without reform here, public ownership of operators may still leave profits flowing out of the system. Bringing all parts of the rail system into public ownership may cost more upfront, but could ultimately save money. 

Regional inequality Finally, as IPPR recently highlighted, rail investment has long been skewed towards London and the South East. If rail in the North had received similar levels of investment to London, this would have meant £140bn extra over the last 15 years. Instead, countless schemes (from Northern Way and the Northern Hub to HS2's northern leg (a topic for another NEB) and the Integrated Rail Plan), and the Integrated Rail Plan) have all been floated and ultimately scrapped. Meanwhile, as we’ve seen, investment in the Elizabeth Line has paid dividends. IPPR calculate that correcting this imbalance could add £118bn to the North's economy by 2050.

Labour’s renationalisation plans are on the right track, but they don’t go far enough. They still leave too much of the system in private hands, vulnerable to the profiteering and inefficiency that have blighted passengers’ lives. And while renationalisation is a necessary condition for better rail, it’s essential the government makes ambitious, sustained investment. Otherwise public ownership will never get the chance to prove what it can deliver.

Good evening from New Economy Brief.

Next week will be four years since Russia’s invasion of Ukraine sent energy prices skyrocketing, combining with other factors to accelerate a long-building cost of living crisis. Inflation peaked at 11.1% in October 2022, and despite falling since it remains at 3% – significantly above the Bank of England’s 2% target. New polling for the Cost of Living Action campaign has found that almost two thirds of the UK public still consider this one of the three most important issues facing them personally. A similar number say it has made them cut back on essentials, and 40% have £100 or less left at the end of each month after bills and essentials. 

It’s clear that for millions of people the cost of living crisis hasn’t gone away. This week’s New Economy Brief digs into why, and how the government can respond. 

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Energy

The government has estimated that 9 million households in England could be considered ‘fuel poor’ in 2024, almost double the 2021 total. Here, this means they need to spend more than 10% of their income on energy to heat their homes sufficiently. This is much higher than the official figure of 2.73 million households in England, which controversially measures fuel poverty more narrowly. 

Scotland and Wales both still use the 10% definition in their official metrics, with 861,000 and 340,000 fuel-poor households respectively. This means around 30% of all UK households are in fuel poverty. 

A driving factor for this high number is, unsurprisingly, the continuing high price of energy. The average annual household bill for gas and electricity in early 2026 is £1758 – below the October 2022-June 2023 peak of £2380 but still 44% higher than before Russia’s invasion. Why have bills stayed so high?

Reliance on gas. The first reason is the UK’s reliance on gas imports for power plants and heating homes. Gas prices shot up in the wake of the Russian invasion, and because the price of electricity in the UK is dictated by whatever is the most expensive source of generation needed to meet demand, expensive gas has translated directly into expensive electricity – even when other sources of electricity generation, including renewables, have been cheaper. This ‘marginal pricing’ system means that the UK’s electricity market price is set by gas 98% of the time – way above the EU average of 39%. Partly because high electricity prices disincentivise adoption, the UK has the slowest heat pump rollout in Europe, leaving us highly dependent on gas for home heating.

Privatisation and profiteering. Another major issue is privatisation. Compared to other European countries, the UK lacks publicly owned energy infrastructure. As Common Wealth analysis shows, this has led to high profits and wealth extraction along the UK’s energy supply chain. In countries with public energy systems, prices are 20-30% lower. Meanwhile in the UK, private companies paid out at least £70.7bn in dividends between 2010 and 2025 - money that could have gone directly into infrastructure investment or cheaper bills. 

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Incomes 

Wage stagnation. Another key cause of the cost of living crisis is low incomes – driven by both wages and the social security system. Long before the energy price spike, the UK was in the grip of persistent wage stagnation. In 2024, the Resolution Foundation calculated that average wages were only £16 a week higher in real terms than in 2010. And while other rich countries have also experienced low wage growth, the UK has suffered particularly badly. If UK wages had risen at US or German rates, average pay here would be £3,600 a year higher. Back in 2023, TUC analysis showed that real wages would not return to 2008 levels until 2028. 

The TUC had already labelled 2022 the worst year for real wage growth for almost 50 years, as pay failed to keep pace with spiralling inflation. And while real earnings growth did return in 2023, it has slowed again. Importantly, even this growth was not shared equally: analysis by the Joseph Rowntree Foundation (JRF) shows that average real earnings have actually been falling for the bottom 40% of households. 

A threadbare social security system. Last year the government abolished the two child limit, which restricted financial support via the benefits system to a household’s first two children. This will lift 450,000 children out of poverty by 2030, but after years of cuts and freezes the basic rate of Universal Credit remains painfully low – just £400.14 a month for single adults over 25. This is around its lowest ever level as a proportion of average earnings, and far below the £120 a week minimum needed to afford essentials, according to JRF. 

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Housing 

The nightmare of private renting. Unfortunately for the 20% of people in the UK living in the private rented sector (PRS), rents are now at record highs. They consume 44% of the average wage, up from 40% five years ago and way above the 30% the Office for National Statistics considers affordable. 

To make matters worse for low-income private renters, repeated freezes to Local Housing Allowance (LHA) means the gap between financial support and the actual cost of renting keeps getting wider. The Resolution Foundation estimates the monthly shortfall is £104 a month for a typical two-bed property, rising to £180 a month by 2029/30 unless the government increases LHA. 

The government’s flagship Renters’ Rights Act, which received Royal Assent in October last year, also includes very limited measures to tackle the affordability crisis, with renters’ union ACORN calling it “the key area missing from the Act.” 

Social housing shortage. 2024 analysis by Shelter found that social rents are 64% more affordable than private rents, costing tenants £828 less on average per month. But a lack of social housing is trapping families in the more expensive PRS. There were 336,366 families awaiting social housing in London alone last year – a ten-year high. 

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How to end this crisis

The cost of living crisis has multiple drivers, and that means multiple solutions are needed to tackle it. 

Nationalising the energy distribution network would eliminate the high profit margins associated with the current model of private ownership. Going further, there may be room to build the role of GB Energy as a publicly-owned generator, removing the profits that add to bills in other parts of the system - such as the gas power plant profits worth £120 per household. More effective price caps on energy bills would also provide immediate relief to consumers, with suppliers required to offer a standardised tier or sliding price structure.     

An 'essentials guarantee' in Universal Credit would enshrine in legislation a minimum level of support from the social security system that is based on the actual cost of essentials. Fair Pay Agreements, which we covered back in September 2025, would also set minimum pay and improve working conditions, especially important in low-paid sectors like retail and hospitality. 

The government has committed to building more social housing, recognising the “chronic shortage of affordable, and in particular social rented, homes.” Ramping up its Affordable Homes Programme would not only provide much needed social housing, but also generate billions in economic benefits over the longer term. In the short term, realigning LHA with the actual cost of renting would provide much needed support for low-income private renters. And rent controls – which although sometimes dividing opinion – can, if designed carefully, reduce rents effectively without affecting supply. 

The good news for the government is that the Cost of Living Action campaign found that all these solutions are supported by a majority of the public, including both a majority of people intending to vote Labour at the next general election and the majority of people intending to vote for Reform. 

The cost of living crisis hasn’t gone away, and it will remain the number one issue for the public until the government tackles it comprehensively. There are plenty of potential policies on the table; the one option that won’t work is inaction.

Good afternoon from New Economy Brief.

Special Educational Needs provision in England is at breaking point, left under-resourced by austerity and reliant on costly private provision. With a much-anticipated Schools White Paper expected in the coming weeks, this week’s New Economy Brief takes a look at the crisis and what it means for families, councils and the wider economy.

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The SEND picture in England: a system in crisis

In England, local authorities are responsible for identifying children and young people with special educational needs and disabilities (SEND), who have a right to receive special educational provision. More than 1.7 million children in England receive support for special educational needs, up almost a third since 2016. Those with more complex needs have Education, Health and Care Plans (EHCPs), and these have more than doubled to nearly 500,000 - over 5% of all pupils.

Rising demand and squeezed budgets. Unsurprisingly, these increases have squeezed  local authority finances. In 2020 the Government effectively let them keep SEND spending in excess of the Department for Education (DfE) grant funding they received off their balance sheets until 2023. This ‘override’ was then extended to 2026 and then again to 2028. This has helped councils meet their legal requirement to run balanced budgets, but it hasn’t solved the problem – providing SEND support is a statutory duty, and it still costs them more than they receive from the government. To cover the gap, many are either borrowing more or cutting non-statutory services. 

Councils’ deficits from SEND spending have therefore been increasing, from £0.2 billion in 2020/21 to around £2.5 billion in 2025/26. The Office for Budget Responsibility now forecasts cumulative deficits will reach £14 billion by 2028. The Government says all SEND spending after this must come from existing day-to-day spending budgets, but hasn’t yet explained how this will be achieved. 

It is a large-scale and severe problem: last weekend the Local Government Association said 95% of local authorities run a SEND deficit, and this will bankrupt 80% without government reforms. Some councils have even proposed raising funds by increasing council tax above the normal 4.99% maximum – a request the government granted only this week. 

Private provision and short-termism. Growing demand means local authorities increasingly rely on private provision in the face of insufficient state capacity, and councils can spend as much as £250,000 a year per pupil doing so. To make matters worse, analysis of public service ownership by Common Wealth highlights that many independent schools used to meet SEND demand are ‘owned by offshore companies, private equity and, in at least one case, by an Abu Dhabi sovereign wealth fund’.

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Long-term consequences for children and families

This broken system’s impact on the children it should support are far-reaching. Estimates from IPPR suggest the rate of achieving grade 5 or higher in English and maths amongst children receiving support for special educational needs is half the national average. 

SEND and poverty. Beyond educational outcomes, the Joseph Rowntree Foundation found  that ‘children with SEND are more likely to become poor, while children living in poverty are more likely to develop SEND’ a decade ago, and research from the Childhood Trust shows that almost three quarters of social workers feel the cost of living crisis is disproportionately impacting children with SEND.

The crisis affects families unevenly. Sutton Trust research finds children from poorer households are more likely to have SEND, but wealthier families are more able to fund private provision or to challenge assessments. These inequalities persist: children with SEND who are also eligible for free school meals have lower outcomes by 16 than their peers who are not eligible.

A broken system is forcing families to extreme lengths. Behind these statistics, thousands of families are managing the cost of a failing system themselves; from children making 80+ mile round trips to access appropriate private provision, to parents leaving work to homeschool children whose needs mainstream education can’t meet. Research for ITV found that a third of parents had to use the legal system to get their children’s needs met, a process one mother said left her ‘at a point where you can’t function anymore, but the demand is still there from everyday life’.

Quality and breadth of provision are suffering too. When surveyed by the National Education Union, just one in ten teachers in mainstream schools reported having sufficient access to specialist SEND support. For children assessed for an  EHCP, less than half (and falling) receive their plans within the statutory 20 weeks.

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Ambitious reform is needed

Ahead of the White Paper’s publication, ministers have trailed reforms including 10,000 new SEND places and a £200m investment in teacher training. 

But as IPPR argues, complex, systemic failings have created an ‘inevitable compounding downward spiral’, and ‘incremental reform of the existing system is not an option.’ Fundamental reform is needed to provide better, more accessible SEND support and fund it sustainably for the long term.

Improving Access and Quality. The Association of School and College Leaders has outlined recommendations including building workforce capacity through specialist SEND qualifications, sustained investment in SEND provision and adding more specialist state school places.

Meanwhile the Independent Provider of Special Education Advice calls for greater accountability, with a “a zero-tolerance approach to local authorities that fail in their duties to children and young people with SEND.” The Disabled Children’s Partnership has also warned ministers that legal rights for disabled people are ‘red lines’. 

Fixing the funding. But improving services will be hard without fundamental changes to the way SEND provision is funded and structured. Pressure from local authorities to have their SEND deficits written off has been growing. This week the Government announced the cancellation of 90% of councils’ historic SEND-related deficits up to 2025-26. But as the County Councils Network argues, if the system’s structural problems aren’t dealt with, “costs [will] continue to outstrip available funding, even if deficits are cleared.”

IPPR advocates for a redesign of the whole education system to prioritise early intervention and inclusion rather than treating SEND provision as a separate system. This would rebalance funding and resources, “allowing mainstream settings to deliver additional support where and when children need it”. 

Councils’ finances are struggling on multiple fronts. It’s also important to remember that SEND costs are far from the only threat to council budgets. Pressures on other statutory services like adult social care and temporary accommodation have also left them at breaking point, as we explored last year. Non-statutory services have been cut to pay for the statutory ones, and restoring these will take still more funding. 

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The political risks of getting reform wrong 

The Government has already seen what happens when it gets reforms wrong – just look at its attempt to change disability and incapacity benefits last year. 

And there are warning signs: ahead of the White Paper there have been hints that the government might move to reserve EHCPs for those with the most complex and severe needs. Parents and campaigners have understandably met these suggestions with concern, although DfE minister Georgia Gould has reassured families that children will not have their current support reduced, or lose their specialist school places. 

The Schools White Paper will be a critical test of whether the Government can deliver much-needed change to meet children’s and parents’ needs, support those working in the sector and provide long-term sustainable funding. With parents fearing loss of provision, MPs foreseeing a potential rebellion and council finances buckling under pressure, the stakes to get these reforms right couldn't be higher.

Good morning from New Economy Brief.

Andy Burnham will not be a candidate in the upcoming Gorton and Denton by-election. 

But with so much focus on Labour’s internal ‘psychodrama’, there has been less attention to the economic side of the story. This is despite the fact that “Burnham is raising the possibility of a completely different political economy”, according to the New Statesman’s Tom McTague. 

This week’s New Economy Brief explores what we know about Burnham’s proposed ‘Manchesterism’ and what it could mean for the UK. 

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Defining ‘Manchesterism’.

‘Manchesterism’ is sometimes understood as what the Greater Manchester Combined Authority’s (GMCA) economic development plans have been since Burnham became Manchester’s Metro Mayor, which have seen the city region become the "fastest growing part of the UK economy”.  

But it’s also used to describe Burnham’s economic plan for the UK if he were to become PM. In Burnham’s own words, it’s a “modern and functional response to the high-inequality, low-growth trap that came from the 1980s drive to privatise economic power and overcentralise political power in the Treasury. It is about creating a new politics to plot our way out of that and develop a new economy.”

So in short: ‘Manchesterism’ involves using public ownership to take more control of providing essential goods and services, in order to expand their supply, reduce costs and make the “basics of life” – necessities like housing, energy, water and transport – more affordable for people.

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Reversing the ‘privatisation premium’.

In a recent Guardian op-ed, Burnham argued that “the four horsemen of Britain’s apocalypse are deindustrialisation, privatisation, austerity and Brexit”. And the question of ownership is central to Burnham's story about the UK’s poor economic performance, and how to improve it. 

A core tenet of Manchesterism’s economic strategy is that the public control of essentials is necessary to drive down costs for both ordinary people and the state. Burnham points to examples where the GMCA has built more social housing and taken buses into public ownership to reduce costs.

The think tank Common Wealth has termed this the “privatisation premium”. Their Who Owns Britain project shows the UK public has paid £200bn to shareholders of key industries since privatisation. This is equivalent to every household paying the owners of water, rail, bus, energy and mail companies £250 a year since 2010.

Prices are higher than they otherwise would be for essentials because private shareholders demand an extra return on their investment, which would not happen under public ownership. For example, almost a quarter of the average energy bill in 2024 ended up as corporate profits. Meanwhile half the rail industry’s income in 2023-24 came from taxpayers via direct or indirect subsidies, but all its profits went to shareholders. Public ownership also stops multiple private companies extracting profit at each link in the supply chain.

The government can also borrow much more cheaply than the private sector, so it can afford to invest more in building up supply. For instance, Thames Water’s latest £3bn loan pays 9.75% interest, whereas public sector bodies can borrow at close to the bank rate – currently less than half that. The water sector is a prime example of mismanagement and extractive behaviour by shareholders. Writing for Common Wealth, Ewan McGaughey explains that the government could legally take the water industry into public ownership without paying shareholders a penny. 

Burnham’s New Statesman interview also suggested “there might be ways to reclaim some of the money he says has been ‘siphoned out’ in dividends.” Ewan McGaughey proposes that the government could legislate for a ‘bail in provision’ to charge shareholders for the damage they have done by sweating public assets and extracting value from them in the years since privatisation. 

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A new macroeconomic strategy.

Reducing costs for households has the clear economic benefit of letting them spend more of their disposable income on goods and services and create more demand in their local economies, rather than the money being siphoned away to line shareholders who own an increasing amount of essential goods and services. 

But there are other macroeconomic benefits too, including making the economy more resilient to inflationary pressures. For example, rebuilding the social housing stock can help limit house price inflation, and building up ‘buffer stocks’ of energy and food (as economist Isabella Weber has recommended) can reduce price spikes if there is a supply shock from a war, natural disaster or other frictions in trade.

A more active approach to managing inflation. The OBR’s latest report showed how government policy can actively reduce inflation and the expected path of interest rates: the measures in the 2025 Autumn Budget to lower energy bills and extend the freeze on fuel duty were estimated to reduce inflation by 0.3% percentage points in 2026. ‘Manchesterism’ seeks to go further in limiting price rises, using what others have called ‘unconventional fiscal policy’ to fight inflation. (Look out for a forthcoming paper from Common Wealth for more on how reclaiming essentials drives down the cost of living and state spending.) Where the climate crisis and geopolitical frictions make the UK economy increasingly unstable, this gives the state a new role in macroeconomic management. (See NEF’s report on how domestic monetary and fiscal policy need to work together in an increasingly shock-ridden world.)

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Why are we “in hock to the bond markets”?

Some of Burnham’s critics have accused him of economic incompetence, pointing to his assertion that “we’ve got to get beyond this thing of being in hock to the bond markets”. 

Pushing back against this criticism in a speech at the Institute for Fiscal Studies, Burnham argued that the reason why the UK is ‘in hock to the bond markets’ is due to a neoliberal political economy that has led us into a ‘doop-loop’ of low growth, high debt and sticky inflation. This resonates with the point made by economists such as Dimitri Zenghelis, who has argued stagflation is the main reason for the UK’s elevated borrowing costs in bond markets.

In his IFS speech, Burnham also talked about how GMCA has been ‘roll[ing] back the 1980s’ with public ownership of buses, more social housing, control of public investment and an industrial strategy to regenerate Greater Manchester and spur economic growth. The idea is to expand ‘Manchesterism’ UK-wide to improve the nation’s macroeconomic fundamentals. Burnham also wants to push towards ‘maximum devolution’ so that all regional leaders not only have the powers he has had in Manchester, but can go further still to introduce policies like rent controls. 

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The cost of living crisis makes and breaks governments.

There are international precedents, and a strong political case, for such an economic approach. The return of inflation has destabilised governments across the world. ‘Manchesterism’ somewhat resembles Spain’s approach to the cost of living crisis under the government of Pedro Sanchez – one of the few to survive having their support inflated away by price shocks since 2022. Spain implemented a temporary windfall tax on banks and energy companies to fund free rail fares, strengthened rent controls and took many other steps to hold down the price of essentials and deter ‘greedflation’ by private companies.

Manchesterism’s core argument is simple: that the cost of living crisis, weak growth, political instability and bond market instability all stem from the same source: loss of public control over essential goods and services. Burnham is hoping his plan – and his success in putting it into action as mayor – gives us a blueprint for how to reverse this. Whether he’ll get the chance to test that at a national scale is anyone’s guess

Good afternoon from New Economy Brief.

What is going on with US foreign policy? Is there any economic explanation for the current wave of aggression, or is it pure power politics? 

Or perhaps it is a mixture of the two, with a dash of postmodern chaos thrown in: what Adam Tooze has called ‘feckless reality TV cosplay resource imperialism’. 

This week’s New Economy Brief tries to cut through the noise, examining the role of economic interests in shaping US policy towards both Venezuela and Greenland.

Catching up on a dizzying few weeks.

Within the first few days of the new year, the US launched a military operation to capture the Venezuelan President, before pressing domestic drug trafficking charges against him in a New York court. 

Trump has also set his sights on Greenland. He first offered to buy the Danish territory in 2019, but recently this interest seems to have become an obsession. The first few weeks of the year saw a radical ramping-up of threats, with at least parts of the administration dangling the possibility of military force and Trump himself promising tariffs against European states (including the UK) if they continued to oppose his plans. 

At Davos, the US President pulled back from the brink of both actual and trade war, but his apparently unscripted remarks do not promise lasting peace. Trump has not given up any claims to Greenland: he is still pushing for a deal that includes greater access for the US and further militarisation of the whole Arctic – including a ‘Golden Dome’ missile defence system.

So what does the US want? 

Returning to Venezuela, a big part of the apparent rationale is economic. The country has the world’s largest oil reserves, but its industry has been crippled by US sanctions (and corruption and mismanagement). Trump has been clear that he wants the US to take control of this supply and step up production. His justification? That the US is just taking back what was expropriated from the US multinationals that played a critical role in developing the Venezuelan oil industry. 

The problem is that major US oil companies seem lukewarm at best about the prospect of providing the billions of dollars in investment needed to revive the Venezuelan industry. The oil industry has a history of complex, often geopolitically-inflected negotiations over prices and supply. In a world where ever-rising demand can no longer be taken for granted, companies have less incentive than ever to take risky bets to increase oil supply. 

This is compounded by the specific situation in Venezuela – extracting its ‘heavy, sour’ oil imposes high upfront costs that make the economic calculus very different from the logic that has powered the US shale boom. (While this heavy crude is what many of the refineries on the US Gulf Coast were designed for, commentators have been sceptical about how much weight their interests would carry). It also compares unfavourably to high quality reserves in neighbouring Guyana, which were only recently discovered and have already been subject to a competitive rush from both the American oil majors and the Venezuelan state. US action appears to have removed the risk of a Venezuelan takeover of Guyanese reserves, safeguarding the interests of US oil giants Chevron and Exxon in the territory.

Bringing in Greenland (... or was that Iceland?) further complicates the picture.

The Arctic territory has large deposits of so-called ‘critical minerals’, which play an important role in a range of technologies from semiconductors to solar panels. In particular, it has the world’s eighth-largest reserves of ‘rare earth elements’. The US may see this as an opportunity to break China’s stranglehold over these supply chains, which has been at the centre of US-China tensions for many years. While the Biden administration’s stress on the importance of these minerals for the clean energy transition has fallen away, the Trump administration clearly still sees China’s dominance in rare earths as a security threat. More immediately, at least one Trump ally and donor has an immediate commercial interest in expanding operations in the territory. In persuading the president to target Greenland, this ally seems to have been hoping to replicate a string of deals that have given US firms (some with close ties to Trump) access to mineral reserves in nations including Ukraine. 

But again, the evidence is mixed on how significant a motivation this really is for the latest moves. Trump himself has played down its importance, suggesting there is ‘no such thing as rare earth’, and that his interest is only in national security. It is true that accessing Greenland’s reserves would be expensive and difficult, given the ice sheets that cover most of the territory, the limited infrastructure, and the prospect of resistance to further mining  from the Greenlandic population and politicians. Yet even more than with Venezuela, some commentators have stressed that the US does not need to control Greenland to achieve its stated aims there. As a Danish territory, it is already an ally with generous access for the US military and (to a lesser extent) companies. 

Where does this leave us overall?

In all of this, we should not let the geopolitical drama distract us from the bigger picture: it would be an environmental catastrophe for Venezuela’s oil production to return to its peak capacity. In Greenland, mining has a history of damaging the local environment and communities. Multinational corporations are already trying to use investor state dispute settlement (ISDS) to overturn a ban on uranium mining, and any deal with the Trump administration is likely to add to the pressure for resource extraction. The conflict over Greenland and its resources looks like a lose-lose for its people and its nature. 

Attributing motives in international politics is never straightforward, especially when the situation is this fast moving and chaotic. But it seems clear both that the moves in Venezuela and Greenland are interconnected and that they reflect a complex entanglement of economic and geopolitical interests. Amid the noise, we can discern a clear shift. We are moving beyond the era in which the US largely pursued its national and corporate interests within and through a ‘rules-based system’. US hegemony is clearly under threat, with key foundations – including the dollar's status as the global reserve currency – being undermined from within and without. Longstanding US allies are coming to understand their interests as distinct from those of a country that is increasingly pursuing nakedly imperial politics. 

As Canadian PM Mark Carney’s candid speech at Davos revealed, the existing system was always a convenient ‘fiction’, but it is no longer a sustainable one even for those who have done well from it. What comes next is far from clear, but it is at least possible that alongside the obvious risks, smashing these fictions will also present opportunities for those who want to see a more equitable global system. 

Good morning from New Economy Brief.

The natural world is in crisis, and evidence that this threatens the economy is mounting.

Halting and reversing these trends requires a big increase in investment. To deliver it, fiscally strained governments worldwide are creating new markets to make nature ‘investable’ for private finance.

This week’s New Economy Brief unpacks the challenges and controversies around funding solutions to the nature crisis with private capital, and looks at proposals for alternatives.
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The age of extinction

Biodiversity is declining faster than ever. Land-use change, including clearing land for agriculture and mining, is the main cause, but climate change is increasingly causing habitat degradation and species loss. Experts now believe several critical ecosystems are nearing ‘tipping points’. Crossing these would have catastrophic consequences – such as the rapid loss of the Amazon Rainforest. 

There’s no doubt that urgent action is needed. At the 15th UN biodiversity talks (COP15) in 2022, 188 nations approved the Global Biodiversity Framework, a commitment to halt biodiversity loss and restore ecosystems, with 23 ambitious targets for 2030, including protecting 30% of all land and sea. Progress, however, has not been smooth sailing, with nature degradation continuing at a dangerous rate since.

Meeting these commitments also needs investment – over $700 billion a year, according to an influential report by the Paulson Institute. At fraught COP16 talks in 2024 and 2025, participating nations pledged to reach only $200 billion a year in biodiversity finance from public and private sources by 2030. Much of this funding is needed in fiscally constrained, biodiversity-rich Global South countries. Yet high-income countries aim to direct just $30 billion a year in public biodiversity-related spending for low-income countries – far less than their fair share. According to the COP16 agreement, mobilising private finance is the way to fill both domestic and international ‘finance gaps’. 

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Nature as an asset class

Getting private finance to fund nature requires creating assets it can invest in. Various nature-related financial instruments have been created, from ‘green bonds’ – which allow companies to borrow to fund sustainable activities –  to new markets for biodiversity offsets or credits. Here, units of nature can be bought or traded to ‘offset’ damage done elsewhere. This is meant to create a financial incentive for restoration or conservation (a similar concept to carbon markets, whose failures have been well documented).

Can pricing nature work? Ecological economists have long critiqued ‘natural capital’ approaches to conservation. A fundamental issue is that monetary values cannot reflect the complexity of the natural world. Ecosystems aren’t interchangeable - you can’t make up for destroying one with conserving or restoring nature somewhere else. Valuing nature is also practically challenging, and to date the small size, high risk, and low returns of nature projects means that profit-seeking private investors have yet to fund them at a significant scale.

Challenging the private-public dichotomy. According to biodiversity finance expert Sophus zu Ermgassen and co-authors, these challenges mean that cajoling private investment into nature relies heavily on the state, primarily via regulation to create demand for nature assets. For example, England’s biodiversity net gain scheme requires developers of housing, commercial buildings and infrastructure projects to deliver a 10% overall increase in biodiversity. Developers can do this by directly restoring habitats on the site of their developments or elsewhere, or by buying biodiversity credits generated by other projects. However, regulation is vulnerable because of how often it comes up against vested interests or clashes with shifting political priorities – as demonstrated in last month’s partial roll-back of biodiversity net gain requirements. 

Poor outcomes for people and planet. Even where private investment has been successfully directed into markets for natural capital, projects have typically failed to improve the environment. Biodiversity offsetting projects, like carbon offsets before them, also have a poor track record for social impacts, with one 2018 study estimating that 34% of all biodiversity offsets lead to displacement of local communities. 

Though social impacts are often more direct in the Global South, where more people depend directly on local nature for their livelihoods, similar dynamics have played out closer to home. Large amounts of rural land under unusually concentrated and lightly regulated ownership has made Scotland a particularly desirable destination for investors seeking to profit from natural capital. An influx of rich investors – dubbed ‘green lairds’, are inflating land prices and worsening existing inequities. Laurie Macfarlane argues that this illustrates a fundamental tension in getting private finance to invest in nature: unless you buy the land and make gains from its rising value, nature restoration is not particularly profitable. 

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What are the alternatives?

Private finance, false economy. According to economist Katie Kedward and co-authors, the sheer difficulty of aligning private motives with environmental benefits without substantial public subsidies makes a strong economic case for more direct public investment. A recent Future Economy Scotland report backs this up, finding that the use of private finance for peatland restoration could increase costs by up to 48%.

Halting destructive activities. Economists at the World Bank’s C3A Nature Transition Hub have argued that the focus on filling the ‘finance gap’ distracts from the need to address unsustainable patterns of production and consumption. To do this, we need to steer financial flows away from harmful activities – including through the use of central bank tools, according to Lydia Marsden from UCL Institute for Innovation and Public Purpose.

International financial reform. The same World Bank economists argue that the ‘finance gap’ rhetoric obscures the need to reform the international financial system, which locks biodiversity-rich Global South countries into producing extractive and polluting exports for Global North consumption. They argue that a more critical approach based on “transforming finance” for the transition is needed to address the nature crisis. 

For now, governments look likely to push ahead with market-based approaches to addressing the new age of extinction. But as the limitations of this approach become increasingly clear, and environmental degradation increasingly impacts our economies and livelihoods, governments may be forced to turn to concerted action themselves and provide more direct funding in order to halt destruction.

Good evening from New Economy Brief.

The World Economic Forum’s annual gathering in Davos takes place next week. Elected leaders, corporate CEOs and the global business elite will once again converge for the Met Gala of geopolitics and economics. 

This edition of the New Economy Brief examines what Davos is, what’s on the agenda, the political backdrop and what civil society says needs to change. 

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What’s Happening?

Met Gala of capitalism. Each January, the World Economic Forum’s flagship event is held in the Swiss town of Davos. The event is a who's who of global capitalism, from corporate executives, to heads of state and senior politicians from the G7, G20 and BRICS (Brazil, Russia, India, China & South Africa). At the margins, expect to see civil society attempting to influence the narrative and inject alternative perspectives. 

Full attendance. Last year saw some notable names, like Meta and OpenAI CEOs Mark Zuckerberg and Sam Altman forgo attendance in favour of Donald Trump’s inauguration. Given the US has confirmed a bumper guest list ranging from the President to the Treasury, Energy and Commerce Secretaries (and more), expect CEOs from across the board to be there. 

Cooperating in a world of chaos. Official WEF framing emphasises strained alliances, eroding trust and the need to explore how cooperation can be renewed. This comes against a backdrop of rising geopolitical tension, conflict and economic instability. In the first two weeks of 2026, the US has toppled and captured the Venezuelan head of state and threatened to take Greenland by force. This follows military action in Syria, Yemen, Nigeria, Iraq, Somalia and Iran in just the past 12 months. So the themes of the conference seem increasingly at odds with the actions of the world’s leading power. 

Grow baby, inclusively grow. Inclusive growth is another major theme. AI-driven sectors have seen phenomenal growth, though talk of a bubble ready to burst abounds (see our recent digest for more on this). Evidence suggests that the investment, rents, profits, financialisation and debt agreements built upon the AI boom are funneling surpluses upward in what has been described as a ‘rent-seeker’s paradise.’  At the same time, broader economic conditions are sluggish, with low and stalling growth in many national economies. Global growth is expected to slow from 3.3% to 3.1%, and uncertainty continues to impact the outlook. 

Work it, sustainably. CEOs, billionaires and politicians will also be putting their heads together to build ‘resilient workforces and support skills transitions’ in an era of ‘profound change’. This may be a way of avoiding using terms like ‘climate breakdown’. Or naming the economic shifts needed to avoid catastrophic impacts likely to come without a rapid phase-out of fossil fuels. In 2020, Payal Parekh argued that despite continued focus on climate change, failure to address it is baked into the economic model that Davos attendees uphold. Given the focus on how ‘prosperity can be rebuilt within planetary boundaries’, it will be interesting to hear how the conversation squares with the massive expansion of energy and resource-consuming AI infrastructure like datacentres.

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Why Does it Matter?

Club Capitalism. On the surface, Davos looks like a forum for tackling the world’s greatest challenges. But the reality may be somewhat different. Journalist Peter Goodman has argued that most attendees are “the ultimate beneficiaries of the status quo” and are likely to resist any changes that could threaten their own wealth. Other international forums dedicated to tackling global issues are far from perfect, but they are less dominated by corporations, whose short-term objectives of profit maximisation and shareholder return often conflict with what is needed to tackle issues like climate change. 

This is why civil society organisations like Oxfam and the Patriotic Millionaires use Davos as a platform to highlight the increasingly extreme inequality in the global economy. Each year Oxfam releases new data on wealth inequality. It found that the wealth of the super-rich rose three times faster in 2024 than in 2023 (creating almost four new billionaires a week), while the number of people living in poverty has barely changed since 1990. The data show wealth and power are being skewed toward a small and shrinking number of people. The public and wealthy people alike are concerned about this power, and its ‘undue influence’ on politics.

So what can be done about it? Calls for wealth taxation, at both national and international levels, continue to garner attention as a lever to pay for public services and check the exploding wealth of the super-rich. Groups like Tax Justice UK are spearheading the calls domestically, while rising French economist Gabriel Zucman is among the notable figures advocating a global minimum tax, having worked with the Brazilian Presidency of the G20 to draw up proposals.

On a structural level, negotiations continue to establish an effective forum to set international tax rules and prevent a race to the bottom. 125 countries voted to introduce a United Nations convention on tax, aiming to replace the OECD group of wealthy countries that has assumed this responsibility to date. The carveout given to US multinationals has brought the limitations of the current approach into sharp focus - they are now exempt from the previously agreed global minimum corporation tax. However, without the USA, can progress be made or will it be a toothless forum unable to do anything in reality?

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What Next?

If we’re unlikely to see progress on tackling thorny global issues at Davos, where else should we be looking this year? 

Negotiations on the UN Tax Convention are set to take place in early February in New York. Discussions are planned about the framework convention itself, and about protocols on taxing cross-border income, and on preventing and resolving tax disputes. The UK government’s engagement is one to watch; it has failed to support progress to date. After the UN climate talks in December failed to move forward on the issue, a ‘coalition of the willing’ will meet in Colombia in April, with the host nation and the Netherlands responsible for advancing efforts to phase out fossil fuels. Seeing who turns up and commits to ambitious action will be key. 

With continued economic turbulence, rising unilateral action and potential for conflicts to expand further, big progress at traditional economic forums seem unlikely. For now, regionalised or bespoke efforts to address global challenges may offer the best prospects for positive international cooperation. Achieving true impact in these arenas may have larger ripple effects which could ultimately make both legacy forums and exclusive groups like Davos less relevant.

Good afternoon from New Economy Brief.

Earlier this month, the government published its Child Poverty Strategy, fulfilling a 2024 manifesto commitment. Most of the headline measures had already been announced, including the abolition of the two-child limit, the rollout of free breakfast clubs, and the expansion of free school meals. The decision to end the two-child limit — a deeply controversial policy — marks the culmination of a long and hard-fought campaign and has rightly been hailed as a major victory, which will reduce child poverty significantly.

However, as we explore in this week’s New Economy Brief, concerns remain about the government’s overall level of ambition in tackling poverty. In particular, its approach to other parts of the benefits system risks undermining the progress promised by the strategy.

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Delivering on a ‘moral mission’ 

No child should have to grow up in poverty. But that is far from the reality in the UK today. JRF’s annual Poverty in the UK report – which we covered earlier this year – finds that as of 2022/23 30% of children in the UK were in poverty, rising to 44% in single-parent households, and to 45% in those with three or more children.

Labour’s 2024 manifesto made a commitment to bring down child poverty in the UK, arguing that it ‘not only harms children’s lives now, it damages their future prospects, and holds back our economic potential as a country’. The government’s resulting strategy should, according to its own calculations, lift 550,000 children out of relative child poverty by 2029 (relative poverty is defined as having a household income less than 60% of the median). 

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Abolishing the two-child limit 

The two-child limit covers means-tested benefits including Universal Credit, and on average cuts incomes by £4,300 a year. The Conservative government first announced the policy in its 2015 budget as a cost-saving measure and to ensure claimants “face the same financial choices about having children as those supporting themselves solely through work”. 

Those advocating for children and families in the UK have described the policy as morally wrong, and a major driver of child poverty, particularly amongst those most at risk of hardship. Even on its own terms the policy has failed, according to Professor Ruth Patrick, having “neither substantively affected fertility rates among lower-income households nor supported transitions into employment”. The Centre for Analysis of Social Exclusion also found that children from Black, Asian and mixed ethnic families are all more than twice as likely to be affected by the two-child limit as children from white families.

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Of all the measures in the new strategy, abolishing the two-child limit has the biggest impact – lifting 450,000 children out of poverty by 2030. According to IPPR, the North West is set for the biggest reduction in hardship. The government’s decision comes after years of campaigning from charities and think tanks, including a recent open letter from leaders across anti-poverty charities. New Economy Brief covered the debate as far back as 2023; agreeing to remove the limit marks a shift for the government who last July removed the whip from seven of its MPs voting against the limit.

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From increasing incomes to investing in services

The strategy also includes a range of other policies to tackle child poverty. The government has committed to removing the income threshold for access to free school meals by children in households receiving Universal Credit - this measure is anticipated to raise a further 100,000 children out of poverty. And there are new funds for pilot schemes to move families out of temporary accommodation within six weeks, free breakfast clubs expansion, and financial support and better information around baby formula.

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A foundation but not a finish line

Campaigners across the third sector have welcomed the headline policies as first steps which will ‘improve the lives of children up and down the country.’ However, much more would be needed to eradicate child poverty completely, with millions of children expected to be left in relative poverty under this strategy - the most recent figures put overall child poverty at around 4.5 million. 

Many are keen to ensure this government goes further than rolling back the previous one’s policies, and there has been no shortage of calls for more ambition. Some, including the Women’s Budget Group and the Children’s Commissioner, have called for the strategy’s policies to be applied more universally, including an expansion of free school meals to all children, not just those whose families receive Universal Credit.

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More to be done within our social security system

There are two particularly glaring omissions in the new strategy. The first is the benefit cap – an upper limit on the total income a family can receive from the social security system unless they meet a certain income from paid work. This affects an estimated 300,000 children in the UK. In anticipation of the Child Poverty Strategy, Impact on Urban Health called for the cap to be abolished, as have many others since its implementation in 2013. Nearly 40,000 households are affected by both the two-child limit and the benefit cap, and despite the removal of the two-child limit will therefore not receive any additional income for third and subsequent children while the benefit cap endures.

Beyond lifting the benefit cap, the government can look to Scotland for more ambitious ways to tackle child poverty. In 2021 the Scottish Child Payment was introduced with the specific aim of reducing child poverty. It provides around £27 a week for each child in a household receiving Universal Credit or related benefit. The payment has reduced the level and depth of child poverty without disincentivising work. Supporting families of all sizes, it shows how people can be provided with adequate income through the social security system.

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Housing costs remain unaddressed

The second big gap is action on housing costs. Since 2016 successive governments have intermittently frozen Local Housing Allowance (LHA) – the rate used to calculate the amount private renters on benefits can receive towards their housing costs. The current freeze, upheld in this year’s Autumn Budget, leaves households out of pocket as average rent increases outpace incomes. Citizens Advice analysis of demand for their services concludes that the need to uprate LHA is ‘urgent’.

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Calls for further support for migrant families

Before the strategy’s publication, IPPR set out seven measures to support the 1.75m children facing additional barriers due to their immigration status. Coram notes that the strategy does well to include reference to families with no recourse to public funds, but argues wider Home Office policies undermine the financial security of those with precarious immigration status.

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The Child Poverty Strategy cannot be viewed in isolation

While the Child Poverty Strategy marks a meaningful step forward, it sits alongside a wider approach to the benefits system that remains troubling. Proposals affecting disability and incapacity benefits, in particular, risk pulling in the opposite direction to the strategy’s stated aims. The Chancellor is looking for savings to the welfare budget, the Prime Minister is pushing for welfare reform and the Health Secretary has raised concerns about the number of people claiming disability benefits, ordering a review of mental health diagnoses earlier this month. The ongoing Timms review into Personal Independence Payments (PIP) will conclude in 2026 with recommendations for disability-related benefits, and there are concerns that it will result in cuts.  

Ultimately, these tensions and inconsistencies in the government’s approach to social security point to the need for a clearer and more positive narrative about the system as a whole. If negative attitudes and stigmatising rhetoric about some benefits and claimants persist, the progress made on child poverty will remain limited and vulnerable to attack. As NEF’s Max Mosely writes: “this government’s decision to remove the limit was commendable, but now it must win the war of detoxifying the welfare state itself.”

Good afternoon from New Economy Brief.

World leaders gathered in Belém, Brazil, during November for COP30 – the 30th UN climate talks. As ever the event was contested, with heated debates about phasing out fossil fuels, financing climate adaptation and the presence of lobbyists from polluting industries. Indigenous activists and their allies staged demonstrations, negotiations went down to the wire and verdicts on the outcome have been mixed, to say the least. 

This week’s New Economy Brief unpacks what happened at COP30 and what it means for progress on climate change.

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Thirty years of talks

COP30 is the 30th Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC). It is the centrepiece of the annual UN climate negotiations, bringing together countries that signed the UNFCCC at the 1992 Rio Earth Summit to review and progress collective efforts to address climate change.

An undercurrent throughout was the USA’s continued absence. This gave other states and regional groupings more space to influence proceedings. Some commentators referred to the EU’s power waning and the BASIC bloc – Brazil, South Africa, India and China – growing in stature. 

This was meant to be the “implementation COP” – where previously agreed rules and frameworks would be put into practice. Yet there was no final agreement on transitioning away from fossil fuels, nor on ending deforestation. Critics decried the watered-down references to food systems and agriculture. And countries’ new climate plans would reduce global emissions by just 12% by 2035 – far short of the 55% required to limit warming to 1.5°C.

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The big issues in Brazil

Show us the money! Climate finance – especially support for adaptation – was one of Belém’s defining issues. Global South countries, civil society and climate activists have long called on rich countries to pay to support those most impacted by climate change. This isn’t just about financing resilience and preparedness. Many lower-income countries and voices from the Global South see climate finance as a way to repay climate debt and compensate for the harm climate change has already done. They note that it results directly from centuries of fossil-fuel driven growth and development by rich nations which have exceeded their fair share of the carbon budget – the maximum amount we can cumulatively emit without causing dangerous warming. 

Financing adaptation. This year’s negotiations followed last year’s stalled COP29 talks in Baku, Azerbaijan, and before COP30 began Brazil published its Baku to Belém roadmap, aiming to raise $1.3 trillion in climate finance by 2035. 

One of the summit’s biggest outcomes was an agreed set of 59 indicators for countries to measure progress on adaptation – a Paris Agreement commitment to strengthen climate resilience. This is the first shared framework for measuring resilience. Delegates also tripled adaptation finance – a long-standing call from lower-income nations and campaigners. To date, a large bulk of climate finance has flowed toward mitigation (actions to reduce greenhouse gas emissions), rather than building resilience to impacts that are already baked in.

Not so simple. While the headlines focused on the climate finance increases and adaptation targets, the detail drew sharp criticism from experts and civil society. The final agreement pushed back the deadline for tripling adaptation finance to 2035 from the proposed 2030. Moreover, technicalities around the baseline amount to be trebled mean it’s uncertain what the 2035 target actually means, and holding countries to it may be difficult. 

Fossil fuel contention. There was still no agreement on how to end fossil fuel use. A coalition of countries including climate-vulnerable states and Latin American and European governments called for a global phase out. But opposition from oil and gas producers including Saudi Arabia and Russia stymied any official or binding roadmap in the final agreement. The large number of fossil fuel lobbyists in attendance also raised eyebrows – some 1,600 according to Global Witness.

Even so, groundwork was laid for further action, with the Brazilian hosts committing to developing voluntary roadmaps on a just transition away from fossil fuels. Colombia and the Netherlands will also attempt further progress with a follow-up conference for a ‘coalition of the willing’ next spring.

Keep the trees in the ground. That’s what a Brazilian-led proposal – the Tropical Forests Forever Facility – hopes to do. It seeks to reward countries for protecting forests and provide an incentive for nations with high deforestation rates to make positive progress to unlock the funding. It also aims to provide more reliable finance than project-by-project models can. It sits within a bigger push for agreement to stop deforestation by 2030, and for richer nations to provide significant financial resources for forest protection. France, Norway and Germany have already pledged funds, alongside Brazil and Indonesia. The UK and China opted out, but may follow in 2026. The UK and Starmer have been criticised for abdicating leadership on climate and nature, and for burning diplomatic capital with a Brazilian government it had previously courted as a close partner on these issues. 

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What’s the big picture?

The Articulation of Indigenous Peoples of Brazil – a major national body representing indigenous people in the country – says COP30 can’t be considered a success without deforestation or fossil fuel phaseout in the official text. 

The Brazilian presidency stressed the implementation role of COP30. However, despite new climate action plans and progress in many areas like indigenous land rights, big questions remain unanswered. Phasing out fossil fuels and stopping deforestation are critical issues that require rapid agreement to avoid severe, likely irreversible repercussions. Mohamed Adow of Power Shift Africa said: “COP30 kept the process alive — but process alone will not cool the planet. Roadmaps and workplans will mean nothing unless they now translate into real finance and real action for the countries bearing the brunt of the crisis.”

Climate Action Network International – a coalition of 1,800 organisations – celebrated the adoption of the Belém Action Mechanism. Known as “Bam!”, it requires countries to take concrete steps toward a just transition. Additionally, it calls for international coordination so everyone can see what actions are being taken where and who they affect. It’s hoped the mechanism will advance ambition on rights-based climate action and open the door for more grant-based climate finance. 

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Only a year until the COP goes again

Questions remain about the future of UN climate talks. Ahead of Belém, a group of international experts suggested the slow pace and consensus-seeking nature of the COP process was “no longer fit for purpose.” Harjeet Singh from the Fossil Fuel Treaty Initiative said we “can’t discard [COP] entirely”, instead calling for change and “retrofitting” of the process. 

Next year’s talks are an awkward compromise, with Turkey hosting and Australia overseeing the process, breaking a deadlock on who would lead the next conference. With so many big issues on the table – from progressing COP30’s climate finance agreements to moving towards implementing the Global Goal on Adaptation – this kind of squabbling may not bode well. But multilateral engagement is always messy, and in today’s geopolitically riven world, perhaps we should take solace in knowing that the process to address this most global of problems is at least trundling on.

Good afternoon from New Economy Brief.

“Are we in danger of, ‘Here we go again’?” This was the question put to Andrew Bailey, Governor of the Bank of England, in October’s Financial Services Regulation Committee following the collapse of two US car companies, Tricolor and First Brands. Bailey’s response? Maybe. Just a week before, Kristalina Georgieva, Managing Director of the International Monetary Fund, admitted the collapses were keeping her awake at night. 

This week’s New Economy Brief asks: what exactly is going on Stateside? Are the hard-won protections introduced after the 2008 financial crash keeping us safe? Or are these bankruptcies the early signs of something much more worrying?

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What’s happening with US credit markets?

Cheap cars, cheap car parts. Tricolor and First Brands may be unfamiliar to those of us in the UK, but they were a big deal in the US. Tricolor was a major subprime car-finance lender, including to undocumented immigrant communities; First Brands, a cut-price auto-parts maker. At the time of their collapse, they were worth billions. Crucially, they also were both deeply entangled with the private credit sector. 

An explosion in credit: Private credit, loans provided to businesses by something other than a bank, has skyrocketed in the last decade. Private credit is provided by “non-bank financial institutions” or NBFIs, which can include things like pension funds, insurers or wealthy individuals. In 2013, this market accounted for just $460 billion in assets; in 2025, it’s over $3 trillion. 

Regulatory arbitrage: Following the financial crash in 2008, regulators around the world placed stricter rules on how banks could lend. This included requirements for more due diligence and higher capital reserves, which have made lending more expensive. NFBIs have seized that opportunity, providing an alternative source of credit free from the expense of regulatory oversight, undercutting traditional banks. This has led to what Marc Rowan, CEO of private equity firm Apollo, called a “race to the bottom” in lending standards.

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Why the collapses happened

Creative accounting: These looser lending standards mean loans may face less scrutiny than more traditional finance. Warning signs can go overlooked, or ignored. When Tricolor and First Brands collapsed, it was amid significant claims of fraud. Tricolor was supposedly “double pledging”, taking out multiple loans on individual assets like warehouses or cars. First Brands, meanwhile, exploited accounting loopholes to hold debt off its balance sheet, meaning when it collapsed it owed nearly $12bn despite publicly declaring debts of just $6bn. 

Trumped up: While fraud is clearly the proximate cause, both companies were facing economic headwinds from US policy. First, Trump’s tariffs, which the First Brands bankruptcy statement blames for its collapse, have driven up the cost of imported materials, making car parts more expensive. Second, Trump’s attacks on undocumented immigrants may have directly affected Tricolor’s customer base, undermining its business model. 

Overindebted: Household finances have also played a role. Unemployment is up, consumer sentiment is down, and cracks are showing in the wider US auto finance sector, the second biggest consumer credit market in the US, worth $1.7tr. In the US, sub-prime car finance “delinquencies” are at their highest ever rate, meaning loans made have been going unpaid. As Professor Ben Lourie told the Guardian: “My guess is the companies went into bankruptcy because the market is not great and they started doing things they should not be doing.” 

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Impact of the financial sector:

Immediate losses: Banks are not as protected from the private credit industry as we might have hoped. UBS could lose nearly $500m from the collapse of First Brands, while Barclays’ exposure to the collapse of Tricolor was £110m. Barclays has said it can absorb this loss, but if this spreads beyond a couple of individual cases, there may be more cause for concern. As JP Morgan’s Jamie Dimon said of the collapses: “when you see one cockroach, there’s probably more. And so everyone should be forewarned at this point.” 

Slicing and dicing: A significant chunk of these losses stem from First Brand’s position as one of the largest issuers of loans bought by collateralised loan obligations, or CLOs. CLOs are investment vehicles that bundle up multiple corporate loans of varying riskiness and then slice them up in “tranches” which are then sold on to investors, depending on their risk appetite. When First Brands went bankrupt, the value of its debt (including the loans that had been bought, bundled, sliced up and sold on by CLOs) went through the floor. The level of exposure (as we’ve seen, First Brands listed nearly $12 billion in liabilities) has set warning lights flashing. But the big worry is that this isn’t an isolated incident and that the CLO market could be awash with riskier loans. If more firms fail, losses could spread throughout the market and beyond. 

Maybe this all sounds a bit familiar: similar investment vehicles called Collateralised Debt Obligations (CDOs) were a major catalyst of the global financial crisis in 2007-2008. “If you were involved before the financial crisis and during it, alarm bells start going off at that point,” Andrew Bailey has said of the CLOs’ structure.

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What can we do about it all?

Tougher Rules. Without regulation we can’t know exactly where private credit is being directed. The Bank of England is right to want to lift the “drains up”, to see exactly what is going on in the private credit sector. Yet Andrew Bailey has also said he doesn’t plan to look at further regulation. Meanwhile, Chancellor Rachel Reeves has prioritised financial sector deregulation, as detailed by our previous briefing on the Leeds Reforms. And in America, the Trump Administration continues to scrap financial rules. The risk with an unregulated financial sector is that we’re all exposed to a collapse, and will ultimately have to pick up the bill again. 

Safer lending. The core ingredient of both this moment and the 2008 financial crash is the close intertwining with sub-prime markets. Tricolor was lending at 16% APR to people with no other way of accessing credit, making money by exploiting vulnerable communities. Since 2008 we have done little to protect these people. In the UK, the Finance Innovation Lab is calling for a Fair Banking Act that would ensure banks provide affordable credit, close down exploitative lending, and create sustainable access for communities currently stuck in high-cost debt. 

Where does this leave us? Maybe this will come to nothing. But the collapses of Tricolor and First Brands reveal a deeper danger: the protective walls built after 2008 are being quietly bypassed. At the macro level, the private credit boom is creating hidden vulnerabilities across the financial system. At the human level, those vulnerabilities equal exploitation of the people who can least afford it. Financial instability at the top, exploitation at the bottom. That’s the pattern that led to 2008, and it’s now taking shape again. The warning signs are there. The question is whether we act on them.

Good afternoon from New Economy Brief.

Weeks of speculation about how the Chancellor would respond to the OBR’s widely expected productivity downgrade ended yesterday as Rachel Reeves delivered her second Budget. But all the focus on tax rises, spending cuts and ‘headroom’ continues to obscure the question at the heart of the UK’s economic woes: why is productivity so low as to have warranted a downgrade in the first place?

This week’s New Economy Brief goes a little deeper than your usual post-Budget summaries and asks: why are we in this mess, and how do we get out of it?

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What did the Chancellor announce?

Tax ‘smorgasbord’. The Chancellor increased a variety of taxes without breaking the government’s manifesto pledge not to increase taxes on ‘working people’, raising £26bn of additional revenue by 2029/30. The House of Commons Library provides a useful summary of all of the changes, including freezing National Insurance and income tax thresholds for another three years after 2028, a ‘mansion tax’ on expensive properties, increasing taxes on gambling taxes and on investment income like property, savings and dividends, and more.

Action on the cost of living. The Chancellor also scrapped the two-child limit on means-tested benefits, froze rail fares, took levies off energy bills and into general taxation and raised the minimum wage. Interestingly, the government is actively using what some economists have termed ‘unconventional fiscal policy’ to reduce inflation, traditionally the role for the independent central bank – the OBR predicts these measures will reduce inflation by 0.3 percentage points next year. 

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Zooming out: why did taxes rise?

The run-up to the Budget was dominated by months of speculation about a downgrade to the OBR’s forecast for UK productivity growth. It was generally expected that the combination of this productivity downgrade and new pressures on spending would put the Chancellor on track to breach her ‘stability’ rule, which requires the government’s tax receipts to cover current spending in 2029/30. 

In the event, the impact of the productivity downgrade was unexpectedly counteracted by higher inflation and wage growth. This meant that the Chancellor’s tax rises largely served to increase the size of the buffer (the so-called ‘headroom’) against the ‘stability’ rule, rather than to stop her from breaching it. These changes also financed some increases in spending, including the action on the cost of living explained above. 

We can draw a number of lessons from this. First, that media and political speculation about a ‘black hole’ in the public finances has been as baseless as it is ceaseless. Second, that we still risk missing the real story: whatever its impact on ‘headroom’, the productivity downgrade matters. In revising its trend productivity forecast down, the OBR is moving closer to other forecasters. This reflects the UK’s dismal productivity growth since the Global Financial Crisis, with much larger slowdowns than other nations. 

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Underinvestment and austerity economics.

We have previously covered how underinvestment has been putting the brakes on economic growth and harming debt sustainability for decades.

And the Chancellor’s recent speech setting the scene for the Budget acknowledged underinvestment as a key reason for the UK’s ‘productivity puzzle’: “it’s not a puzzle. The causes of our economic underperformance are well understood. The chronic stop-go cycle of public investment has left us with roads full of potholes, high energy prices and unstable conditions for vital business investment in skills and technology.” 

It is important to remember the role that the OBR played, and still plays, in incentivising this underinvestment. Its first assessment in 2010 formed the basis for then-Chancellor George Osborne’s spending cuts, and drew criticism from the IMF’s then-Chief Economist Olivier Blanchard. 

Public investment was repeatedly cut in an effort to meet fiscal rules that debt should be falling as a percentage of GDP, but we now know that government spending cuts harmed GDP in every advanced economy that tried them. Even Osborne has admitted he wishes he had not cut public investment as much. 

Lower productivity growth has serious implications for long-term debt sustainability. The OBR previously estimated that if productivity returned to growing at its average rate from before the 2008 financial crisis, public debt could remain well below 100% of GDP for the next 50 years. Conversely, if productivity growth stays at its average rate since then, debt could spiral to almost 650% of GDP.

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They can’t tinker their way out of this one.

A ‘smorgasbord’ of tax rises to build up more ‘headroom’ against breaking the rules doesn’t get to the root of the problem. In fact, the excessive focus on headroom is infantilising the fiscal policy debate. 

The OBR’s most recent external review noted the “short-term focus” of fiscal debate in UK politics and media, with its incessant discussions of ‘headroom’. It said this was “unhelpful, as it threatens to obscure broader assessments of UK fiscal sustainability.” The Chancellor took a step in the right direction today, using the political space provided by the IMF to move to one OBR assessment of the fiscal rules each year. But although we will now only face the carnival of media speculation before one fiscal event a year, rather than two, this does not solve the underlying problem – the media fixation on ‘headroom’.  

Solving the productivity puzzle with more investment. If low productivity is harming debt sustainability, the rational thing to do would be to improve productivity with more growth-enhancing investment. This government has taken a step in the right direction, committing an extra £120 billion to public investment so far over this parliament. But that was only enough to reverse the cuts planned by the last government. And the additional investment was frontloaded, meaning overall public investment will actually fall towards the end of this Parliament. 

Furthermore, the UK underinvested £550bn relative to OECD nations over the 30 years prior to the last election. This means workers in the UK’s factories, hospitals, construction sites, warehouses and offices often rely on out-dated infrastructure, machinery and software compared to their counterparts abroad. 

A new briefing from Invest in Britain includes economic modelling to show how the government can close this gap within the next ten years with an additional £60bn of public investment per year (+2% of GDP). This would boost growth, wages and improve long-term debt sustainability, as higher GDP growth increases employment and tax receipts while reducing demand for social security spending. 

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Exercising austerity economics from the fiscal framework.

The OBR has started to appreciate the benefits of public investment for long-term growth, but they are still required to assess compliance with fiscal rules that require debt to be falling within three years – far too short to capture the benefits of public investment on fiscal sustainability. So when the UK economy needs counter-cyclical stimulus, the current fiscal framework incentivises consolidation – a self-defeating attempt to reduce the debt to GDP ratio that ends up doing the opposite by limiting economic growth.

Root and branch reform of the fiscal framework. With the move to one OBR assessment a year, the government will have to amend the Charter for Budget Responsibility that enshrines the OBR’s mandate, the government’s fiscal rules and how they are assessed. Perhaps this time there will be a more enlightened debate about previous and ongoing fiscal policy mistakes that have led to chronic underinvestment and poor debt sustainability.

Good evening from New Economy Brief.

There’s nothing new about technological innovations driving financial bubbles, as investors speculate on highly profitable future uses. The dotcom boom is a typical example; the crypto boom of 2020 another more recent one. It is more unusual for the CEO of a company at the centre of this boom to openly say ‘yes’, we are in a bubble. Sam Altman, CEO of OpenAI, did just this in August 2025. 

This was before OpenAI closed deals with other AI-focused companies totalling $1 trillion. Commentators noted the circularity of many of these deals, tying the companies’ fates ever closer together. Major financial institutions like the IMF and the Bank of England now warn about the risks from a deflating AI bubble. This week, we're exploring how the fallout from an AI bust might affect the UK. 

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All aboard the AI express

Successive UK governments quickly embraced generative AI. Back in 2023, then-Prime Minister Rishi Sunak sought to position the UK as a frontrunner in AI safety. The Labour government is putting AI at the heart of its economic strategy, setting out its AI Opportunities Action Plan in January 2025.

This includes building out physical infrastructure, like data centres, to deploy AI at scale. The government has created ‘AI growth zones’ in Culham (Oxfordshire), Cobalt Park (Newcastle) and Blyth (Northumberland) to fast-track this. Companies like Microsoft and Blackstone could invest up to £30 billion in these projects. 

This infrastructure could create a large number of jobs: both in the years-long construction process and through new opportunities for AI research and businesses more broadly. Big Tech companies are also in talks with the government to provide AI skills training to millions of UK workers, with the hope of boosting workforce efficiency.

The UK is also home to the largest start-up investment ecosystem in Europe. Venture capital (VC) investment reached £9 billion in 2024, with over a quarter of that going into AI companies. Globally, the UK ranks third in AI investments, a quantity that even affected demand for sterling. For the government, these AI companies are essential to keep the UK at the forefront of AI job and growth creation. 

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Hubble, bubble, AI and trouble 

With near-zero growth in the UK and a challenging fiscal position, the government has fully embraced AI to turn the economy around. Underlining this, the Prime Minister took forward all 50 recommendations from the AI Opportunities Action Plan. But now experts are ringing the alarm bells about an AI bust, how might this impact the UK economy and one of Labour’s big political commitments?

The bust’s epicentre would likely be the USA. Stock markets might be affected drastically, with AI stocks representing 39% of S&P 500 market cap. This means that 39% of the total value of shares on the world’s most important stock index comes from AI. By contrast, the FTSE100 is less exposed to tech stock valuations with technology companies constituting closer to 5% of its total market capitalisation. 

Nevertheless, major UK pension funds are invested in US technology stocks. An AI slowdown would tank these stocks and so affect retirement savings in the UK. Only 20% of workplace defined contribution pension schemes are invested in the UK, down from 50% 10 years earlier. This means UK workers now have a lot more to lose if big US companies start failing.

A more common effect of a stock market downturn is the rising cost of borrowing. The Bank of England has warned that a ‘sharp correction’ might impact the ‘cost and availability of finance for households and businesses’. This typically follows from hedge funds selling off their positions during a downturn, pushing down the value of the asset they are selling. Other investors holding these assets then receive ‘margin calls’ from their banks or brokers, asking them to post more collateral to keep holding their position or otherwise sell it off, too. Often forced to sell, this leads to a rapid liquidation of related assets which might cascade into a broader financial crisis. Yet while a possibility, this danger might be mitigated by new regulatory provisions following the Global Financial Crisis of 2008. 

More likely than a broader crash is an immediate funding freeze for infrastructure projects (like largely debt-financed data centres) and AI training schemes. The £30 billion of investments pledged by Microsoft and co. are private company commitments that can be withdrawn should the tech giants feel the need to curb their spending. A significant drop in Big Tech shares might pressure them to improve profitability and focus spending on operations critical for their bottom line. Training programmes for UK workers also seem a likely target of early funding cuts following an AI downturn. Over 80,000 people work in the AI sector, and 2.2 million people work in tech-related positions – roughly 6% of the workforce. This means a significant number of workers might be abandoned mid-training. 

Even more severely affected might be the AI start-up space. Historical examples from the dotcom bust and the 2022 reversal of monetary policy show that VC funding can quickly dry up in a downturn. When the Bank of England started hiking interest rates from 0.1% in December 2021 to over 5% 18 months later, late-stage VC funding dropped 75%. When investors want to see profitability, start-ups starved of funds are quickly forced into bankruptcy or consolidation. This would weaken domestic AI-driven growth and employment.

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What Next?

The above points suggest that an AI downturn could be a genuine threat to the government’s growth plans. But there are a few immediate steps that could be taken:

Increase transparency about financial exposure. The focus here should be on large pension schemes with significant exposure to tech stocks. Stress tests might bring more clarity on how a significant drop in the US stock market could bring on ‘fire sales’ and put pension schemes under strain. This proposal is a more specific example of the broader recommendations made by the BoE’s Financial Policy Committee in 2024 to ‘to enable the effective monitoring of the systemic risks from AI’. 

Create contingency plans for project financing. If big US funders were to pull out, who could step in to complete the projects? The government might consider public alternatives, like an AI growth fund, to put financing on a more reliable footing. Already existing examples of government-backed stabilisation for start-up financing include funds launched by Bpifrance in France and KfW in Germany.

Avoid overcapacity. While there are huge potential benefits to building out data centre capacity, this need should be re-assessed periodically and adjusted in line with rapid technological progress. Government payouts could be tied to hitting performance targets, e.g. a certain amount of capacity usage. Building data centre infrastructure is not like building railway infrastructure – a lot of components will be obsolete within years, not decades. Data centre overcapacity could therefore be very costly. Besides the financial dimension, building and running computing infrastructure is carbon intensive and can compete directly with the general population’s energy needs.

The UK faces significant exposure to an AI market correction through pension funds concentrated in US tech stocks, billions in potentially volatile data centre investments, and a start-up ecosystem dependent on venture capital. Historical crashes show how quickly tech bubbles deflate, threatening Labour's AI-driven growth strategy. Proactive policy interventions around transparency, contingency financing, and capacity management could help mitigate these interconnected risks. And with even Alphabet (Google’s parent company) CEO Sundar Pichai warning about ‘irrationality’ in the AI boom, this only seems more pressing.

Good morning from New Economy Brief.

The National Wealth Fund is a key part of delivering the government’s missions on growth, regional inequality, and clean energy by 2030. 

It’s now a year since the Fund was formally set up, so this week we’re exploring how it has developed so far, whether its ambition matches the scale of the challenges facing the UK economy, and how to increase its impact. 

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How is the National Wealth Fund shaping up?

Investing in the Industrial Strategy. The National Wealth Fund (NWF) is a publicly-owned policy bank that finances projects in partnership with the private sector and local authorities. Despite its name, it therefore isn’t a sovereign wealth fund, which invest countries’ export revenues (typically from oil and gas). Instead, it is funded by government borrowing, and tasked with channelling public investment into strategic priorities with the aim of stimulating further private investment. 

The NWF isn’t a completely new institution – it evolved from the UK Infrastructure Bank (UKIB). As well as a name change, the Labour government made changes to “turbocharge” its impact. These included increasing its capital from £22 to £27.8 billion, and broadening its remit beyond infrastructure. 

Crowding in private finance. The NWF aims to address the UK’s woeful levels of investment –  the lowest in the G7 for much of the past 30 years. It also reflects a growing consensus that government investment can encourage or ‘crowd-in’ the private funds, particularly in new industries perceived as too risky for private investors. In line with this, the government has tasked the NWF to attract £3 of private money for every £1 it invests. 

The NWF’s risk appetite has also been increased to roughly five times that of commercial banks –  to let it invest in projects that risk-averse private finance won’t touch, but where patient investment could enable innovation or growth of new industries. Though the NWF’s investments must earn enough to cover its financing costs and overheads, it doesn’t need to maximise profits. In theory, this should give it more freedom to prioritise its growth and climate change objectives, absorbing losses if some risks don’t pay off, and investing in high-priority projects, even if they offer lower returns. 

What impact has the NWF had so far? The NWF has invested £3.6bn in the last year. Most of this was in private sector projects spanning clean energy, transport, digital, manufacturing and natural capital, including £1.3bn in loan guarantees to retrofit social housing. Almost £1bn has also gone to local authorities, including a recently announced deal to fund a community wind farm in the Orkneys. The NWF is also delivering the government’s major £36.6bn loan to build the Sizewell C nuclear power station.

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Can the NWF fix the UK’s investment problem?

Too small to shift the dial. The £27.8 bn that the NWF has to invest from 2021-29 is widely considered too little for the UK’s needs. A recent Treasury Select Committee inquiry concluded that “its ambitions to deliver significant regional and economic growth are likely to be very challenging, considering its size.” And the NWF doesn’t match the scale of funding previously delivered by the European Investment Bank but lost on Brexit - £8.1bn in 2016. Nor does it match peers in France and Germany, which invest around 1% of  GDP each year. For the UK, this would mean quadrupling the NWF’s remaining annual capacity to around £21 billion a year. 

How to scale up investment. The question is how the NWF should be scaled up. Last year’s changes to the UK’s fiscal rules mean these no longer directly prevent increasing its size through central government borrowing. This is because the fiscal framework's new target measure for debt – public sector net financial debt (PSNFD) - effectively excludes  borrowing for financial investments. This includes loans, guarantees, and minority equity stakes that don’t confer significant public control, delivered through institutions like the NWF and GB Energy. 

Independence is key. If the government won’t borrow to increase the NWF’s capital, it could also scale it up by letting it borrow for itself on capital markets. Economist Mariana Mazzucato told the Treasury Select Committee that financial independence is key to the large size and impact of other countries’ successful policy banks. Raising its own finance could also benefit the public finances, according to the New Economics Foundation (NEF), as bonds issued by the NWF would not run the same risk of pushing up government bond yields that scaling it up via increased central government borrowing might.

So far, the government has resisted loosening Treasury control and empowering the NWF to raise its own finance. However, the Chancellor’s aim to both halt the UK’s “chronic stop-go cycle of public investment” and reduce public debt within this parliament could strengthen the case for reform. 

Should public finance do more than fill gaps? A more immediate question, however, is how the NWF can rapidly make use of its existing firepower. Though investment has sped up, it is still underspending, getting just £3.6bn of a potential £5.5bn out the door in the past year. NEF’s Jaya Sood argues the NWF should be proactively financing more mature green technologies like offshore wind and housing retrofits, including offering cheaper financing where high capital costs threaten the UK’s climate and energy targets by delaying projects.

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What to look out for

Will a new CEO shift the dial? This month Oliver Holbourn became NWF CEO, after John Flint stepped down earlier this year. Flint, who has vocally criticised the UK financial sector’s lack of risk taking and failure to deliver green investment, has said the incoming CEO will need a “spine, thick skin, and self-confidence” to succeed. Holbourn’s first task will be to deliver a comprehensive investment strategy that reflects the NWF’s broadened remit and risk appetite, due early 2026.

Avoiding the pitfalls of de-risking. The strategy needs to balance rapidly ramping up investment and taking greater risks with ensuring the NWF gets a fair share of the rewards when risks pay off. This could mean prioritising equity investments – where the state gets a share in projects - over loans and guarantees, where the public still loses money if things don’t work out, but gets less of the benefits if a project does well. It could also mean attaching conditions to NWF financing, such as creating a certain number of high-quality jobs - similarly, the Trades Union Congress (TUC) has proposed that companies in high carbon industries that get financing from the NWF to help cut emissions should be required to have ‘Just Transition Agreements’ that protect workers from job losses. (Read our previous deep-dive on de-risking private finance for more). 

Will legislation increase the NWF’s ambition? Jesse Griffiths, CEO of the Finance Innovation Lab, says that forthcoming legislation formally renaming the NWF will be a key battleground for those looking to increase its climate ambition and financial firepower. Campaigners are also likely to argue for governance reforms, with the NWF’s board currently lacking formal representation from unions, regional authorities or key industries it is intended to invest in. 

As the Fund marks its first year, its prospects for success in driving growth, reducing regional inequalities, and accelerating the clean energy transition will depend on whether it is given the scale and independence to match its ambitions. The case for expanding its firepower – either through more government funding or new powers to finance itself – is getting harder to ignore. 

Good afternoon from New Economy Brief.

Last week was historic for the 12 million people who call England’s private rented sector home. The Renters’ Rights Act became law upon Royal Assent on Monday 27th October and is the biggest reform to the regulations governing renting in a generation. 

The government claims that these changes, which come after years of campaigning from tenants’ rights organisations, charities and think tanks, will “ level decisively the playing field between landlord and tenant and transform the experience of private renting”. This week we’re taking a closer look at the Act and whether it lives up to the government’s billing. 

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The reality of unreformed renting 

The passage of the Renters’ Rights Act, and the years of campaigning that preceded it, showed the reality of renting for many of the one in five people in England who live in the private rented sector (PRS): poor-quality homes, spiralling rents and the ever-present risk of eviction. 

Sword of Damocles The 1988 Housing Act has defined renters’ experience since the Thatcher era, most notably by introducing ‘Section 21’ no-fault evictions, which meant landlords could force a tenant to leave their home with just two months' notice through no fault of their own. Its removal is the centrepiece of the new Act. Over 32,000 households in England were served with a no-fault eviction last year, and with no mechanism to challenge their notices, 6,640 risked homelessness as a result. Even for those who were not evicted or threatened with eviction, the knowledge that a notice could be issued at any time deterred tenants from complaining about conditions in their homes or landlord behaviour.

English housing’s poor (quality) relation. Renters have a lot to complain about. One in five privately rented homes is “non-decent” (i.e. it does not meet the official standards required of social housing): a far higher proportion than homes of owner occupiers or social tenants. One in eight of these contains a “Category 1” hazard, one that poses “a serious and immediate risk to a person's health and safety”. Most (57%) of private renters live in an energy-inefficient home, meaning higher energy bills.

Cost of rent through the roof. Far from being a cheap alternative to home ownership, being a renter is costly. Average UK monthly private rents increased by 7.7% in the 12 months to March 2025, far outstripping inflation. After more than a decade of such increases, tenants in England spend over 36% of their income on rent – above the 30% threshold to be considered affordable – while in London that rises to 41%. For those on lower incomes, it soars to two thirds. 

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Levelling the playing field 

Successive governments promised action. A white paper was produced under Theresa May; abolishing Section 21 was part of the Conservative 2019 manifesto; and the last government brought its own legislation, the Renters (Reform) Bill, forward in 2023. Amid vocal opposition from landlord groups and landlord-aligned backbenchers, multiple amendments designed to water down renter protections received sufficient support to delay the Bill’s passage. Rental reform remained unresolved when the  2024 general election was called.

Take two. Labour, the Conservatives, the Liberal Democrats and the Greens committed to abolishing Section 21 last summer, and the Labour government introduced the Renters’ Rights Bill in September 2024. The Act that received Royal Assent last week finally delivered this.

The end of no-fault evictions. The new legislation means landlords may only evict their tenants for a legitimate reason. This could be to move themselves or a family member into the property, to sell it or as a result of tenant rent arrears or anti-social behaviour. As well as needing to provide a ‘provable’ reason for eviction, landlords must now give tenants four months to find a new home – double the notice period under Section 21. Overall this means renters are much more secure in their tenancies than before.

No hard stop. The Act also puts a stop to fixed-term tenancies, replacing them with rolling contracts. Instead of the ticking clock of a year-long agreement, the home is yours until you wish to leave, unless the landlord has a legitimate reason as outlined above.

War no more. Infamous rental ‘bidding wars’, where prospective tenants were told to bid significantly above the asking price or supply several months’ rent in advance in order to secure a home, have also been outlawed.

Proper oversight. The opaque nature of the renting process meant that many tenants had no access to basic details about their homes and landlords. Rectifying this has long been a priority for campaigners, who have pushed for a national register for landlords for many years. The new legislation goes some way to addressing this – but it falls short of the demands of the Renters' Reform Coalition (a group of 19 organisations representing private tenants).

Pets welcome. By requiring landlords to accept requests for pets in homes in all “reasonable” circumstances, the Act means tenants with pets are also now much more able to move home or adopt an animal.

Decent homes…in a decade? The government will extend the Decent Homes Standard (currently used for social housing) to privately rented homes. However, in its consultation, the government proposed deadlines of 2035 or 2037 to implement it, which would expose renters to the poor standards that have so long defined the sector for another decade.

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Where next for private renters?

The elephant not even in the room. While the new act directly addresses the problems of insecure tenure and bad homes (albeit slowly in the latter case), it does very little to bring rents down. The government says direct measures to counter the affordability crisis in the PRS are off the table.

Uncontrolled rents. In particular, it has rejected proposals for rent controls or caps of any kind, including the Renters’ Reform Coalition’s calls for in-tenancy rent increases to be limited to whichever is lowest of wage growth or inflation. As have the requests from the Mayor of London for devolved powers to cap rents in the capital. It remains to be seen whether these measures will return to the table if rents keep soaring.

Build baby build?  When pushed on the lack of measures in the Act to address affordability in the PRS, the government points instead to its plans to increase housing supply. It aims to build 1.5 million homes this parliament, but there are concerns that it’s already off track and too reliant on private developers to meet its targets. In the past, such rates of housebuilding have only been achieved with significantly more construction of social housing. And while more homes are needed to help tackle the housing crisis, Professor Josh Ryan-Collins argues that to address unaffordable house prices and rents “we must make the existing as well as new housing stock more accessible for those most in need by reducing speculative investment”.

Are we at peak renting? Landlord groups have denounced these changes, claiming that further regulation will drive landlords out of the market and reduce supply of homes to rent. But might a rebalancing of the housing market – with more people owning or living in social housing – be part of the plan? The government's own data found that the PRS doubled between 2000 and 2016, reaching an abnormal size by historic British standards. Generation Rent also found that the relative size of the PRS is not an important factor in rental affordability – it can shrink without rents going up. 

For those ‘left behind’ in rented homes, this legislation will make them more secure and will in theory improve the standards of their homes in years to come. But without tangible action on affordability, tenants will still feel the squeeze of sky-high rents – and amid an ongoing cost of living crisis, this is what the government is ultimately most likely to be judged on.

Good afternoon from New Economy Brief.

What we can learn from the Carer’s Allowance scandal

Over the last year Carer’s Allowance – the main benefit for carers in the UK – has been under scrutiny as thousands of recipients have been put into debt as a result of its flawed design. 

On the International Day of Care and Support, this week’s NEB explores what the scandal tells us about how our economy and society undervalue care.  

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A scandal years in the making.

In the UK there are almost 6 million unpaid carers supporting someone, either in their family or beyond, who is ill or disabled, or needs help as they get older. Carer’s Allowance (and Carer Support Payment in Scotland) is the main benefit designed to support unpaid carers in the UK. It was introduced in 1976, and while it is non-means tested, recipients must meet strict requirements. These cover the number of hours of care provided, the benefits claimed by the person cared for, and how many hours of paid labour the recipient is authorised to do alongside their caring duties. Taken together, these requirements limit takeup of the benefit – only around 1.4 million unpaid carers in the UK currently claim it.

The human cost of an inflexible system. Unlike benefits like Universal Credit, there is no taper built into Carer’s Allowance. Once a recipient earns a penny more than the authorised amount – £196 a week – from paid work they’re doing alongside caring, they lose all their entitlement. This, combined with a reliance on self-reporting, has left an estimated 140,000 recipients being incorrectly overpaid – sometimes over many years.

These overpayments then count as a debt to the Department for Work and Pensions (DWP). This isn’t a new problem: a 2019 National Audit Office investigation found that the DWP was seeking repayment from just under 80,000 carers – nearly half with ‘debts’ over £1,000.

Five years later, a 2024 Guardian investigation brought these overpayments into the public consciousness. It reported that most unpaid carers in debt owed between £2,000 and £5,000, but found some owing up to £20,000. It also covered more than 600 carers prosecuted for fraud since 2019. Carers UK estimates that overpayments to unpaid carers have reached at least £357 million.

A limited response. In response the DWP this year conducted an Independent Review of Carer’s Allowance overpayments, aiming to identify how the situation has arisen and what solutions will reduce future risk. Its findings have been internally reported, and the government has promised to respond by the end of this year. Hoping for a remedy for those already affected, over 100 organisations (including Disability Rights UK, Oxfam GB, and the We Care Campaign) have signed an open letter calling for debts to be halted and ultimately cancelled.

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Unpaid carers are already financially insecure.

As a recent essay from the Women’s Budget Group articulated, the scandal shines a light on the hardship carers face. JRF’s annual UK poverty report this year found 28% of unpaid carers are in poverty (compared to 20% of the wider population). And, with Carer’s Allowance paying just £83 a week and limiting income from paid work to £196 a week, the poverty rate amongst its recipients rises to 34%.

JRF estimates that unpaid carers face a pay penalty - earning £414 a month less on average than those without caring responsibilities; their analysis concludes: “Carer’s Allowance is ineffective both at incentivising paid work and at replacing earnings.”

This isn’t a niche experience. Resolution Foundation research finds more than 40% of low-to-middle income families include a carer or disabled person. Their analysis cites limited access to paid work and inadequate social security as reasons for unpaid carers experiencing ‘considerably lower incomes and living standards than others’. Three quarters of low-to-middle income carers can’t work at all or as much as they would like, and for more than half providing care is the equivalent of a full-time job (35 hours a week).

Wider reforms threaten unpaid carers further. Earlier this year the government’s Welfare Reform Bill – including plans to cut social security spending by tightening eligibility for Personal Independence Payments (PIP) – faced widespread criticism. A backbench rebellion forced a U-turn, including pausing the PIP cuts. Among the concessions was a review into PIP assessments, led by DWP minister Stephen Timms and concluding in autumn 2026. Any resulting policy changes could have worrying implications for unpaid carers: access to Carer’s Allowance depends on the person they care for receiving one of several benefits including PIP. Carers UK estimates the original plans would have cost 150,000 unpaid carers their entitlement.

Approaches to social security put paid work first. Even with these plans on hold, the government wants to reduce economic inactivity – a category which includes unpaid carers and disabled people not in paid work. Its Get Britain Working White Paper explicitly sets out this ambition, but as Care Full explains, paid work is too often impossible for unpaid carers and reforms in this direction undermine the value of care in our society.

There is consensus that Carer’s Allowance needs reform. Carers Trust, IPPR and JRF have each called for an overhaul of Carer’s Allowance, whether that’s cancelling current debts, increasing the value of Carer’s Allowance or wider reform, beyond the independent review’s focus on the buildup of debt. There is also pressure to meaningfully involve those with lived experience of care in discussions about PIP. Organisations including NEF, Trussell and Turn2us have signed a joint letter including calls for unpaid carers to be given a voice in the review’s co-production commitments, given their ‘direct stake’ in the outcome.

Policies that could transform care. Beyond Carer’s Allowance and directly related policies, there are other ways to transform the financial security of unpaid carers. IPPR Scotland and Carers Scotland have proposed a Minimum Income Guarantee pilot for unpaid carers that would raise their incomes enough to provide a good standard of living. Elsewhere the Oxfam Time to Care Campaign backs the JRF- and Trussell-led Essentials Guarantee – the idea our social security system should enable us to meet our essential needs – as an unpaid care policy given many unpaid carers rely on the system for their income.

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Care is a cross-economy issue.

In their programme A Green and Caring Economy, the Women’s Budget Group link care to our wider economy, calling for care to be at the centre of the  design for a fairer system. This would ‘put wellbeing above profit, moving away from energy-intensive and polluting industries and towards activities that care for people and planet, and ending GDP growth as our main economic objective’. Supporting this, research out today from Care Full articulates our current economy’s design features – from wealth extraction to individualism – that must be overcome to centre care in all forms.

In the context of a wider social care crisis, Emma Dowling argues that “the care of the population…is a cost to capital that, systemically speaking, must be kept as low as possible” and challenging this requires rethinking our economic model. Oxfam UK echoes this, calling for “a proactive shift in our economic approach to a model that invests in a feminist caring economy”.  They name steps to get there including wealth tax proposals from Tax Justice UK and Patriotic Millionaires to “redistribute the wealth created and sustained by the labour of unpaid and underpaid carers”. 

Questions about care, unpaid labour and social security become entry points to thinking more broadly and deeply about who our economy is designed for. As Emily Kenway argues, if “we continue to consider care policy separate from wider labour market policies, we will continue to prioritise waged labour above our need to care for our loved ones”. As demographic shifts leave more and more people needing care, the consequences of this separation will become increasingly acute.

Good morning from New Economy Brief.

Last week finance ministers from all over the world gathered in Washington DC for the  International Monetary Fund and World Bank’s Annual Meetings. 

This week we give a brief summary of key themes from the meetings and what they mean for the UK government’s upcoming Autumn Budget.

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The IMF Annual Meetings.

To coincide with the meetings, the International Monetary Fund (IMF) has released its latest World Economic Outlook, Global Financial Stability Report and Fiscal Monitor of global developments and how they affect countries’ public finances. The toplines from this autumn’s reports are that the international economy has remained more resilient to the global trade war than the IMF previously expected in their Spring Meetings. Global growth has been revised upwards, and is now projected to hit 3.3% in 2024 before slowing to 3.2% in 2025 and 3.1% in 2026. However, IMF director Kristalina Georgieva warns of growing ‘anxiety’: “From technology to geopolitics to climate to trade, change is unsettling.”

“Global Economy In Flux, Prospects Remain Dim.” Global growth is still fragile, but it is being propped up by the ‘AI mega-boom’, particularly by huge investments from US tech companies. But the IMF warns that this may not last, and Georgieva notes in her speech: “the history of financial market responses to pathbreaking new technologies is a story of overestimation and market correction… The world would be wise to manage such risks.” (Look out for our briefing on the AI bubble in the coming weeks.) The World Economic Outlook also warns of a range of other risks to growth: “Prolonged uncertainty, more protectionism and labour supply shocks could reduce growth. Fiscal vulnerabilities, potential financial market corrections, and erosion of institutions could threaten stability.”

Anxiety over financial instability and public debt. In its Global Financial Stability Report, published on Tuesday, the IMF said markets appeared “complacent” and pointed out three reasons to be anxious: overstretched valuations for tech stocks; pressure in government bond markets as they absorb fast-growing debts; and risks in the shadow banking sector. The IMF is particularly worried about rising public debt in both emerging and advanced economies, with the Fiscal Monitor noting that the already-fragile state of many countries’ finances could make it hard for them to respond to the growing risk of a financial crisis or another shock. 

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What does this mean for the UK?

At the top of the IMF’s list of recommendations for highly indebted governments trying to navigate this new ‘world of uncertainty’ is to repair the public finances with fiscal consolidation. It thinks this is “necessary so they can buffer new shocks and attend to pressing needs without driving up private sector borrowing costs.“ 

Invest to grow. The Fiscal Monitor also makes the case for governments to spend more efficiently to free up funds for more investment in infrastructure, human capital and R&D. This would in turn improve growth, create more jobs, bring in more revenue from taxes and improve resilience and debt sustainability. Here, the IMF’s Director praised the UK for “doing the right thing… They are signalling [to the bond markets]. They have a growth vision and are showing financial responsibility”. (However it is important to note that the UK is still investing less than the OECD average and the ‘capital gap’ with other countries is in the trillions of pounds – so it will take much more ambition to catch up.)

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Looking ahead to the Autumn Budget.

Put simply, the IMF is saying to governments: repair your public finances via fiscal consolidation and grow your economies with public investment. Fiscal consolidation means either tax rises, spending cuts or both. Given the state of UK public services (check out the IfG’s latest Public Sector Performance Tracker for more on this) and the political backlash over the proposed cuts to disability benefits to increase headroom back in the spring, many commentators expect the Chancellor to lean much harder on tax rises in the Autumn Budget. In fact, the Chancellor used last week’s IMF meetings to give her clearest indication yet for increasing taxes on the wealthy and ‘those with the broadest shoulders’. 

Pro-growth tax reform. The IFS’s Green Budget recommended a variety of tax-raising options, but emphasised that reforms should focus on creating a more ‘growth-friendly tax system’. Similarly, economist Jonathan Portes wrote in the FT that the Chancellor needs to explain to markets not just how much tax will be raised but “why it will be good for growth and public services and how pain will be fairly shared”. New polling from Invest in Britain shows that a majority of Labour MPs want Reeves to go beyond ‘fiscal tinkering’ and raising taxes only enough to meet fiscal rules. Instead, they think she should be more ambitious and raise enough for extra spending and investment to boost growth.

More flexibility and firepower in the fiscal framework? The Times’ Mehreen Khan reports that the Chancellor met with the head of the IMF to speak about its “recommendation that the government only has one fiscal forecast measuring its compliance with the budget rules a year." Experts at the Institute for Government say such a reform would promote policy stability and prevent the government being pushed around by adverse economic forecasts. (Read our previous New Economy Brief on this.) 

However, former chief economist at the Bank of England Andy Haldane argues that this reform alone “would not tackle the inflexibility embedded in the system”. He proposes further steps to make fiscal policy more growth-friendly. These include recommending that the Treasury should also take back control of forecasting from the OBR and have the OBR scrutinise it instead (as NEF has recently proposed); allow ‘tolerance bands’ of 1% of GDP around the fiscal rules to “remove the need for a growth-limiting squeeze to boost fiscal headroom”; and assess policies’ impact over a longer period than a single parliament so more of the growth-enhancing benefits of public investment can be taken into account.

Modernising fiscal policy for an unstable world. Any change to the fiscal framework would require updating the Charter for Budget Responsibility – which enshrines the OBR’s mandate, the fiscal rules and how the OBR assesses them – and passing secondary legislation through Parliament. The polling above also shows most Labour MPs think the fiscal framework should focus more on promoting sustainable and inclusive economic growth (76%), resourcing high-quality public services (72%) and responding to geopolitical threats and emergencies (59%). Invest in Britain has published a briefing explaining a variety of wider reforms that could make the fiscal framework more flexible, investment-friendly, and capable of meeting today’s economic, climate and geopolitical challenges. 

In its laser focus on the technical to-and-fro with the OBR or the political ups-and-downs at the Treasury, the UK fiscal debate can easily lose sight of the global context. But looking at other countries – from the IMF’s warnings last week to the ongoing French budget crisis and the government shutdown in the US – it becomes clear that the UK situation is about much more than the hangover from Liz Truss’s mini-budget. Instead, it reflects trends that are putting fiscal policy under strain in even the wealthiest countries, and which will require more systematic solutions than another round of belt-tightening.   

Good afternoon from New Economy Brief.

This September the 80th United Nations General Assembly took place in New York. It featured a new ‘Summit for a Sustainable, Inclusive and Resilient Global Economy’, which the UN Secretary-General called “the first of its kind”. Focused on development finance and progress towards the UN’s Sustainable Development Goals (SDGs), the summit covered the funding commitments that world leaders have made and the huge gaps that remain. 

The General Assembly also set the stage for COP30 – the climate talks – in Brazil this November, where climate finance and multilateral cooperation are expected to be high up the agenda. 

What do these international events mean for progress on climate change and financing the sustainable development goals? This week’s New Economy Brief unpacks what happened at the UN General Assembly and looks ahead at what we can expect from COP30 in November.

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Financing for development and climate action 

Each year since its founding in 1945, the United Nations has convened its General Assembly (known as UNGA) – an annual forum for all 193 member states to discuss key global issues and decide on policy. Centre-stage this year was the cascade of countries announcing recognition of Palestinian statehood amid further evidence of genocide being committed by Israel in Gaza.

A new summit. UNGA also focused on development, climate and finance, and included the first ‘Biennial Summit on a Sustainable, Inclusive and Resilient Global Economy’. The summit was mandated by the UN’s 2024 Pact for the Future, which intended to “turbo-charge” progress on the Sustainable Development Goals’ (SDGs). As a quick reminder there are 17 of these goals, including no poverty, zero hunger, climate action and gender equality, each with key milestones to reach by 2030.

Keeping promises. The first iteration of this new summit had several key themes. First, a focus on the commitments world leaders have already made on financing for development – particularly relevant in light of what Secretary-General António Guterres called “collapsing aid commitments and rising trade tensions”. 

Representation and coordination. The second theme was strengthening the representation of developing countries, who have regularly been sidelined and under-represented in decision-making. The third was strengthening coordination between member states, the UN, and international financial institutions like the World Bank and International Monetary Fund (IMF). 

Closing the gap. The final and most pressing theme, linking the other three, was the need to close the $4.2 trillion (and growing) annual financing gap between the funding already committed and what is really required to meet the SDGs. 

Paris Agreement at risk? A dedicated climate summit also took place during UNGA, giving countries a platform to update their climate commitments ahead of COP30 in November. Developing countries have regularly shown frustration at multilateral forums like this in recent years. Numerous leaders have made clear their dismay at unmet climate finance pledges, and have loudly warned that without new resourcing, the Paris Agreement is at risk. This is a landmark legally binding climate treaty agreed in 2015 by 193 states. It is the defining agreement on climate change to date, with the goal of preventing global average temperatures from rising by more than 1.5-2°C.

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The real-world consequences of the financing gap 

UNGA is a unique forum in many ways. It may not be perfect: it can seem like a ‘talking shop’, and its processes and language are dense and confusing. But it remains an important piece of international architecture that can – and should – be a space for progress.

Nevertheless it’s undeniable that this year the summit was held against a backdrop of rising geopolitical instability. Numerous countries are scaling back their international development financing, with real and disastrous impacts being felt around the world. In just the last year, the USA, UK, Germany, Switzerland, France and others have slashed official overseas assistance, with billions of dollars less committed toward achieving the SDGs. 

More cuts. Reasons for cutting back development funding range from reallocating budgets to defence spending in the case of the UK and Germany, to criticisms from the right of the political spectrum as in France. The OECD projects official development assistance (ODA) will fall 9-17% in 2025, on top of a 9% drop last year. Sub-Saharan African countries are likely to be particularly exposed, with health and education-focused projects hit hard. The cuts could also increase reliance on private finance. As we’ve covered in previous editions, rich countries failing to honour aid and finance commitments forces many Global South governments to take expensive loans from international capital markets. This simultaneously enables richer governments to avoid their obligations and saddles poorer countries with more debt. 

SDG progress at risk. Many of the targets that serve as milestones towards achieving each of the 17 SDGs are now far off track, with just 15% due to be met by 2030. And the $4.2 annual trillion financing gap is not only growing but is being compounded by the increasing costs of servicing debts. In fact, many low- and middle-income countries are spending more on debt repayments than on crucial areas like healthcare or education. (You can find more on the debt crisis in our earlier issue).

Tackling debt and tax is key. This year’s new UN summit also highlighted the urgent need to mobilise funds from both public and private capital, for international tax cooperation and for initiatives aimed at debt relief. In his address to the summit, South African President Ramaphosa argued that both debt relief and global tax reform are essential if the SDG financing gap is to be closed. He also noted “we need confidence that commitments will be honoured and that global rules will be shaped by all members and not just a few”.

Reform is long overdue. Part of this can happen through reform of the traditional international finance institutions like the World Bank and IMF. The design of both institutions has left Global South countries under-represented in governance, decision making and lending practices. Redistributing power – from a place of historic and current inequity – and giving countries from the Global South more say in how both work is vital. 

Going beyond reform. It’s also important to remember that many campaigners, activists and experts from the Global South go beyond calling for reform of the World Bank and IMF. Instead they think these institutions – and the economic orthodoxies they enforce – should be abandoned completely. In its statement ‘The IMF is Never the Answer’, the Collective on African Political Economy, for example, argues that “the Third World must re-imagine a path out of our current crisis that doesn’t depend on the IMF, its allied institutions, and Western capital.”

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From UNGA to COP30 – and beyond 

Speaking after climate negotiations in Bonn earlier this year, Sanjay Vashist of Climate Action Network South Asia said “As we pivot to COP30 in Belém, we demand not just promises, but delivery—real, predictable, and equitable finance.”

Funding commitments, especially to support developing countries with climate action, will again be high on the agenda in Brazil, including efforts to reach the $1.3 trillion in funding for developing countries by 2035 that was agreed at COP29 last year.

Since then the USA has withdrawn from the Paris Agreement and global geopolitical tensions have continued to rise. This year’s UN General Assembly highlighted both the deep challenges we face and the growing determination to close the gap between global ambition and action on sustainable development and climate. As the world looks ahead to COP30, the focus must shift from dialogue to delivery – mobilising real finance, reforming global systems, and ensuring that commitments translate into meaningful change.

Good afternoon from New Economy Brief.

On 2nd February 2018, Northampton became the first council in 20 years to issue a Section 114 notice, a public admission they’d run out of cash. Since then, six other councils have followed, including Birmingham, Europe’s largest local authority. Earlier this year, the National Audit Office warned nearly half of English councils are at risk once temporary government support for Special Educational Needs and Disabilities (SEND) spending expires.

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The government hopes a combination of its newly announced Pride in Place scheme and its long-trailed Fair Funding Review 2.0 will shore up local authority finances. But with local coffers in the spotlight ahead of crunch local elections next year, with a third of council seats being contested, have ministers done enough to fend off another Reform surge? 

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A crisis decades in the making.

The roots of today’s crisis are found in the UK’s unusual approach to local government funding. In 2014 just 7% of UK tax revenue was raised locally, compared to 32% in Germany and 50% in Canada. According to New Local, that makes the UK one of the most centralised taxation systems in the OECD.

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Limited funding options. Councils rely on three main funding streams: central government grants, council tax and business rates (property taxes on residents and companies respectively). Unlike those in other countries, UK local authorities have limited powers to raise money themselves. When one of these three streams falters, disaster looms.

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Austerity bites. 

As comedian Alexei Sayle once said, “Austerity is the idea that the global financial crash of 2008 was caused by there being too many libraries in Wolverhampton”. Through the 2010s, English local authorities were hit hard by government cuts. Some saw 40% of their central government funding disappear. Even now, after increased funding during Covid and more recent uplifts, core spending power remains below 2010 levels.

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The cuts deepened regional inequalities. The Institute for Government finds that, as of 2024, councils in the most deprived areas have seen real terms funding fall by 18% since 2010, compared to growth of 1% in the wealthiest areas.

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Squeezed dry. The theory was that councils would make up for lost funding from the centre by raising more locally. However, rules on retained business rates have left councils short, with reform promised but never implemented. Meanwhile, many have maxed out council tax rises (capped at 5% annually), squeezing low-income households who are left paying proportionally more than richer ones. Many of them can’t afford to pay and as a result, collections rates have dropped and arrears doubled in a decade to £8.3bn. It’s notable that English councils are considered amongst the most aggressive creditors; council tax remains the only debt that retains the punishment of imprisonment. Scotland and Wales have fared slightly better, with devolved governments maintaining higher levels of grant support, but similar pressures remain.

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Fixing the foundations?

Fair Funding Review 2.0. In August, the government closed its consultation on the Fair Funding Review 2.0, with a response expected ahead of the 2026/27 financial year. The review promises to reform central government funding through a new “needs-based” formula based on three factors: relative need (local deprivation), the costs of providing services locally, and local capacity to raise taxes.

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Pride in Place. Meanwhile, the recently announced Pride in Place scheme pledges £5bn over 10 years to the hardest-hit towns, based on a combination of deprivation and community need. With “fake barbers” in the crosshairs, the fund hopes to rejuvenate high streets by allowing councils to buy up boarded-up shops and abandoned businesses for community use. 

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Too little, too late? Labour hopes this will correct the policy failures of successive previous governments. However, the funding increases being announced are relatively modest, and some councils will lose out under the new fair funding model, with London boroughs hit particularly hard. Further, Institute of Financial Studies modelling suggests that the redistribution proposed doesn’t go far enough, and could even transfer money from deprived areas to wealthier ones.

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Vital services on the line

Councils do much more than just collect bins. They have a statutory duty to deliver essential parts of the security net such as emergency housing, child protection and adult social care. With budgets under pressure, councils often face difficult decisions, forced to cut preventative services like public health as the need for more immediate services rises. These needs have grown as the cost of living crisis continues and the housing crisis worsens; they will keep growing as the country grapples with the challenges of caring for an ageing population.  

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Essential services. Transport for children with SEND illustrates the problem. Costs have ballooned as councils turn to private taxis to get children with Education, Health and Care Plans (EHCPs) to school, while local bus routes have been cut and in many places, local special school provision remains insufficient, requiring pupils to make long journeys to access the support they're entitled to.The picture with housing services is equally bleak; Eastbourne Borough Council says it’s expecting to spend the equivalent of half the council tax it collects on temporary accommodation this year. 

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Doge fail. As newly Reform-led Kent County Council recently discovered, councils are already “down to bare bones” and promises of new ‘DOGE-style’ cuts are unlikely to get far. The new political leadership is already looking at raising taxes to fill the gap.

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The visibility of cuts. This means that the services on the chopping block are the ones most of us notice. Libraries close, potholes go unrepaired, local buildings are left to degrade. Communities feel cuts to these services deeply, and confidence in local councils has been falling. 

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The invisible costs. New Local argues that councils are in a weak position when bargaining with the private sector – they depend on outsourcing to provide essential services, but are too small to shape the terms on which this is done. In practice, this means they are often forced to pay steep fees to private providers, such as care homes run by private equity firms, but have limited influence over the quality of services delivered. Smaller or rural authorities are particularly exposed, with little leverage to challenge prices or improve standards.

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Breaking point?

Reforming tax. Fundamentally, councils need more money. Recent reports suggest council tax reform may be on the table at the upcoming budget. Organisations including Fairer Share have proposed replacing council tax with a proportional property tax, under which homeowners would pay a fixed percentage of their property’s value every year. This would both be a fairer, more progressive tax, and raise an extra £5.6bn. IPPR has also suggested a tourist tax, a model already common across Europe, which could raise millions in additional revenue for local areas.

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Rebuilding local resilience. For years, organisations like the Centre for Local Economic Strategies (CLES) have called for Community Wealth Building to retain wealth and opportunity for local people. They believe that by using public procurement to nurture local supply chains, and playing to the area's strengths when managing their assets, local councils can invest, locally, ultimately improving their long term financial resilience.

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Rethinking service delivery. As well as funding, organisations like We Own It call for insourcing and service provision reform to wean local governments off  expensive private provision in social care and housing. They argue this would save councils money, improve services and boost local investment.

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The consequences of over-centralisation. While the upcoming English Devolution and Community Empowerment Bill promises to hand more powers to local areas and communities, financial autonomy remains much less certain. Without true fiscal devolution, accompanied by sustainable funding, piecemeal measures like the Pride in Place scheme or Fair Funding Review 2.0 seem unlikely to deliver the resilient, locally rooted services that communities desperately need. 

Good afternoon from New Economy Brief.

This year Rachel Reeves addressed the Labour Party Conference with the government in a challenging economic and political situation. In her speech, she set out an ambition to build “a Britain founded on contribution”. The Guardian reports that “this focus on ‘contribution’ comes amid concerns among some in Labour that the government needs to offer voters a clearer vision of its agenda.” 

What could the new focus on 'contribution' mean for policy? This week's New Economy Brief explores the economic themes in the Chancellor's speech and what they might signal ahead of the Autumn Budget.

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The meaning of ‘contribution’. 

The Chancellor’s conference speech was light on policy substance – understandably, given the Autumn Budget looming at the end of November – but a paper from Labour Together set out ‘the case for contribution’ a week earlier. This had been trailed in the Times as not just the basis of the Chancellor’s speech but also part of a wider reset of the government’s political strategy. The paper’s author, Labour Together Chief Policy Advisor Morgan Wild, explains that a focus on ‘contribution’ could inform policy in a wide range of areas including migration, criminal justice, welfare reform and fiscal policy. The crux of the Chancellor's speech touched on some of these themes, explored below. 

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Youth job guarantee via threat of sanction.

Rachel Reeves stressed the need for "hard work matched by fair reward". One announcement builds on a previous policy of a ‘youth guarantee’, which promised every 18- to 21-year-old in England access to an apprenticeship, training, education opportunities or help to find a job. The carrot: The Chancellor will now try to reduce the nearly 1 million young people not in education or training (NEETs) by offering guaranteed work placements to all young Universal Credit recipients who haven’t been “earning or learning” for 18 months. The stick: those who refuse without a “reasonable excuse” could face sanctions like having their benefit entitlement cut. 

The case against a sanctions-led social security system. The Chancellor was at pains to explain the difference between a Labour government and its Conservative predecessors. However, critics might draw some similarities with 2010-era reforms of benefit conditionality which 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 commenting that “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. For instance, it is “largely ineffective in facilitating people’s entry into or progression within the paid labour market over time” and many businesses dislike the way it wastes their time with “large numbers of unsuitable and unfiltered job applications” while often making it even harder for people who are sanctioned to find jobs.

The case for a contributory welfare system. The Labour Together paper advocates linking people’s individual benefits with their contributions and moving away from a means-tested social security system “towards one that aims to insure, reskill and match to well paid jobs.” It does not represent a complete break with sanctions, arguing that “modern day free-riders”, such as “people who won’t develop the skills they can to contribute properly to society”, should receive less. However, its  authors think Universal Credit should continue providing everyone with a guaranteed minimum income, but that those seen as contributing should get extra benefits. These might include more help with childcare, a more generous pension or additional short-term earnings-linked payments if they lose their jobs. The aim is to acknowledge individuals' contributions to society, and make it clearer what society is doing for them in return. Many people feel what they do for others isn't appreciated and that they get little or nothing back if they ask for help themselves; the paper argues that linking benefits to contributions will be essential for changing this. 

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“In place of decline, we have chosen investment”.

The Chancellor emphasised her commitment to public investment, highlighting a change to fiscal rules in the 2024 Budget which enabled the government to invest over £100 billion in infrastructure and public services. However, she was also at pains to underline that they could only do this due to “responsible management of the public finances”. She took a characteristic pop at the Liz Truss mini-budget and the way it increased interest rates and eroded disposable incomes of people with mortgages. But she also laid into “those who peddle the idea that we could just abandon economic responsibility and cast off any constraints on spending”. 

Burnham, borrowing and the bond vigilantes. Many have interpreted this as a thinly veiled critique of suspected leadership hopeful Andy Burnham, who recently argued that we should get away from the idea of “being in hock to the bond markets”, and proposed the government take essential utilities into public ownership to reduce the cost of living. The current leadership have called this economically illiterate, but the Times’ Mehreen Khan had more sympathy with Burnham’s point: “it needs to be told to the British public that [bond vigilantes] limit democratic choices…most don’t know what the fiscal rules are…they just want lower inflation and interest rates”. Read our previous explainer on the interaction between bond markets and fiscal policy, and this briefing from Invest in Britain on why you should be sceptical of claims that more government borrowing for public investment would mean higher inflation and mortgage costs.

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Tax and the Autumn Budget.

As set out in our recent briefing, the Office for Budget Responsibility is likely to show the Chancellor is on track to miss her fiscal targets at the forthcoming Budget. With the government digging even deeper into its opposition to further borrowing – a position which appears to be driven both by the fear of adverse bond market movements and the desire to draw clear divides with political opponents – the real elephant in the room in the Chancellor’s speech was tax. 

The Labour Together paper argues that a politics of contribution “would mean continuing large increases in growth investment and starting to devolve tax-and-borrowing powers to places”. It explains what  equalising capital gains tax with income taxes would mean for a fictional small business owner, “so that workers, business owners and investors each have to make equal contributions to the common good.” (Read CenTax’s paper explaining why such a reform could improve productivity and economic growth.) Many will likely view the focus on contribution as pitch rolling for higher taxes in the Autumn Budget – will we finally see the equalisation of CGT? 

Good afternoon from New Economy Brief.

US President Donald Trump’s second visit to the UK ended with a deal on technology investment and a memorandum of understanding for collaboration on research and development. What was in the deal? How does it fit into the big picture of trade negotiations with the US? What might the UK have to give up to get it, and what are the implications of conceding to the demands of the ‘Big Tech’ lobby? This week’s New Economy Brief explores.

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What’s in the US-UK Tech Prosperity Deal?

Last week the two countries signed a technology partnership, pledging to work together on areas like AI, quantum computing and space. US tech companies like Microsoft, Google, Nvidia and OpenAI announced £31 billion of private investment in data centres and other AI infrastructure in the UK economy, pitched as a way to compete in a technological race with China – such as a new ‘AI Growth Zone’ in the North East. They also agreed a ‘civil nuclear deal’ to deregulate the sector and speed up the delivery of new energy projects. 

Resisting ‘digital feudalism’. The UK government hopes the partnership will accelerate healthcare innovation, lower energy bills, create skilled jobs and spur economic growth, but economist Mariana Mazzucato warns it “will lead to outsourcing… more AI capacity across public institutions and the wider economy to US tech firms”. She suggests Labour should put clear conditions on any investments to ensure AI is governed for the common good rather than commercial interests – like the Biden administration’s use of the CHIPS act to limit share buy-backs and improve working conditions. (Her Project Syndicate article has more on this.)

Explaining the UK’s ‘Goldilocks zone’ strategy. Last week's state visit and trade deal are part of much wider US-UK trade negotiations. Many UK priorities still need to be secured through future negotiations – it also wants to lower the 25% US tariffs on UK steel and aluminium exports and receive ‘preferential treatment’ on any future pharmaceutical tariffs. To strengthen its hand, the UK government is trying to position its digital economy between a more laissez faire US market and the more strictly regulated EU. Chatham House experts describe this as a ‘Goldilocks zone’, with the UK removing barriers for US tech firms in exchange for minor US concessions on trade. However, they warn such an approach is “hazardous indeed. The UK is right to try and avoid the pain of trade war. But that cannot come at the cost of sovereignty over the foundational digital infrastructure on which so much of modern life is built.”

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What do the Big Tech lobby want?

A couple of things are reportedly on the table in the negotiations of future trade deals. The Trump administration and the Big Tech lobbyists accompanying his state visit want less regulation, like rolling back parts of the Online Safety Act and AI copyright law. The administration also says other countries’ Digital Services Taxes (DSTs) are specifically “designed to plunder American companies”. The UK introduced a DST in 2020, and Politico says it “could stand in the way of a final US-UK trade deal, or even prompt new tariffs”.

Digital services tax (DST). The Times reports that scrapping the DST is the Trump administration and Big Tech lobby’s chief concern. Set at 2% on the revenues of search engines, social media services and online marketplaces, it mainly affects US companies like Google, Meta and Amazon. Despite persistent rumours, Secretary of State for Science, Innovation and Technology Liz Kendall reiterated that the government is still committed to the DST… for now. Tax Justice UK note that “while we didn’t hear about it being scrapped during this visit, there is still a risk that it could go.” They warn that scrapping the tax would cost £5 billion pounds over the course of the parliament, which could train up to 128 thousand nurses or eight of the sixteen new hospitals the government plans to build until 2030.

Regulation and US tech monopolies. Any removal or watering down of the Online Safety Act is unlikely to go down well. Polling shows the British public generally supports tech regulation, particularly on issues around online harms and young people growing up online. The Times reports Big Tech monopolies may already be benefiting since Labour replaced the chair of the Competition and Markets Authority with Amazon UK’s former boss and gave it a “pro-growth” strategic steer, including using regulations “proportionately, with growth and investment in mind”. IPPR explains why, on the contrary, rising market concentration in a handful of powerful companies is stifling the UK economy, and an “unwavering and robust competition policy, enforced by a more responsive regulator” can boost UK investment in line with industrial and trade policy goals.

AI copyright law. Some of the biggest British artists including Mick Jagger and Paul McCartney wrote to Keir Starmer ahead of Trump’s visit arguing “Labour had failed to defend artists’ basic rights by blocking attempts to force artificial intelligence firms to reveal what copyrighted material they have used in their systems.” Equity warns that exempting generative AI from copyright law threatens the incomes of actors, artists, journalists and more by allowing their creative work to be used without consent or compensation. Beeban Kidron, the crossbench peer who tabled amendments to the incoming data bill, said: “by prioritising the short-term optics of data centre announcements and trade deals, they are knowingly undermining the foundations of the UK’s creative industries.” (The government is keen to show it’s taking such concerns seriously, and will publish a report on the changes’ potential impact by March 2026.) 

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The case for protecting UK digital sovereignty.

MPs on last week’s business and trade committee concluded that any tech deal “should strike a careful balance: promoting AI adoption and cross-border collaboration to strengthen the western technological alliance, while safeguarding intellectual property, ensuring fair taxation, and enabling the development of sovereign UK AI capabilities”. There is also a strong political case against conceding further to the US negotiator. New Tax Justice UK polling finds “67% of the public think the UK government should enforce its laws on Big Tech, even if it strains relations with Trump. Half of the public also think the [DST] is too low at just 2%.”

Chatham House analysts think it’s likely the UK will eventually have to abandon its ‘goldilocks zone’ and stop trying to straddle the fence between the US and EU. They recommend siding with the EU, arguing its approach to digital regulation is “one of the most meaningful attempts to use pooled democratic power to manage and rein in the influence of these companies. Piecemeal concessions to the US in exchange for the uncertain prospect of tariff exemptions or trade deals might be less beneficial than aligning with the EU approach.” In making its choice, the government may have to decide which it values more: chasing the chimera of growth through deregulation or protecting sovereignty in the face of a clear set of threats.

Good afternoon from New Economy Brief.

US President Donald Trump has spent the summer attacking the Federal Reserve – America’s central banking system. He’s accused the Fed’s Chair of failing to reduce interest rates fast enough, tried (unsuccessfully) to fire a Fed board member, then installed his own economic adviser on the board. The independence of the USA’s central bank is under sustained threat, with senior central bankers warning that Trump’s behaviour endangers the stability of the global economy. 

In this week’s New Economy Brief, we reflect on the recent challenges to the Federal Reserve’s independence from the Trump administration, and their broader implications for central banking – including whether the current approach is fit for purpose. 

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Warning signs at the Federal Reserve.

In recent months, the Federal Reserve has been under mounting pressure from the Trump administration. The President has repeatedly criticised Fed Chair Jerome Powell, attacking his decisions on interest rates and accusing him of stopping people buying houses. Trump’s attempts to influence the Federal Reserve risks undermining its reputation for independent decision-making. 

Although a Federal judge recently stopped Trump firing Federal Reserve board member Lisa Cook, it’s since been confirmed that the Chair of his Council of Economic Advisers, Stephen Miran, will soon join her on the board. Miran is one of the chief architects of Trump’s controversial global tariffs and champions an activist approach to monetary policy. He’s also the first White House official to join the Fed Board since the creation of the modern institution.

Trump’s actions are raising alarm bells. Senior figures in other leading central banks have expressed concerns about the consequences of a loss of trust in the Fed, with ECB head Christine Lagarde calling this  a “very serious danger for the U.S. …and the world economy.” Trump has a long, contradictory track record of doubting the Fed’s independence, claiming interest rates are kept too low during Democrat presidencies and too high during Republican ones. Taken far enough, Trump’s attacks could transform the global financial system, effectively weaponising the power of the Federal Reserve to serve his political agenda.‍

Dollar dominance could decline. If the world loses faith in the Federal Reserve, the implications could be huge, due to the centrality of the US dollar and US-led institutions within global financial flows. Asian and Middle Eastern investors are already pulling back from the US, with some even demanding depository accounts with non-US banks (deterred partly by the pressure on the Fed, but also risks of further tariffs and escalating trade war).

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Is central bank independence hitting its limits?

Trump is upending the decades-long status quo of dedication to the principle of central bank independence. In the UK, the Bank of England (BoE), not the Chancellor, has had the power to set interest rates since 1997 — handed over by an incoming Labour government five days after election. But while we may rightly challenge Trump’s motives, the theory of independent monetary policy has increasingly struggled with real economic crises. 

Giving with one hand, taking with the other. Many governments responded to the 2008 global financial crisis with fiscal austerity, pulling billions of pounds out of the economy with public spending cuts. Central banks simultaneously embarked on Quantitative Easing (QE) programmes that pumped billions of pounds into the economy: by pushing up bond prices, bringing down long term interest rates, and encouraging people to spend more, the Bank of England aimed to support the economy and increase inflation to the 2% target. However, this loose monetary policy “pushed up asset prices, including house prices, and combined with tight fiscal policy and terrible earnings growth to entrench an advantage for an older, wealthier generation”, according to the Institute for Fiscal Studies. 

The combination of loose monetary policy and tight fiscal policy has caused rising inequality. The BoE’s own analysis showed that the wealthiest 10% of households got £350,000 wealthier during QE’s first five years of QE, over 100 times more than the poorest 10%. Meanwhile lower-income households were much more likely to suffer from austerity fiscal policies like benefits cuts.  

Coordination has worked before. The COVID-19 pandemic saw much greater monetary-fiscal coordination, with the government increasing borrowing to fund emergency measures to support the economy while the BoE started a new round of QE – its value neatly matching the new borrowing. This kept interest on government debt at all-time lows, despite massive spending increases. 

However, political commitment to central bank independence remained firm: the Bank later began unwinding QE, effectively re-applying the pressure to the government’s finances it had previously alleviated. With some bond market pressure to tighten fiscal policy, former Monetary Policy Committee (MPC) members and others are raising concerns that losses on unwinding QE (around £22 billion a year, according to IPPR) are putting government finances under too much strain. They argue the Bank should slow or stop the sale of government bonds to ease the pressure on long-term gilt yields and open up more fiscal space.

The real limits of central bank independence are now being exposed, with some calling its benefits into question. It’s a good time to reflect on the current arrangement’s successes and failures, and the possible advantages of a more coordinated approach.

Underinvestment in essential services.

‍The water industry illustrates many of the UK’s economic problems. In the latest exchange of letters between the BoE and the government, the former’s Governor Andrew Bailey identified rising household water costs as a key driver of inflation. Water companies are hiking prices to make up for years of underinvestment in infrastructure, and utility bills contribute to the headline inflation figure. In July, the long-awaited Independent Water Commission – led by former Bank of England Deputy Governor Sir Jon Cunliffe – recommended a range of measures for reform, receiving mixed reactions from campaigners and unions. They support plans for a new empowered water regulator, but also want public investment and renationalisation. 

Conventional monetary policy won’t work. Part of the standard rationale for holding interest rates high is that it deters private sector investment, cooling the economy and bringing down price inflation. But the current price hike for water is caused by under-investment, so the Bank of England continuing to hold the base interest rate at 4% does little to stop water prices rising and driving inflation. Furthermore, the increased fiscal constraint as QE is unwound makes it harder to mobilise public funds and close this investment gap. 

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The problem with relying on interest rates to tackle supply-side inflation.

External supply shocks are increasingly driving inflation in the UK, and conventional monetary policy hasn't dealt well with this shift. Dr. Swati Dhingra, an external MPC member, has commented that coordination of monetary and fiscal policy instruments is “essential” in the face of external supply shocks, noting that “in a turbulent world, our macroeconomic framework will best support output growth and price stability if monetary policy works in concert with fiscal policy in certain respects". 

Better monetary and fiscal coordination. As NEF notes, “the role of central banks in the economy is not fixed; it evolves in response to changing contexts and new challenges.” With the right institutional framework, we could still enjoy the benefits of independence while better aligning monetary policy with both democratically determined fiscal priorities and with the need to address risks from climate change and geopolitical instability. 

Good morning from New Economy Brief.

The Trades Union Congress’s (TUC) annual conference kicked off on Sunday. In his speech there,  - TUC General Secretary Paul Nowak called on the government to deliver its Employment Rights Bill in full and “show working people whose side you are on.” His comments come amid media speculation that the Bill risks being watered down following the resignation of Deputy Prime Minister Angela Rayner, one of its key champions within government. 

As part of the Bill the government has committed to establishing a Fair Pay Agreement process in the social care sector. And one of the big items on the TUC Congress’s agenda this week is ‘sectoral collective bargaining’ (SCB), where trade unions can negotiate pay and working conditions that apply to whole sectors. Unions want the government to be more ambitious, and are pushing for “a raft of new collective rights and sectoral bargaining agreements”. 

This week’s New Economy Brief takes a closer look at sectoral collective bargaining, including looking at the government’s plans for Fair Pay Agreements and the economic case for extending SCB in the UK. 

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Live from the Trades Union Congress 2025…

A big focus of this year’s TUC Congress is organising and bargaining, including the aim of improving trade union membership. Only 22% of the workforce are members of a union (less than half of what it was in the 1970s), with less than 50% of public sector workers and less than 12% of private sector workers belonging to a union. 

The reasons for this include restrictive trade union legislation by previous governments and years of employers adopting cheaper, more fragmented employment models which are harder to unionise, such as outsourcing, agency work and the gig economy.

Unions want to tackle this by working with government to remove legal and structural barriers to their organisation and collective bargaining. And at the TUC Congress this week a motion was carried agreeing that the TUC will produce “concrete steps to establish sectoral collective bargaining … and a plan to introduce sectoral level agreements in at least three sectors.”

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What is sectoral collective bargaining (SCB)? Instead of bargaining with individual employers, SCB lets unions negotiate pay and working conditions that will apply to entire sectors of the economy. This was common in the UK from WW1 until the 1980s, and meant the vast majority of workers were covered by collective agreements. According to employment barrister David Renton, the UK now has “the most restrictive anti-union laws in Europe”, following legislation by previous governments to weaken workers relative to businesses.

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What are the government’s plans for ‘Fair Pay Agreements’? In opposition, Labour’s Employment Rights Green Paper promised to deliver ‘Fair Pay Agreements’ (FPAs) “across the economy” via sectoral collective bargaining. These would cover issues including pay, pensions, working time and holidays, and would be binding on all employers and workers in the sector. Labour’s manifesto promised much less, only covering the social care sector. And its flagship Employment Rights Bill (ERB), now progressing through Parliament, has kept this limited scope: establishing a Fair Pay Agreements process in the social care sector and also including proposals for school support staff. The Institute for Employment Rights (IER) has been critical, arguing that “the commitment to SCB is all but gone.”

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What’s the trend abroad? The IER says that “the Labour Party has rowed back from its original commitments on sector wide collective bargaining and has fallen a long way short of the steps being planned elsewhere in Europe”, where the European Commission is currently promoting SCB to reduce low pay and inequality. UNI-Europa, the Europe-wide federation of service worker unions, has published four international case studies demonstrating SCB’s potential benefits for pay and conditions – e.g. in 2022 it secured pay rises of up to 16.4% for some 700,000 German industrial cleaners.

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The economic case for stronger collective bargaining in the UK.

As we have previously covered in New Economy Brief, strong workers’ rights are not only good for individual employees but for the whole economy. There is clear evidence that boosting them can improve living standards, productivity and growth. 

Higher pay for workers increases consumption and economic growth. But surveys of employment protection laws worldwide have also found these protections increase job stability, reduce unemployment, improve productivity and make sure the proceeds are shared with workers. 

However, at least 60% of British workers (around 19 million) are not protected by a collective bargaining agreement (compared to less than 5% in Belgium, Austria, France and Italy). SCB is key to making sure more workers get these protections. 

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SCB is good for employers. Establishing minimum rights for a whole industry also benefits employers. It lowers management costs by dealing with employee relations industry-wide rather than within individual firms. It makes it harder for other firms to undercut them and poach skilled workers. And it creates formal structures for cooperation between labour and management across sectors, helping spread ideas and good practice. This can increase investment in R&D and adopting new technologies, letting companies improve productivity and performance. 

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SCB should cover more than just pay. The Employment Rights Bill currently excludes negotiating bodies for school support staff and adult social care from collective bargaining in key areas from health and safety, to dispute resolution procedures. University of Warwick academics argue that fair pay agreements “need to cover much more than pay if they are to make a real difference to working lives” – they should focus on ‘fair work’ rather than just ‘fair pay’. Common Wealth argues "The Bill should have a sectoral duty to bargain on all terms and conditions."

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SCB should cover more of the economy. IPPR makes the case for FPAs in other sectors as part of ‘mission-driven industrial relations’. The IER argues it is essential to run SCB pilots in the private sector ahead of a gradual rollout across the economy, identifying  warehousing, cleaning, security, hospitality, construction, couriers, textiles and agriculture as good candidates.

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The political case for ‘making work pay’ 

Despite the clear economic benefits, the Employment Rights Bill currently only contains a limited version of SCB, and recent reporting suggests that other parts of the Bill are at risk of being weakened. This would be a political as well as an economic mistake. Reform UK is riding a wave of popularity while the government is struggling in the polls, and pay growth is facing another ‘lost decade’ of stagnation. Can it afford to water down the ERB any further? 

Polling from IPPR and Persuasion UK shows wide support for stronger workers’ rights among 2024 Labour voters, including those who switched from the Conservatives. Meanwhile the Guardian reports these policies are also popular with those “flirting with Reform UK”, which suggests that delivering the Bill in full (as the unions are calling for) could pay clear political dividends as well as economic ones.

Good afternoon from New Economy Brief.

On Wednesday the Chancellor Rachel Reeves announced that she will deliver her Autumn Budget on 26^th November, fresh on the heels of more jitters in the bond market – 30-year gilt yields reached a 27-year high on Tuesday, pushing long-term government borrowing costs up.  

And as Parliament returns from its summer recess, the Chancellor's dashboard is flashing red: estimates of the size of the government’s fiscal ‘black hole’ range from £20 to £40 billion. This ‘black hole’ is the Office for Budget Responsibilities’ estimate of the projected gap between the government’s current spending and its income from tax and other revenues in 2029/30; Reeves needs to plug it if she is to meet her self-imposed fiscal rules. 

Some bond investors have called for spending cuts. But as eminent economists warned before the Spring Statement, “the last 15 years have taught us that the UK cannot cut its way to growth”. Further cuts would hammer public services already struggling from the consequences of cuts imposed in the 2010s. And after the political storm, backbench rebellion and subsequent U-turn over cutting disability benefits earlier this year, the government’s appetite for spending cuts looks limited. Speculation has been growing that the Chancellor will instead announce tax rises at the Autumn Budget. 

This week, we explore the tax options the Chancellor has available to raise revenue – and how different reforms could impact the economy and public finances. 

The state of the public finances  

Predictions of the size of the fiscal ‘black hole’ vary, with the National Institute of Economic and Social Research (NIESR) estimating a deficit of as much as £41.2 billion. Other estimates are closer to £20 billion. Given the Chancellor’s repeated insistence that her commitment to its fiscal rules is ‘ironclad’, this presents a problem. The government’s argument so far has been that economic growth will plug the gap. But relying on growth is risky – especially as UK GDP growth remains sluggish. 

The situation – low growth, persistent inflation and economic uncertainty – has led some economists to compare the government’s current position with the 1970s, when the UK was forced to take out an emergency loan from the International Monetary Fund. This prognosis may be "well wide of the mark", with Michael Saunders, former member of the Bank of England’s Monetary Policy Committee, calling it “complete nonsense” and “just hysteria”. Nevertheless, the comparison is not one Reeves will enjoy. 

The long lead-in to the Budget does leave time for the warning lights on the Chancellor's dashboard to stop flashing so urgently. But relying on the economic picture changing drastically for the better before November is risky – hence the widespread expectation that Reeves will raise taxes. 

Tax options on the table.  

Over recess, speculation ramped up about which taxes the Chancellor is considering. Given the Labour Party’s 2024 manifesto pledged not to increase taxes on "working people", including VAT, National Insurance (NICs) and income tax, most of these reports have focused on more niche options to raise revenue, particularly those that apply to currently under-taxed groups. Here’s a rundown of some of the ideas being floated and how they could work in practice:  

NICs on rental income. The Treasury was recently rumoured to be considering the expansion of National Insurance contributions (NICs) to include rental income, which could raise around £2 billion. Labour sources told the Times that property income was “a significant potential extra source of funds”, and that focusing on landlords is seen as a way of targeting “unearned revenue”. 

Property tax reform. A rumoured property tax – which would replace Stamp Duty Land Tax (SDLT) –  was one of the more eye-catching of the reforms floated over the summer. Campaigners from across the political spectrum – including Fairer Share and the Onward think tank – have long argued that SDLT should be replaced with a “proportional property tax”. Onward’s report on property taxes, said to be influential with the Treasury, calls for a levy of 0.54% on the value of a home above £500,000. A higher rate would apply above £1,000,000.  

CGT on Primary Homes. Currently, income from selling a primary home is exempt from Capital Gains Tax (CGT), which usually applies only to properties that aren’t the owner’s primary residence such as a buy-to-let property. The Chancellor is supposedly considering scrapping this exemption on homes worth over £1.5 million. However, Tax Justice UK’s Faiza Shaheen argues that this would create a disincentive to sell property and stifle the housing market. 

NICs on Partnerships. Whether or not the Chancellor is considering the expansion of NICs to include rental income, she may also look to apply this to partnerships. The two main forms of multi-owner business in the UK are companies and partnerships but currently, partners do not pay the equivalent of Employer NICs. 

A report published this week by CenTax argues that scrapping this “tax break” would raise £1.9 billion in 2026-27. The authors describe this as “an accident of history that is damaging productivity and growth”. Partnerships often operate in industries like law, finance and professional services, and CenTax finds that introducing a version of Employer NICs for partnerships would mainly affect top earners – it estimates that almost half of the revenue raised would come from the top 0.1%.  

Farmers tax reforms? Rachel Reeves may also wish to use the Budget to repair relations with groups she upset at the last Budget. Another CenTax report, published in August, suggests how Inheritance Tax reforms announced last year could be better targeted by introducing a ‘minimum share rule’ and an upper limit on relief. This could bring in more revenue from richer landowners, potentially freeing up funds to raise the relief allowance for working farmers.  

What about a wealth tax? The Chancellor has so far ruled out introducing a wealth tax, and the Institute for Fiscal Studies argues that reforming existing taxes such as CGT would be easier and faster to implement. However, there is mounting pressure for Reeves to reconsider. Tax Justice UK (TJUK), for example, is calling for a 2% levy on individuals with assets worth more than £10 million – a measure it says would affect 0.04% of the UK population while raising £24 billion a year. As TJUK points out, 75% of the public are in favour. 

And earlier this summer former Labour leader Neil Kinnock called on the government to implement such a tax, noting that as well as bringing in revenue it would send a clear moral message to the voters that “we are the government of equity … This is a country which is very substantially fed up with the fact that whatever happens in the world, whatever happens in the UK, the same interests come out on top unscathed all the time while everybody else is paying more for getting services.”

All eyes on the Budget

With a potentially wide fiscal gap, jittery markets and sluggish growth, the challenges facing the Chancellor as she prepares for the Budget are multiple. If she continues to stick to the manifesto commitment not to increase the three big taxes – income tax, National insurance and VAT – and steers clear of spending cuts, she will need to rely on more targeted tax rises to meet her fiscal rules. These have the potential to raise significant revenue, but as always when it comes to tax, there are risks – not least political risks – attached. But this Budget is also an opportunity for Reeves to make bold, progressive – and in some cases, long overdue – changes to the UK’s tax system, for example through taxing property and wealth. The question is, how bold will she be? With nearly three months until the big day, get ready for weeks of speculation… 

Good afternoon from New Economy Brief.

In July, Chancellor of the Exchequer Rachel Reeves gave her second Mansion House speech,  delivered annually by the Chancellor to senior figures in the financial sector at the residence of the City of London’s Lord Mayor. The speech – and the package of measures called the ‘Leeds Reforms’ which accompanied it – committed the Government to an agenda of financial deregulation to boost economic growth. In this edition of New Economy Brief we unpack the rationale behind these regulatory rollbacks and consider the risks of relying on deregulation to deliver growth.

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Why the rush for growth?

Rachel Reeves has described her Leeds Reforms as “the most wide-ranging package of reforms to financial services regulation in more than a decade”. The government is set to lower banks’ capital requirements and reform the UK’s ringfencing regime, with Economic Secretary Emma Reynolds tasked with “[striking] the right balance between growth and stability”. Reeves is hoping these measures, along with new initiatives to encourage firms to list shares in London, will attract new businesses to the UK and unlock the finance needed to make them successful.

The Chancellor was clear her objective is “to ensure that regulators are really regulating for growth”, suggesting that “in too many areas, regulation still acts as a boot on the neck of business, choking off the enterprise and innovation that is the lifeblood of economic growth.”

And growth matters – not least because “kickstarting economic growth” is one of Labour’s five missions for government and a central manifesto commitment. Yet growth remains sluggish, with forecasts showing this is likely to continue. This is particularly problematic because there are fears of a gap emerging in the Government’s finances, with forecasters anticipating a large shortfall in public funds relative to spending. Estimates of the gap converge around £20 billion but reach as high as £51 billion if the Office of Budgetary Responsibility has overestimated the UK’s long-term growth potential – according to the National Institute of Economic and Social Research (NIESR). Labour is relying on growth to plug this gap, and the Chancellor is hoping deregulation will help her do it.

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Will financial deregulation boost the economy?

Reeves’ justification for rolling back regulations is that they unduly prevent risk-taking, which holds back the UK economy. But it remains to be seen whether banks will take on more risk in order to scale up investment in businesses and support growth in the real economy, or instead shift that risk onto ordinary people while boosting their profits.

There are two important ways that banks can pass on the risk. Firstly, after they make a loan, they have the option of selling the future returns on that loan to a third party. This happened at vast scales in the run up to the global financial crisis, with banks providing credit for high risk mortgages and then selling the debt on to other financial institutions, such as pension funds. Banks pocketed fast profits, while the pension funds were left ‘holding the bag’ when the risky mortgages failed to pay out. Secondly, the banking sector has historically had the advantage of being ‘too big to fail’. In the event of another major financial crisis, the state could be forced to step in once again and bail out the banks to prevent economic collapse. The reforms put in place after 2008 have partially mitigated this risk, but Reeves’ deregulatory agenda threatens to remove some of these protections.

And how is the financial sector likely to allocate the increased investment ‘unlocked’ by looser rules? Unfortunately, the financial sector has a long track record of neglecting lending to consumers and businesses, preferring to allocate credit to the finance, insurance and real estate sectors. Analysis from Positive Money reveals that net lending to the productive sectors of the economy “decreased by £5 billion in 2021, by £5.6 billion in 2022, and by £8.5 billion in 2023.” The regulatory changes Reeves has proposed therefore risk damaging broader economic growth and undermining the Government’s Industrial Strategy, as Finance Innovation Lab’s Jesse Griffiths has argued.  

Any new regulatory approach seeking to increase financial risk-taking must ensure the downside remains with those making lending decisions. Failing to do so incentivises excessive risk-taking – an effect known as 'moral hazard'. In the aftermath of the 2008 global financial crisis, higher capital requirements and a robust ringfencing regime for banks were put in place specifically to avoid a repeat of that disaster.

The Leeds Reforms overestimate the contribution of finance to growth and set the UK on course for a deregulatory ‘race to the bottom’, with finance growing as the real economy declines. The UK has housed one of the world’s largest financial sectors for decades, but has nonetheless seen the lowest investment rate in the G7 in 24 of the last 30 years. Far from laying the groundwork for a prosperous economy, the Government’s deregulatory agenda risks growing the financial sector for its own sake.

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Alternatives to financial deregulation

So what can the Government do to boost growth, and ensure that the benefits reach the real economy? One effective solution is to increase public investment. Analysis by NIESR shows that a permanent one percent rise in public investment as a share of GDP leads to a 2.2–2.9 per cent increase in GDP growth over 35 years. 

The Government did change its fiscal rules to increase public investment at last autumn’s Budget. But the additional £113 billion these changes unlocked is only enough to reverse the deep cuts to public investment pencilled by the previous government’s spending plans. NIESR also argues that despite these changes, “the current UK fiscal framework constrains public investment”. 

Instead of hoping that financial deregulation will boost growth and plug the gap in the public finances, the Government could raise taxes without breaking its manifesto commitment to avoid raising taxes on working people. New research by Positive Money argues that a windfall tax on the big 4 UK banks’ record £48 billion profits could raise more than £11 billion. 

The way the Bank of England pays interest on the reserves commercial banks hold with it could also be changed. A system of tiered reserves which requires banks to hold some reserves that don’t pay interest – like that outlined by the New Economics Foundation – could save up to £55 billion in the next five years. This money could be channelled into current spending and investment. Former Prime Minister Gordon Brown is supportive.

While they cannot replace the need for public investment, there are policy approaches to boosting growth that do not rely on increasing taxation or borrowing. One is implementing a credit guidance regime: by enforcing upper and lower bounds on how much credit banks can extend to different sectors, the Government can compel banks to channel investment directly into productive areas of the economy. Such an approach has proven effective in the past. 

And on the monetary policy side, the Bank of England could offer dual interest rates: rewarding banks that assign a greater proportion of lending to the real economy with a better rate of interest.

The Chancellor is under intense pressure to deliver economic growth. But relying on financial deregulation to provide it risks failing to learn the lessons from the recent past. Rather than giveaways to the financial sector, there are a broad range of fiscal, regulatory and monetary policy tools available to ensure that the real economy is receiving the investment it needs, and to put the UK on track for balanced, sustainable growth.

Good morning from New Economy Brief.

Bills are rising; rivers, seas and lakes are full of sewage, and water company bosses and shareholders have drained billions from the UK’s water industry since privatisation in 1989, leaving it heavily indebted and starved of investment. 

How do we get out of the quagmire? This week's New Economy Brief looks at whether the government’s proposals for stronger regulation will fix the water sector, and explains the economic and political arguments being put forward for public ownership. 

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Fixing the water industry

The Independent Water Commission, chaired by former Bank of England deputy governor Sir Jon Cunliffe, published its final recommendations to fix the English and Welsh water sectors last week. Environment Secretary Steve Reed responded by announcing plans to abolish Ofwat, saying the regulator had “failed to protect customers from water companies’ mismanagement of their hard-earned money and failed to protect our waterways from record levels of pollution”. 

Instead, the government will combine four regulators’ water functions into “a single powerful super-regulator”. The Cunliffe Review recommended a “fundamental reset of economic regulation” and changing how the price of water is controlled “to ensure companies are investing in and maintaining assets” and “attract long-term, low-risk investment”. The government will publish a White Paper in the Autumn explaining which recommendations from the Review it will adopt, followed by a consultation and a water reform bill. 

Public ownership wasn’t an option. Steve Reed banned the Cunliffe review from looking at nationalisation, arguing that regulation and companies’ management were bigger factors in their performance than their ownership structure. 24 campaign groups, trade unions and community organisations responded with a statement of no confidence in the recommendations. They say these won’t deliver the systemic change needed to fix our broken water system, because they ignore the fundamental problem: private ownership. 

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Is stronger regulation enough?

A 2023 Unison report on the water industry demonstrated how Ofwat senior staff move freely between the regulator and lucrative jobs at the water companies. For example, Ofwat’s previous CEO is now a director at struggling Thames Water. This revolving door is argued by Unison to have helped the water industry “capture” the regulator.    

Profiteering. An important part of this is the five-yearly ‘Price Review’ process, in which Ofwat permits companies to let them raise prices based on their investment plans. It has also been argued by academics at Greenwich University that water companies have been gaming the Price Review process by overpromising and underdelivering on investment, claiming they made ‘capital efficiency’ savings and using this to justify paying extra dividends. In over three decades since privatisation, “shareholders have literally invested less than nothing” and consumers have paid for what little investment there has been. Water companies are now well over £65bn in debt, while shareholders have taken dividends worth more than £85.2bn in real terms. 

Regulatory capture. Laurie MacFarlane, an economist who used to work at Ofwat, thinks the sector is now “an engine of wealth extraction”. He doubts any new regulator can compete with the resources of 16 water companies with combined revenues of £12bn (Ofwat’s annual budget is around £30m), who can hire the best experts to “game the system”. Regulators already have powers to fine, prosecute or revoke licenses for poor performance, but haven’t used them effectively. Campaigners like Compass warn that the Cunliffe Review offers no plan to avoid regulatory capture, and worryingly also recommends that regulators waive fines if companies claim paying them would hinder investment…

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Why was public ownership off the table?

So why not remove the incentive to maximise profit extraction by bringing the water sector back into a form of public ownership, like in the majority of European countries? Nationalising water companies would require compensating shareholders. The government estimates this would cost taxpayers around £100bn, which they argue would be better spent on other public services. But Ewan McGaughey’s briefing for Common Wealth explains that this figure “is not based in law” and comes from a report funded by water companies, “cynically calculated to scare gullible governments off public ownership”.

What would it cost? According to McGaughey, the government does not even have to pay market value (itself far lower than the ‘regulatory capital value’ behind the £100bn figure) because of the extent of water companies  breaching their statutory duty for poor performance – particularly for regularly dumping untreated sewage into rivers. The government can remove licences or put the companies into special administration, where only secured creditors would be paid ‘appropriate value’ while shareholders would receive nothing. It would be up to a court to decide what ‘appropriate’ compensation is, and the government could argue that damage from pollution or monopoly profits taken by shareholders should be subtracted from market values. 

UK precedents for nationalisation without compensation. There are several precedents of governments taking private companies back into public ownership with little or no compensation to shareholders when this is considered strongly in the public interest. Northern Rock was nationalised in 2008 without any compensation, and Railtrack was put into special administration, giving shareholders just £500m for the entire UK rail network in 2001/2. McGaughey concludes: “If a future government makes proper use of this evidence… compensation could well end up close to zero”.

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The case for public ownership.  

The water sector desperately needs investment to ensure a functioning and safe water supply and the protection of fragile ecosystems and communities at risk of flooding, especially as climate change, population growth and economic development drive demand higher. But under private ownership, this can only be funded through higher bills for consumers. Ofwat increased bills by 36% by 2030 in the latest Price Review to allow the companies enough profits to fund the necessary investments (and receive £22bn for their return on capital). The government hopes this will halve water pollution and win votes. 

Private ownership costs the public more than nationalisation. Publicly owned water is cheaper for two reasons. Firstly, the public sector can borrow far more cheaply than the private sector (e.g. Thames Water’s latest £3bn loan pays 9.75% interest, whereas public sector bodies can borrow at close to the bank rate – currently less than half that). Secondly, profit that would previously have gone to shareholders can be used for reinvestment in critical water infrastructure and services instead (over a third of water bills currently pay for dividends and interest payments). We Own It calculates that public ownership would cut households’ annual bills by £100–160 or allow £3-5bn more investment per year.

‍The government needs to reduce the cost of living. Lingering in the background of this debate is Nigel Farage’s pledge to nationalise half of all utilities, including half of the water industry. The state of England’s water is a radicalising issue for many voters because it is such a strong symbol of an economy that is rigged against ordinary people, and Reform UK are telling voters that neither Labour nor the Conservatives will stand up for them. 82% of the public support nationalisation of water, and groups within the Parliamentary Labour Party like the Living Standards Group are already warning that the government will lose the 2029 election unless it adopts more radical ideas to address the cost of living.

Good afternoon from New Economy Brief

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Last week the Office for Budget Responsibility (OBR) released its fiscal risks and sustainability report – an underappreciated and often misunderstood annual analysis of the long term sustainability of the UK public finances. The report highlights key risks to the government’s current and future fiscal position over the next 50 years, and updates its previous predictions about both the cost of transitioning the UK economy to net zero emissions and the cost of climate damages.

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This week's New Economy Brief explores why the OBR now believes net zero is cheaper than previously thought, climate damages are more expensive than previously thought, and why we should still expect this to understate climate change's impact on the economy. We’ll also look at why we need more investment in climate adaptation to make the UK economy more resilient to the effects of a warming world.

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Fiscal risks and sustainability of the public finances

This year’s report doesn't pull its punches, warning that the public finances are in a “relatively vulnerable position” due to turbulent bond markets, rising pension costs, climate change and the costs of global instability (e.g. trade frictions, cyberattacks and the need to spend more on defence). Much media commentary has focused on the costs of achieving the UK’s climate targets. However, this entirely misses the key conclusion from the report: that mitigating climate change will cost less than the OBR assumed until recently, but also that GDP losses will be far worse than previously estimated. In fact, damage from climate change will cost the government an estimated six times more than transitioning the economy to net zero emissions. 

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Getting to net zero is “cheaper than previously expected”. The OBR reduced its estimate for the overall economic cost of transitioning to a net zero economy by 2050 to £116bn over 25 years, some £204bn lower than previously expected. The key driver for this is that clean technology is becoming cheaper more quickly than expected, reducing the cost of low-carbon investment. To put this in context, Carbon Brief calculates that “in very rough terms, this figure – which excludes health co-benefits due to cutting emissions and avoided climate damages – is equivalent to less than £70 per person per year.”

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Climate damage “more severe than previously thought”. Estimating the cost of climate damage is highly uncertain, and the OBR has suggested a range of estimates based on different levels of warming and different impacts. Its central scenario of 3°C of warming above pre-industrial levels would hit UK GDP by nearly 8% per year by the 2070s, which could explode the government’s debt-to-GDP ratio. The OBR explains that the largest impact of climate damages on government borrowing is “lower productivity and employment and, therefore, lower tax receipts”. Beyond these new numbers, the OBR acknowledges that it still does not include the cost of adapting to climate change in this report, or how far this could reduce damages (it aims to assess this “in the coming years”). While government has also given relatively little attention or funding to adaptation so far, Green Alliance’s Climate Adaptation Task Force has published a new briefing explaining why “smart adaptation measures are an 'invest to save' opportunity, generating economic activity while protecting communities from escalating climate impacts.”

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The UK economy in a 3°C world.

The world is on track to exceed the Paris Agreement ambition of limiting warming to 1.5°C within the next five years. Even 2°C would likely render vast parts of the world “essentially uninhabitable”, directly affecting a third of humanity, and the United Nations has projected that the world is currently on track for about 3.1 degrees of warming. So how would the UK economy and public finances fare in a 3°C world? The OBR tries to answer this question using the Network for Greening the Financial System (NGFS)’s forecasts. Let’s explore what the consequences of this increase in temperatures could be before considering whether the OBR’s estimates look reasonable.

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What to expect from 3°C of warming. A report earlier this year from the Institute and Faculty of Actuaries warned that if the world heats up by 3°C or more by 2050, there could be more than 4 billion deaths, worldwide social and political fragmentation including the failure of states (with resulting “rapid, enduring, and significant loss of capital”), and a “high level of extinction of higher order life on Earth”. Climate damages are already severe with unprecedented fires, floods, heatwaves, storms and droughts. But they have the potential to become “catastrophic”, leading to the “loss of capacity to grow major staple crops, multi-metre sea level rise, [and] altered climate patterns”. We also risk triggering various ‘tipping points’, such as the collapse of the Atlantic Meridional Overturning Circulation (AMOC) - which could cause UK winters to resemble those in Northern Norway - or melting of the Greenland ice sheet - which could increase the sea level by up to 7 metres. 

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(It is important to understand that climate damage isn't just the direct impacts of extreme weather, but also the productivity we'll lose to reduced labour output, supply chain disruptions, and the collapse of crucial industries “in all countries and across all sectors”, which another report predicts could contribute to reducing global economic output by a third.)

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So how accurate is the OBR’s central scenario? The NGFS estimate used by the OBR excludes many of these real-world impacts of climate change. As the OBR acknowledges, it doesn’t model these “large, irreversible changes to the Earth’s climatic system”, the impact of sea level rise, migration, higher risk of epidemics and pandemics or the “disruption of global supply chains which are essential to much of the UK’s economic activity”. The Institute and Faculty of Actuaries concluded that a “prudent approach would be to take the highest estimate of economic loss and reduce it when evidence becomes available that it is over-stated, rather than the other way round.” The OBR’s central estimate of an 8% loss of UK output, however, seems more likely to be an underestimate.

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Fiscal performativity. This matters because if the OBR underestimates the damage climate change will do to the UK economy, governments are less able to see the urgency of responding, and the value for money they can get from upfront, precautionary spending to prevent these damages. That could be anything from making our food system more sustainable to upgrading our flood defences or supporting global efforts to cut emissions (on which the government’s aid cuts are taking us in the wrong direction). 

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Greening the fiscal framework. Even based on the OBR’s small-c conservative assumptions, the case for climate action – and for the vastly greater costs of inaction – is clear. Failing to tackle the UK economy’s vulnerabilities to climate damages, for example by investing in adaptation, is grossly irresponsible. The fiscal framework needs to be redesigned to ensure that these longer-term, ‘potentially catastrophic’ risks are being addressed and that Chancellors are held to account for underfunding the measures needed to take to protect the economy and people’s livelihoods. As a minimum, the scale and growing immediacy of climate risks mean that rather than keeping them separate, they should be integrated into the OBR’s regular Economic and Fiscal Outlooks rather than tucked away in the long-term risks report (as recommended by the OBR’s latest external review). The Chancellor should then respond to them at fiscal events with at least as much seriousness as the OBR’s key economic forecasts, focusing more on big, systemic risks to the public finances and less on minor breaches of fiscal headroom.  

Good morning from New Economy Brief.

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Last week the Department for Business and Trade published The UK’s Modern Industrial Strategy (hereafter referred to as IS), “a 10-year plan to make the UK the best country to invest in anywhere in the world”, in the words of PM Keir Starmer.

This week’s New Economy Brief evaluates key parts of the strategy, with a deep dive on clean energy and advanced manufacturing, the risks of de-risking and a review of what we can learn from international experience. 

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The industrial strategy ‘renaissance’

Industrial strategies provide an overarching plan for the economy (or priority parts of it) aimed at helping the government achieve its policy goals, like economic growth, protecting supply chains or developing the Covid-19 vaccine. In the UK, they largely fell out of fashion in the 1980s as governments favoured a more ‘free market’ approach to the role of the state, with economic policy increasingly limited to deregulation and correcting market failures.

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Since the Global Financial Crisis dramatically highlighted the laissez-faire approach’s shortcomings, Western countries have been experimenting with new forms of state intervention to actively shape, protect and grow markets seen as strategically important. For example, Bidenomics spurred many countries to join the ‘green arms race’ to develop new technologies and capture market share in fast-growing low-carbon industries, such as EVs or photovoltaics. Rising competition from China’s much more state-led economy has also influenced the creation and design of industrial strategies. 

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Securonomics is back. Geopolitical instability and fragmenting global trade is threatening the security of supply chains and the resilience of UK industries. After the Russian invasion of Ukraine, the UK in particular has suffered from spiralling energy costs, with domestic industries paying double what EU competitors pay or four times the US average. This is the context for the UK’s new IS, as PM Keir Starmer explains: “economic competitors have been more assertive and disruptive in promoting their national industries…it is our role to back British businesses, invest in our comparative advantage and make bets in pursuit of growth and productivity.” (For an explainer on ‘securonomics’, read our previous briefing.)

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So what’s in it? The IS outlines how the government will grow eight key sectors (dubbed the ‘IS-8’) and 37 ‘frontier industries’ within them, comprising around a third of the UK economy. The following sectors have been chosen for their strategic importance, relatively high pay and strong growth prospects: life sciences, advanced manufacturing, digital technology, defence, clean energy, finance, professional and business services and the creative industries. The IfG’s Giles Wilkes explains that the volume of industries targeted is “far more than anything covered by the combined efforts of both predecessor strategies.”

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Growth, how?

The IS seeks to attract much more private investment in the IS-8, encourage R&D, improve skills, expand access to finance, and reduce trade barriers and energy costs.  We will focus first on clean energy and advanced manufacturing, drawing on a briefing from Green Alliance which explains the government’s desire to develop green supply chains as “both an export opportunity and a draw to encourage inward investment in domestic energy capacity”.

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Supporting green manufacturing and exports. The IS aims to double business investment in clean energy and advanced manufacturing to over £30 billion and £39 billion a year by 2035, respectively. For example, the government sees an opportunity for UK businesses to make more heat pumps to decarbonise heat and buildings, whilst creating jobs at home and exporting to other countries. (Recent research from the LSE Grantham Institute suggests the UK has comparative advantage in producing certain types of heat pumps – as IPPR also found last year). However, the UK currently has major green skill shortages, particularly in areas like heat pump installation. The IS also increases funding for FE colleges to address this and “create a strong pipeline into the IS-8, with opportunities for good jobs across the country”. Any IS-8 sector that struggles to recruit, train or retain workers will get a dedicated workforce strategy, starting with clean power.

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Lowering input costs for UK businesses. As explained above, UK industries pay a lot more for electricity than those in most other countries. These higher input costs means they have a harder time competing, especially in energy-intensive ‘foundational sectors’ like ceramics, automotive, glass and chemicals. To remedy this, the IS includes a new British Industrial Competitiveness Scheme (BICS) to reduce costs for businesses by exempting them from some levies.  A new Supply Chain Centre will analyse where the government can take action to grow or diversify domestic supply chains among these foundation sectors. This will then guide investments by public finance institutions like the National Wealth Fund, which the TUC calls a “crucial opportunity to not only reshore manufacturing but future-proof existing sites.”

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Bringing in the international perspective. We must also remember that climate change is a global problem, which the UK cannot solve alone. So while the UK needs to reap the economic benefits of the transition in order to make the domestic political economy add up, it would be self-defeating to do so at the expense of others – especially in the Global South. There is a risk that developing countries are locked into an economic model reliant on commodity exports – for instance the cobalt needed for EVs – while developed countries like the UK import these, monopolise production of green technology with intellectual property rights and then profit from selling it back to the Global South. This highlights the need for the UK to pair its industrial strategy with a new approach to issues like technology transfer, investor-state dispute settlement and climate finance. 

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De-risking, crowding in private investment and deregulation.

John Gapper notes in the FT that beyond the clean energy sector, the “economic prescription for the rest is distinctly liberal: less regulation, fewer planning delays, more competition and higher private sector investment to boost productivity.” For example, free ports and investment zones (which Tax Justice UK has referred to as ‘glorified business parks’ with lower tax and less regulation) have been renamed as Industrial Strategy Zones, and having the financial sector as a priority growth industry risks undermining efforts to redirect finance towards national investment priorities, in the words of Finance Innovation Lab’s Jesse Griffiths.

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A key goal of the IS is to reverse the UK’s woeful record on private investment. With fiscal space limited by both a challenging economic environment and the government’s self-imposed constraints, The Economist calculates that the extra spending in the IS (beyond plans made by the previous government) is “modest, around £15bn over five years”. Consequently, the IS will try to “capture a greater share of internationally mobile capital”. Industrial strategies aimed at crowding in private capital have been critiqued as ‘de-risking’ by Daniela Gabor and Benjamin Braun, and bring their own risks. 

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What kind of private investment do we want in UK industry? The US Inflation Reduction Act embodied a ‘de-risking approach’, which Brett Christophers argues enabled predatory asset management firms to gain control over and profiteer from crucial elements of America's infrastructure such as the road network, electricity grid, and housing stock. (Read our previous New Economy Brief for more on this.) However, the US CHIPS and Science Act tied clear conditions to government financing by limiting share buybacks, making supply chains more energy-efficient and improving working conditions and other community benefits. In short, the US experience with green industrial strategy shows us that regulation, conditionality and disciplining private capital is important. It is not yet fully clear whether the UK will learn this lesson. 

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Avoiding extractive behaviours with conditionality. A new briefing from Positive Money and others explains how to strengthen the National Wealth Fund, for instance by prioritising equity stakes and imposing conditions on companies that receive financing to distribute risk and reward more daily between the public and private sector. (See this paper by Mariana Mazzucato and Dani Rodrik for more examples of conditionalities.)

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Some final lessons from the US - and beyond

The UK IS was praised by Heather Boushey, former member of President Joe Biden's Council of Economic Advisers and the Chief Economist for the Invest in America Cabinet at the White House, who thinks “Labour’s industrial policy can succeed where Biden failed.” Likewise, IPPR’s Sam Alvis warns that “to give long-term policies the space to succeed, governments need a short-term economic improvement to people’s lives”, pointing to the way in which Trump defeated Biden and is now rolling back much of his industrial strategy. As he notes, the government should look beyond the US to other progressives who have retained power, like Spain’s Pedro Sanchez and Australia’s Anthony Albanese. Whether they succeeded by taxing wealth or reducing the cost of essentials like energy, transport, medicine and housing, these examples point to the need for bold policies that directly improve people’s lives to complement the macro, long-term benefits of industrial strategy. 

Last week the government published its Spending Review, which set out how both investment and current spending will be allocated across departments over the next few years. It covers the period up to 2028-29 for current (or day-to-day) spending, while on capital spending (investment) it extends to 2029-30. 

While the Chancellor set the overall envelope for both types of spending at last autumn’s Budget, this Spending Review was her opportunity to divide this up and show where the government’s priorities lie over the rest of the Parliament. In our last edition, we covered the Review’s context and background. This week we’re diving into what the decisions on both current and capital reveal about the government’s economic strategy.

The context 

As a reminder, the political and economic backdrop to this Spending Review has been sub-optimal to say the least. Low growth, sticky inflation and turmoil in the global economy have seen the OECD and IMF downgrade their forecasts for the UK economy. 

Meanwhile cuts to disability benefits – a decision the Chancellor made partly to meet her self-imposed fiscal rules – have shown that the UK’s fiscal framework continues to incentivise short-term book-keeping. Some have blamed the backlash to these cuts and the largely reversed cuts to the Winter Fuel Payment for Labour’s poor performance in last month’s local election. With disquiet brewing on the government’s backbenches, polling in the run-up to the Spending Review also revealed that a clear majority of Labour MPs wanted an economic reset to boost investment and avoid damaging spending cuts. 

All aboard the investment train?

Rachel Reeves made investment the key theme of the Spending Review, asserting that ‘in place of decline, I choose investment.’ In fact she mentioned investment a whopping 50 times in her speech, tying it variously to ‘opportunity’, ‘security’, ‘stability’ and ‘renewal’. After criticism that Labour’s messaging has been muddled since the general election last year, such a strong focus on investment suggests they have decided to place it at the centre of their refreshed economic narrative. Housing Secretary and Deputy Prime Minister Angela Rayner confirmed this at the weekend, saying that Labour are ‘staking everything’ on investment to reverse Britain’s decline.

The headline numbers seem to back up Reeves’s and Rayner’s assertions: capital (CDEL) spending is on course to rise 3.6% a year between 2023-24 and 2028-29 – over twice the 1.7% annual increase in day-to-day (RDEL) spending. And looking at where this investment has been focused, Rayner’s department has done well out of the Spending Review. £39bn was allocated to the Affordable Homes Programme over the next 10 years. The settlement has been widely welcomed in the housing sector, with the housing charity Shelter calling it a ‘watershed moment in tackling the housing emergency’. However, the funding may be less generous than it initially seems. Analysis by the IFS and the Financial Times finds it is heavily backloaded, with spending for the next few years – essentially up until the next election – barely higher than the current Affordable Homes Programme budget. 

Whitehall winners

DESNZ. Elsewhere in Whitehall the big winners included the Department for Energy Security and Net Zero (DESNZ). Its settlement, described as a ‘quiet victory’ for Ed Milliband, included a 16% increase in average annual real growth over the Spending Review period – the highest of any department – as well as billions of pounds of investment in nuclear energy. 

Defence. Following major geopolitical developments and the Prime Minister’s commitment earlier this year to increase the defence budget to 2.5% of GDP, it’s no surprise that defence also saw a significant boost in the Spending Review. By 2029-30, the department’s capital budget will increase by 7.3%. 

Transport. There were also some wins for the Department for Transport, with £15.6bn confirmed for city region transport outside of London. This includes £1.5bn for trams and buses in South Yorkshire, £1.6bn for the Liverpool City Region, and £1.8bn to extend the Newcastle to Sunderland metro. 

The current spending squeeze continues 

The settlement for day-to-day spending was much tighter than for capital spending, rising just 1.7% per year. Many departments saw significant cuts, including the Department for Transport (5%), the Department for Environment, Food and Rural Affairs (2.7%) and the Home Office (1.7%). The Foreign, Commonwealth and Development Office  has the steepest cuts – current spending will fall by an average of 6.9% each year. 

Of course, cuts have real-world consequences, and those to the Home Office and Ministry of Justice budgets have been highlighted as a particular threat to plans to tackle violence against women and girls (VAWG). The End Violence Against Women Coalition, a charity, has said the Spending Review ‘fails women and leaves survivors at risk’. 

The cuts to the overseas aid budget have also been widely criticised and 'will come back to haunt us' in the shape of increased global instability, according to Conservative ex-International Development Secretary Andrew Mitchell.  

A health service with a country attached? The NHS has been described as the “big winner” of the Spending Review, accounting for around 90% of the increase in day-to-day spending (although its capital budget is projected to stay flat). That said, this 2.8% per year boost still falls short of the NHS budget’s 3.6% historic annual growth rate – although it is significantly higher than the 1.7% average over the 2010s. 

So where does the Spending Review leave us?

While the government was unsurprisingly keen to focus on the genuinely positive story it has to tell on investment, capital spending only accounts for a fifth of the total Spending Review envelope. Given its often long-term focus, investment can also take time to bear fruit, which also means it will take time for the public to feel the benefit. It’s also important to remember that the £113bn of extra investment allocated at the Spending Review was only enough to avoid the deep cuts pencilled in by the previous government’s spending plans. It will take much more to properly repair the damage caused by decades of underinvestment: the UK’s level of public investment has been below the OECD average for over 20 years. 

On the current spending side, there are reasons to be worried. The Resolution Foundation points out that Labour’s decision to increase current spending for health, defence and education means that ‘spending on the rest of day-to-day public services will fall slightly in real, per-person terms between 2025-26 and 2028-29 – by 1.3 per cent on average, the equivalent of cuts of £2.4 billion by 2028-29.’ Yet improving services remains a priority for the public: research from Persuasion UK shows that ‘rebuilding public services in particular remains central to Labour’s mandate’, and that committing to significantly increase funding for the NHS and other front-line services is the policy that would be most likely to make the average Labour voter stick with the party, reducing the likelihood of them voting for either Reform or the Green party. 

And should growth slow even more, tax receipts and the government’s day-to-day budget will be further squeezed. The Chancellor’s current fiscal rules – which she remains wedded to – do not allow for borrowing for day-to-day spending. In this scenario, she would then face a choice between even harsher cuts to departmental budgets, and raising taxes at the Budget in autumn. Tax Justice UK has argued that “there’s plenty of money in Britain to… avoid damaging cuts” and that the government must now consider wealth taxes. This approach is winning support from an increasing number of sources – including from within the cabinet, according to recent reporting. The Treasury remains sceptical, but if economic forecasts continue to sour it may be forced to reassess that scepticism.  

Note to readers: NEB will be published fortnightly rather than weekly over the summer months

Good morning from New Economy Brief.

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Next week the Treasury will publish the 2025 Spending Review, which sets departmental spending for the next three years. It seems set to be a tight settlement, especially on day-to-day budgets, with many frontbench ministers reportedly still fighting with HMT to secure the funding they believe they need.

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It’s been a bumpy road to get to this point, with economic headwinds and self-imposed constraints – on tax, fiscal rules and spending commitments – limiting the government’s room for manoeuvre. So far the government has responded with cuts to disability benefits, foreign aid and the Winter Fuel Payment, with political fallout including the resignation of a minister and poor local election results.

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This week’s New Economy Brief looks at how these challenges are likely to keep playing out in the coming weeks and months, and explores the case for a fiscal reset to put the government on a better economic and political trajectory. 

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The fraught politics of the Spending Review 

The Comprehensive Spending Review (CSR) is a multi-year allocation of both day-to-day (RDEL) and investment (CDEL) spending within the overall envelope set out in Labour’s first budget back in Autumn 2024. Many departments have already locked in their spending limits for the majority of the remainder of the parliament, but the latest reporting suggests that some cabinet ministers (Angela Rayner and Yvette Cooper) are still holding out. Perhaps unsurprisingly, their departments are responsible for hot-button political issues – housing and policing – in which serious spending and investment is needed to meet the government’s manifesto commitments. 

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Zero-sum spending negotiations make for zero-sum politics. Spending Reviews are always politically tough, not least because they force the government to reveal its political priorities (as noted by Ed Balls, who was at the centre of this process under New Labour). That is hard enough when portioning out a growing pie, but particularly treacherous when choosing where to make cuts. The government is firmly in the latter position on day-to-day-spending, where all departments other than health and defence look likely to face real-terms cuts from 25/6 onwards. 

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This is partly why the government has tried to shift attention to capital investment, where it has a more positive story to tell as it allocates the £113bn in additional investment programmed at last year’s Autumn Budget. But even here, commitments to increase defence spending – and the frontloaded increases in 2024/5 – leave surprisingly little room for new investment elsewhere.

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Escaping the economic doom-loop.

As a reminder, all of these spending and investment decisions are being made within the framework of the overall choices the Chancellor has made at recent fiscal events, in order to keep within her self-imposed fiscal rules. So what are the prospects for a tight settlement now to unlock better economic outcomes – and pave the way for more generous spending – further down the line?

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Last month, the National Institute for Economic and Social Research (NIESR) forecast lower growth prospects, weakening tax receipts for the government and leaving the Chancellor “£57bn short of her commitment to balance the current budget” by 2029/30. This means that without tax increases or changes to the fiscal framework there is a risk that the Chancellor will have to announce further spending cuts to meet her fiscal rules every six months, when the OBR publishes its twice-yearly forecasts. 

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NIESR’s Stephen Millard has called for a rethink of the fiscal framework, arguing that the “self-imposed and arbitrary” fiscal rules have “led to a situation where twice a year the chancellor has to either find further departmental savings or announce politically unpalatable tax rises … the uncertainty created by this leads to low investment and lower growth, the precise reverse of what the government wants to achieve”. So how does the government get out of this situation?

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IMF verdict on UK fiscal strategy. The world’s fiscal watchdog, the International Monetary Fund (IMF), gave its annual assessment of the UK economy and the government’s fiscal strategy last week. It concluded that the Chancellor has the right balance of investing for growth whilst maintaining fiscal sustainability. However, IMF UK Mission Chief Luc Eyraud also warned that global instability will make it difficult for the Chancellor to avoid breaching fiscal rules.  Meanwhile, according to Isabelle Mateos y Lago, chief economist at BNP Paribas bank, the strictness of the UK’s fiscal rules “actually damages the UK’s credibility because they have to hurt themselves so much to meet them”.

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What are other nations doing? While the UK reverts to spending cuts, governments in Germany and France are exploring new fiscal policies to allow them to protect their economies from global instability. Germany is reforming its notoriously stringent fiscal framework to invest nearly a trillion euros in defence, energy security, transport and green infrastructure. The French are exploring taxes on wealthy individuals to ensure higher defence spending doesn’t come at the expense of other social priorities. 

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Refinements to the fiscal framework to avoid further cuts.

With spending pressures rising, slower global growth expected to reduce the UK’s fiscal space further, and mounting political opposition to further cuts, the government will be in search of an alternative. This is likely to mean reassessing the fiscal framework and/or increasing taxes. The government should take succour in this from the IMF, which last week recommended ‘refinements’ to the framework to make for more stable and effective policymaking, and said there was ‘scope’ for increasing tax revenues. These include putting less emphasis on exact estimates of headroom, assessing compliance with the rules only once per year at the time of a fiscal event (allowing for breaches to be solved via tax rises instead of only spending cuts, as we saw at the Spring Statement), and establishing a formal process to prevent small rule breaches at other times from triggering corrective fiscal consolidation.

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Extensive support for fiscal reform. The FT’s editorial board has already endorsed the IMF recommendations and reports that HMT is “always [having] discussions about how we can improve the fiscal framework”. Recent polling reveals a clear majority of Labour MPs also favour a reset of the government’s fiscal policy, with nearly two thirds (65%) thinking the government should either reform its fiscal rules (32%) or raise taxes (11%) to create space for investment and spending, or both (22%). As the Guardian’s Polly Toynbee observed earlier this week, the Prime Minister is fond of observing that “The world has changed.” Yes, indeed. And so must the government on tax and spending…If ever there were a time to uproot old habits, it’s now.”

Good afternoon from New Economy Brief.

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Childcare in the UK is notoriously expensive. Recent research shows that a household needs to earn at least £88,000 in order to afford childcare costs for two pre-school aged children if they’re paying a mortgage and maintaining a minimum standard of living. 

Despite reforms made last year, childcare is still unaffordable for many families and prevents parents – often women – from having the option to return to work. Experts argue that public spending on childcare provision should be seen as investment, and that the labour market and productivity gains would far outweigh the initial cost. This week, we explore the economic case for childcare investment and the arguments for counting it as capital rather than current spending.  

The childcare crunch

The cost of childcare has climbed significantly over recent years. The cost of 25 hours of childcare provision in a nursery for a child under two rose by 59% from 2010 to 2021 – twice as quickly as overall inflation over the same period. According to campaign group Pregnant Then Screwed, 84% of parents say that childcare costs cause financial anxiety. Meanwhile, 17% have had to leave their jobs due to the cost and 62% have been forced to work fewer hours. Many parents have also cited the impact of childcare on the cost of living as a key reason for not having more children. The OECD finds that for a UK couple on an average salary, net childcare costs account for a quarter of average household income. 

Recent reforms. Changes in recent years have focused on reducing costs for parents. In March 2023, the then Conservative government promised 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 in April 2024 with additional free hours for eligible 2 year olds. In September 2024, this was expanded to eligible nine month olds. But experts such as the Early Education and Childcare Coalition (EECC) have argued that funding has not matched the promise of extra provision. 

What now? The Labour government has promised to continue rolling out ‘free’ childcare hours and sees childcare as a key part of its mission to break down barriers to opportunity. However, as the Institute for Public Policy Research (IPPR) argues, expansion “comes on top of a system which arguably has been creaking for some time,” suggesting that the government should instead take this opportunity to rethink the state’s role in childcare provision and move towards a universal guarantee. The Fawcett Society has also called for ‘universal hours’ from the end of maternity leave to school age. 

Beyond costs. Likewise, the Joseph Rowntree Foundation (JRF) has argued that while “tackling high costs and delivering a funding settlement to providers that actually meets the cost of caring are essential … this alone won’t solve the problem.” JRF suggests that what’s needed is greater scrutiny on the structure and functioning of the childcare market overall, and a focus on issues like “poor oversight, variation in quality, gaps in sufficiency for people in need of support, and private-for-profit providers operating without transparency and along attractive business models”, as well as costs. 

Childcare as investment 

Of course, properly delivering free childcare hours (without reducing the quality of services) requires money. The Women’s Budget Group (WBG) calculated that the government needed to spend an extra £5 billion per year to cover the expansion of free provision announced last year, let alone to provide anything extra. WBG estimates that high quality, free universal childcare would cost £25.8 billion per year. This would cover 35 hours of free childcare a week and higher wages for staff. This sounds like a lot of money in today’s fiscal context, and it is. But experts argue that we need to change the way we look at childcare spending, and instead see it as an investment that will at least partly pay for itself due to its positive impacts on the economy. WBG argues that childcare should be funded by borrowing, like infrastructure investment. Repayments could be spread over multiple years, “with the debt repaid by the revenue created by the investment.” So how would the government see a return on childcare investment?

Missing potential. Investment in more extensive free childcare provision would be substantial, but so too is the loss to the economy due to the current system. According to the Centre for Progressive Policy, the UK economy is missing out on £27 to £38 billion a year (approximately 1% of GDP) in economic output due to parents (usually women) having to stop working in order to provide childcare. The same research found that around 1.5 million mums would work more hours if they had access to affordable, suitable childcare. 

Exchequer effects. Meanwhile IPPR and Save the Children calculate  that increased childcare provision could raise approximately £8 billion per annum for the Exchequer, partly through increased income tax receipts as a result of parents returning to work. This figure also includes a reduction in social security spending of £2.8 billion and additional VAT of £1.5 billion due to parents’ increased disposable income.

Why childcare? 

Years of underinvestment, low pay and high costs: childcare is facing many of the same challenges as other sectors across the UK. While next month’s spending review will see tough competition for public spending and investment, the approach of rolling out free hours clearly cannot continue forever without additional investment. And it is clear that investing in childcare not only improves the lives of individual families, it has a significant positive impact on the wider economy and on society as a whole - both now and for future generations. 

Good morning from New Economy Brief. 

At the weekend, the Sunday Times published its ‘Rich List’: an annual inventory of the country’s very wealthiest people. 

According to Tax Justice UK, the top 350 individuals and families on the list hold over £772 billion in wealth, more than the GDP of countries like Belgium, Argentina or Iceland. Meanwhile, campaigners say that the Treasury is losing out on billions by inadequately taxing the country’s very richest.

This week, we unpack the reaction to this year’s Rich List, the options available to tax wealth more, and how HMRC can avoid missing out on revenue through loopholes and tax havens.

“Billionaire Britain”

In recent months, there has been plenty of noise about the “record fall” in UK billionaires, with the government’s abolition of the ‘non-dom’ regime given as the reason why the very rich are “fleeing” the UK. But such headlines disguise a much more significant trend of entrenched wealth inequality. In reality, this year’s list represents a tiny dip in the number of billionaires, against an otherwise soaring upward trend. In 2024, there were 165 billionaires in the UK. This year, there were 156. Yes, this is nine fewer, but in 1990 there were just 15 billionaires. When it was first published in 1989, members of the Rich List needed 6,000 times more wealth than the average Briton to make the cut. Today, that has tripled to 18,000 times. Research by the Equality Trust also finds that the UK’s richest 50 families now hold more wealth than the poorer half of the population.

Extreme wealth. Increasingly, experts are calling for an “extreme wealth line”, akin to the World Bank’s extreme poverty line – a point at which the concentration of wealth is deemed harmful to individuals, society and the environment. A report published last year by the Good Ancestor Movement and Patriotic Millionaires found that extreme wealth poses a threat across critical areas of human life by creating “a psychological and physical buffer between those with extreme wealth and the reality for the vast majority of society.” The wealthy themselves note that extreme wealth threatens democracy, with a recent poll finding that 75% of millionaires think the super rich buy political influence (we covered this research in more detail back in January). Campaigners say that more research needs to be done to determine where an extreme wealth line should be drawn, but a third of millionaires believe the line should be drawn at $10 million per person. 

Growth of extractive wealth. In its new report ‘Billionaire Britain’, the Equality Trust argues that the sources of extreme wealth have become more passive and unproductive. It finds that over half of UK billionaires made at least some of their fortunes through rent extraction: via  property, inheritance or financial markets. This also suggests that “the growth of the ultra rich has little to do with success for the wider economy.”

Taxing wealth

There is a growing chorus calling for higher taxes on wealth to fund much-needed spending on public services. Recent YouGov polling for Oxfam suggests this would also be popular: it found that 77% of the public would prefer increased taxes on wealth to spending cuts.

But what do we actually mean by a wealth tax? Tax Justice UK and others are calling for a 2% wealth tax on assets over £10 million – a levy that would affect just 0.04% of the population yet raise up to £24 billion per year. 78% of the public would support such a tax, according to Oxfam’s research. The tax could be annual or one-off, with different options explored in the 2020 Wealth Tax Commission’s final report. And new research by King’s College London’s Dr Ben Tippett in collaboration with Patriotic Millionaires UK finds that it could have raised £160 billion over the past 32 years – enough to have built 80 new hospitals in that time. 

But what about tax dodging?

One of the main concerns about wealth taxes is the ease with which the super-rich can avoid paying them. The world is losing half a trillion US dollars to tax abuse per year, according to the Tax Justice Network. But much of this is within UK government control – the same research shows that the world’s top three corporate tax havens are all British Overseas Territories: the British Virgin Islands, Cayman Islands and Bermuda. What’s more, the UK is one of eight countries trying to block a UN convention aimed at improving international tax cooperation. Not only is the UK government depriving itself of funds for public services, but is also contributing to a “quarter of global tax dodging” according to Tax Justice UK, , which does particular harm to Global South countries. 

Capital flight? Research indicates that higher wealth taxes have little effect on the behaviour of the rich. Interviews with wealthy Britons for a London School of Economics study found that tax considerations are not a major factor when deciding whether to move to or from the UK. Concerns about career disruption, family upheaval, the emotional toll of leaving their homes, burdensome bureaucracy, and potential damage to their reputations were all more influential. Experts also suggest that the UK could easily implement an “exit tax” – similar to those in Australia and Canada – ensuring that the UK taxes all gains that an individual makes whilst living here.

Tackling extreme wealth

Next month’s spending review looks set to be bruising, and many are looking to the untapped assets of the wealthiest as a way not just to avoid immediate cuts to public services but also to provide extra funding for much-needed long-term public investment. What’s more, experts are increasingly sure that extreme wealth is linked to the growing global threats of climate change, inequality and the erosion of democracy. The arguments for action are strong and urgent. Yet so far, the government has resisted calls to tax wealth effectively and tackle its pernicious influence – although Deputy Prime Minister Angela Rayner did propose a range of modest taxes on wealth before the Spring Statement. But with unprecedented pressures on public services and government finances, the government may find wealth taxes unavoidable if it’s to deliver the change it promised last year. 

Good afternoon from New Economy Brief. 

Last Thursday, cardinals elected Pope Leo XIV – the first American pope – following the death of Pope Francis in April. Given that the pope is one of the highest-profile public figures across the globe, the world is now wondering about the implications – political, social and economic as well as religious – of this new papacy. 

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While the pope is technically a religious rather than political leader, his soft power on the global stage cannot be underestimated. The late Pope Francis in particular gained a reputation for speaking out regularly on economic, social and climate justice. This week, we look at the Vatican’s role in global economic affairs, Pope Francis’ legacy and what to expect from his successor.

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Why the pope’s opinion matters.

With around 1.4 billion Catholics worldwide – more than the population of almost every country – the Pope is the pre-eminent moral authority for communities across the globe, and also, of course, the head of a sovereign state. 

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‍A paradigm shift. The pope’s global reach also means that he is in a unique position to represent both the Global North and Global South. In recent years, the balance of Catholic populations has shifted much more towards the latter. Over the last century, the proportion of Catholics living in Europe has fallen from around two thirds to a quarter, with that of Catholics in Africa and Asia increasing from 5% to between 25 and 30%. As Cardinal Sarah of Guinea has previously said: “the Church is no longer Eurocentric.” A pope from the Global South himself, Pope Francis was known for significant institutional reforms to the Catholic Church, appointing new cardinals in countries such as Myanmar, Mongolia and South Sudan. And his actions reflected not just a demographic shift, but a shift in focus towards global economic inequality and tackling poverty.

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Rooted in teachings. While some popes have been more outspoken than others about inequalities and economics, many of these principles are deeply rooted in Christian teachings. Catholic teaching is rooted in a “duty to help the poor, the sick, the weak and the suffering”. Every 25 years, the Catholic Church also celebrates a Jubilee or Holy Year, a special time of forgiveness and reconciliation. It stems from the biblical concept of the Jubilee, occurring every 50 years, where debts would be cancelled and land "restored to the landless”. As a result, debt cancellation has formed an important part of Catholic teachings in recent decades, with the Church playing a major role in the Jubilee 2000 debt campaign which led to the cancellation of over $100 billion of debt owed by 35 of the poorest countries.

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“Inequality is the root of social evil”

Pope Francis was particularly vocal on issues such as global debt but also on economic inequality more broadly, famously stating that “inequality is the root of social ills”. Economist Mariana Mazzucato has said his “economic vision fundamentally reshaped global conversations by insisting that inequality is not just a technical failure, but a moral one”. The 2015 publication of his encyclical “Laudato Si’: on care for our common home”, a letter written to bishops with the aim of guiding them in their ministries, played a significant role in shaping conversations on tackling the climate crisis and was instrumental in the Paris Climate Agreement. In it, he said it was “remarkable how weak international political responses have been,” and that “the principle of the maximization of profits, frequently isolated from other considerations, reflects a misunderstanding of the very concept of the economy.” He was also a vocal proponent of fairer taxation of wealth, arguing that “the tax pact is the heart of the social pact.” He also condemned tax evasion and praised the majority who refrain from it, saying that “you can tell of the honesty of many people who do not shirk their duty.” He went as far as to say that tax evasion is sinful.

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The global financial system. Recent popes have also been unafraid to criticise the global economic and financial system. Speaking at the height of the Global Financial Crisis in 2008, Francis’s immediate predecessor, Benedict XVI, argued that financial activity can be “completely turned in on itself, lacking any long-term consideration of the common good … finance limited in this way to the short and very short term becomes dangerous for everyone, even for those who benefit when the markets perform well.” In 2015 Francis pulled even fewer punches, calling the “unfettered pursuit of money” at the heart of modern capitalism “the dung of the devil”. He also criticised “the rise of new forms of colonialism”, which “takes on different faces. At times it appears as the anonymous influence of mammon: corporations, loan agencies, certain ‘free-trade’ treaties, and the imposition of measures of ‘austerity’ which always tighten the belt of workers and the poor.”   

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An ongoing legacy. According to CAFOD’s Maria Finnerty, Pope Francis’ influence in turning the dial on economic justice continues to be felt across world institutions, with dozens of economists he appointed to this Jubilee Commission playing a key role in the recent IMF-World Bank Spring Meetings. Finnerty argues that Pope Francis left “a map for leaders who are willing to step out of political comfort zones and embrace real transformation.”

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Rerum Novarum

The good news for economic justice advocates is that Pope Leo XIV is expected to continue this legacy and to focus on economic justice and debt justice in the Jubilee Year 2025. Not only was he a close confidant of Pope Francis, but his choice of name indicates a commitment to social justice and workers’ rights. Pope Leo XIII, the last pontiff to use the name, used his 1891 encyclical Rerum Novarum (“On the Condition of Labor”) to argue for greater workers’ rights amid the upheavals of the Industrial Revolution. It called for fair wages and humane working hours, and for the right to form trade unions. The text is considered foundational in modern Catholic social teachings.

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Continuing the climate legacy. Early indications suggest that Pope Leo will also continue the legacy of the “Climate Pope” Francis. Speaking last year at a seminar on the impacts of the climate crisis, he urged leaders to move “from words to action” and offered a reminder that humanity’s “dominion over nature” should not be “tyrannical”, but a “relationship of reciprocity”. 

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The first American pope. 

Despite Donald Trump’s celebrations of the first American Pope, it has been suggested that he opposes much of the President’s policy regime, particularly on immigration. At a time of such global economic turmoil, much of it recently stemming from US tariffs, it seems likely that the Vatican’s positioning on economic issues will continue to be influential over the coming years. Though there are concerns that Pope Leo may not continue Pope Francis’s progressive approach to important social issues like LGBTQ+ rights, there is well-founded hope that he will continue his predecessor’s legacy of speaking out on economic inequality and the climate crisis.

Good morning from New Economy Brief.

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Local election post-mortems are flooding in, with lots of commentary blaming Labour’s losses and Reform’s record gains on the decisions to cut the Winter Fuel Payment and disability benefits. (See More in Common’s presentation for a good roundup.) But what if the decisions behind these cuts were based in part on inaccurate data?

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This week's New Economy Brief explores ongoing problems with some of the most important economic indicators collected and calculated by the Office for National Statistics (ONS). Getting them wrong can have far-reaching consequences because they are used to develop the forecasts that directly inform large parts of government policymaking.

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The UK’s macroeconomic institutions are flying blind.

Economic forecasts play a critical role in setting policy, and two of the most important official forecasters – the Bank of England and the Office for Budget Responsibility (OBR) – rely heavily on ONS data. But concern has been steadily mounting about that data’s reliability, with the Labour Force Survey (LFS) coming under particular scrutiny.

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The LFS is the UK’s official employment data series, and has been struggling with declining response rates since the pandemic, hitting a low of 17.4% in 2023. So low, in fact, that the LFS lost its accreditation as an official statistic in November 2023. The Resolution Foundation estimated that the LFS may have “lost” up to 930,000 workers, and accused the ONS of “leaving policymakers in the dark”. Chair of the Treasury Select Committee Meg Hillier warned that “these delays will make some of the most consequential decisions taken by the Treasury and Bank of England challenging at best and misinformed at worst”. ONS Chief Executive Professor Sir Ian Diamond has said it may take until 2027 to introduce a more reliable replacement.

This employment data informs decisions taken by the Bank of England’s Monetary Policy Committee about the rate of inflation and appropriate path of interest rates, as well as government decisions on welfare policy. If it is inaccurate, the political and economic implications of inaccurate data are significant. Such is the concern that the Governor of the Bank of England himself, Andrew Bailey, has called it a "substantial problem".

But this substantial problem doesn’t end with the Labour Force Survey. The ONS’s Living Costs and Food Survey, used to help calculate GDP figures, also suffers from low response rates. And in March this year the ONS uncovered further issues, this time related to its producer price index and services producer price indices, which "gauge changes in the price for goods and services bought and sold by manufacturers and service sector companies.” Both are used to estimate the rates of economic growth and inflation.

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Is inflation being calculated wrong? 

Of course, the ONS understands the importance of getting its statistics right, and it has been trying to improve. One example is its approach to the monthly Consumer Prices Index (CPI) – the UK’s headline inflation statistic. The ONS plans to input more real-time data from supermarket scanners, for a more accurate picture of how prices change across the economy. This is because scanners record the prices that people actually pay and include discounts from loyalty cards like Tesco’s Clubcard. This is important because just under a quarter of all UK groceries are bought at Clubcard discounted prices.  

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This new data was meant to become part of the CPI calculation in March this year, but has now been delayed until 2026. But its absence could be distorting our understanding of how high inflation actually is. As FT’s Alphaville pointed out last week, the ONS itself says using scanner data to recalculate CPI for March 2024 shows inflation was just 2.8% – 0.4 percentage points below the 3.2% it thought at the time. 

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Overstating inflation has huge implications for the government. If the Bank of England’s Monetary Policy Committee had better data about the true rate of inflation, would interest rates be lower? It is difficult to speculate, but overstating the rate of inflation has other effects too. Around a quarter of the UK’s £2.8 trillion national debt is linked to inflation, so if the ONS overstated inflation just a little, forecasts of higher borrowing costs could eat into projections of the government’s ‘headroom’ under the government’s fiscal rules. FT Alphaville cites one calculation which suggests that overstating inflation by 0.2% could have cost the government £1.4 billion unnecessarily, nearly as much as the savings made from cutting the winter fuel allowance.

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Political risks in making cuts based on uncertain forecasts.

The ONS’s exclusion of supermarket scanner data on changing food prices is just one example of how bad data could end up causing bad decisions on major policies – especially when so much weight is put on staying on the right side of a highly uncertain forecast from the OBR. For instance, a briefing from Invest in Britain argued that: "The haphazard decisions around welfare spending at the Spring Statement exemplify the perverse effect of making policy to meet targets based on uncertain forecasts."

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Cuts driven by short-term bookkeeping. It is important to remember what drove the benefit cuts announced by the government since coming to power. UK borrowing costs rose earlier this year due to worsening global instability, which prompted the Chancellor to find £4.8 billion in savings by cutting disability benefits (which the government’s impact assessment notes could push 250,000 people into poverty). How this decision was made was the subject of a widely reported controversy. Essentially, it was clear that the policy was being decided for accounting reasons – in order to find enough savings to restore the government’s headroom to £10 billion – not because it was good policy. Or put another way, ministers were tweaking policy to meet the forecast, rather than tweaking forecasts to meet the policy, as was normal before the OBR’s establishment in 2010. Meanwhile, the Winter Fuel Payment cut announced last year was part of a package to fill what Labour called the ‘black hole’ in the public finances left by the Conservatives

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‘Budgetarianism’ leads to bad policy. Jagjit Chadha, former head of NIESR, has previously critiqued this approach as ‘budgetarianism’: where government policy is decided upon based on whether an arbitrary fiscal rule will be met, and the focus of national debate is distorted from what fiscal policy should accomplish, to “whether there is any room for a sliver of expenditure one way or the other.” We have previously covered the risks of cutting spending to meet the OBR’s highly uncertain forecasts of the government’s income and spending needs several years in the future. Now there are concerns about the underlying data these forecasts are based on, and the harm this could be doing to policy, particularly in politically sensitive areas such as benefits.

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The Guardian's Pippa Crerar and Jessica Elgot report “growing anxiety at the top of government” and say “pressure from MPs for a major rethink of economic strategy is likely to mount in the coming days”, with the cuts to the Winter Fuel Payment and disability benefits seen as important drivers of Labour’s losses at the local elections last week. More accurate data probably wouldn’t have been enough on its own to prevent these decisions. And many of the downsides of short-termist, budget-driven policymaking would still apply, even with better data. But it’s also clear that the Chancellor’s last-minute decision to impose extra cuts to disability benefits at the Spring Statement was entirely driven by a desire to meet her self-imposed fiscal rules. And with fiscal headroom so tight, small changes to the data underlying economic forecasts can have an outsized impact on whether these rules are met or missed – which in turn can drive the kind of back-to-front and damaging policy decisions we saw at the Spring Statement. Better data can’t fix this, but it can help.

Good morning from New Economy Brief. 

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On Thursday, voters across England will go to the polls to elect councillors in 24 of the country’s 317 councils. Metro mayors will also be elected in the West of England, Cambridgeshire, Peterborough, Hull and East Yorkshire, and Greater Lincolnshire. 

Local elections are often about hyper-local issues. But they can also be barometers for what the country is thinking more generally. For Labour and the Conservatives, Thursday’s results may well make for grim reading, as commentators anticipate an “anyone but the big parties” election.

This week we’re looking at what to expect from the local elections, digging deeper into Labour’s worries about Reform, and exploring how voters’ views about the economy are often more nuanced than much of the pre-election commentary implies. 

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Which elections are taking place? 

The 24 councils holding elections this week include 14 county councils, eight unitary authorities, one metropolitan district, and the Isles of Scilly (which has its own governance structure). In total, 1,750 councillors will be elected (which includes 93 by-elections). Another 21 county council elections which should have happened on Thursday have been postponed. This includes councils that have opted to join the government’s new devolution priority programme. These have been allowed to defer elections to provide more time for any restructuring necessary for further devolution. A parliamentary by-election will also be held in Runcorn and Helsby, after its previous Labour MP Mike Amesbury stepped down earlier this year having pleaded guilty to assaulting a constituent. 

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What to look out for. 

Metro mayors will be elected for the first time in Greater Lincolnshire and Hull and East Yorkshire. YouGov polling suggests that Reform candidate and former Conservative MP Dame Andrea Jenkyns is likely to win the former. The latter is thought to be a four-horse race between the Conservatives, Labour, the Liberal Democrats and Reform (whose candidate is an Olympic medallist). Another contest to watch is Doncaster. It’s the only council being contested this year that Labour currently holds, and polls are pointing to a potential win for Reform.   

Sky News’s Beth Rigby has characterised Thursday’s election as “the first big ballot box test of Sir Keir Starmer’s premiership”. The results are also likely to reveal how much British politics is changing. As Labour List’s Morgan Jones argues, “we’re no longer in a two-party system, and should stop acting like we are”. And with a broad but shallow ‘sandcastle’ majority, Labour will be paying particular attention to any data that might tell them who they can win over and what coalitions they need to build to win again. 

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The economic backdrop. 

It’s worth remembering that Labour suffered significant losses last time most of these seats were up for election in 2021, so losses on the same scale are unlikely this year. However, as Oxford University’s Professor Jane Green points out, Labour has been losing support among voters who feel most economically insecure, and “these feelings of economic insecurity are higher among voters who might consider voting for the Greens, Liberal Democrats, or Reform UK.”

Analysis by Green and Professor Geoffrey Evans for the Joseph Rowntree Foundation found that overall Labour had lost 40% of its general election voters, and had lost 46% of its economically insecure voters. According to Green, “a party that delivers on economic security – supporting people by bringing down costs and giving people a chance to restock their savings safety net – can feel much more secure in their electoral prospects too. Without it we’re likely to see much more political volatility and further electoral fragmentation.”

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‍So where do voters stand?

A complex picture. Clearly, Labour’s big worry is Reform. With much of their recent campaign labelling Farage’s party as “secret Tories” and talk of the red wall turning turquoise, the party is spooked. But new research by Persuasion UK suggests that simply adopting Reform UK policies is not an effective strategy for Labour. For starters, it finds that historically, there is not much overlap between Reform and Labour voters: almost three quarters (74%) of Reform voters at last year’s General Election have not voted Labour in a single general election since 2005. And while there are ‘Reform-curious’ Labour voters, they make up only 11% of Labour’s 2024 support – a much smaller percentage than 2024 Labour voters who are now open to voting Green (29%) or Lib Dem (41%). Translating this into general election seat projections, Persuasion UK’s MRP polling suggests that Labour would lose 123 seats if all Reform-curious Labour voters defected, but more than twice that (250) if all Green-curious voters abandoned Labour. 

Dividing lines. One of the most interesting findings in Persuasion UK’s analysis is that there are clear differences between Reform voters and Reform-curious Labour voters when it comes to the economy. Reform-curious Labour voters are much more likely to be economically populist, “backing things like government regulation and taxation of the richest in far greater numbers”, as well as being “more attracted to ideas like building more council housing, being more likely to be social renters themselves.” 

Net zero/red herring. These Reform-curious voters are also much less hostile to net zero than Reform voters and are actually “broadly sympathetic” –  in line with the general public. Also like the general public, these voters are more likely to blame high energy prices and low economic growth on profiteering by energy companies and reliance on imported gas rather than net zero. 

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‍Shared priorities. 

When it comes to building electoral coalitions, there are some eye-catching similarities between Labour voters who are wavering to both the right and the left. Large majorities of both Reform- and Green-curious Labour voters agree that the wealthy should be taxed more. Persuasion UK’s research also found that a commitment to significantly increase funding for the NHS and other front-line services is the policy that would be most likely to make the average Labour voter stick with the party,  and would reduce the likelihood of them voting for either Reform or the Greens. The message to Labour is clear: progressive economic policies and a focus on improving public services is an effective way to unite its voter base. 

This is backed up by new research from Hold Sway for the Trades Union Congress, which found that Labour’s Employment Rights Bill “improves Labour's favourability among voters". This was especially true of Labour 2024 voters who would now vote Reform. Persuasion UK also found that large majorities of both Reform-curious and Green-curious Labour voters believe that employers have too much power over workers, and that “more regulation of business is in the interests of ordinary people”. A major issue, though, says Hold Sway, is that public awareness of the legislation is low: 72% of people had heard nothing or only a little about before being asked. Another lesson for Labour here, then – it needs to communicate popular policies if it is to reap electoral rewards for them. 

Good morning from New Economy Brief.

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Over the last couple of weeks we've looked at the rationale behind Trump's tariffs and their impact on the Global South. 

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This week we're turning our attention to how the tariffs are affecting the UK economy, and how the government is starting to respond to protect key sectors from the fallout.

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How might tariffs reshape the UK economy?

Even in the short term, the impact of tariffs will be complex and hard to predict. For example, Megan Greene, an external member of the Bank of England’s Monetary Policy Committee, emphasised this week that these tariffs could have both inflationary and disinflationary effects. In this section, we’ll cut through the complexity by identifying a few headline impacts. 

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Export suppression. Tariffs make products made by British firms more expensive for American consumers, which is likely to reduce demand and slow UK economic growth. The US accounts for 15.3% of total UK goods exports, mainly in machinery, transport equipment and chemicals. A briefing from the House of Lords Library estimates that this makes up around 1.4% of UK GDP. Parts of the UK will be hit harder than others: regional analysis from the Centre for Local Economic Strategies (CLES) suggests the West Midlands could bear the brunt of trade restrictions, as many of the cars produced there are exported to the US. CLES also finds the East of England exports a lot of goods to the US, including in the pharmaceuticals, life sciences, aerospace and defence sectors, so demand is likely to be hit here too.

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Trade diversion. High tariffs on imports to the US could also lead to a phenomenon called ‘dumping’, where exporters – especially from China – divert cheap products to UK markets. Once again, the scale and impacts of such dumping are hard to predict and will probably vary widely by sector. Dumping is likely to reduce prices, which could be welcome in sectors where the UK has limited domestic industry. For example, relying on cheap Chinese imports for heat pump components might not be such a bad thing – it could help us cut emissions faster from heating buildings by boosting consumer demand. But in sectors where the UK does have an industrial base, like car manufacturing, low-cost imports could undercut UK companies. The government will want to avoid any more industries going the way of steel, which dumping has played a significant – albeit highly contested – part in bringing to the brink of collapse, requiring the government to intervene to save jobs. 

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How is the UK responding to the immediate impacts of trade frictions?

The longer-term impacts of Trump’s global trade war on the UK economy are difficult to predict, partly because they depend on the final shape of various trade deals – between the US and UK and the UK and EU to name a couple. What is certain in the near-term, though, is the level of extreme uncertainty; and uncertainty is bad for investment and growth. On Monday, the IMF shaved 0.5% off its forecast of UK GDP growth for 2025 and on Wednesday, the latest purchasing managers’ index (PMI) showed UK export orders falling at their fastest pace since the early months of the pandemic in 2020. 

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Investment poaching. Trump’s anti-net zero stance and generally combative approach to global trade and international relations has also created major uncertainty about the US market as a safe bet for long-term investment. The EU earlier this week signalled that it aims to capitalise on this uncertainty by promoting the 28-country trading block as a safer, more stable place to do business; lots of demand is already shifting from US to EU financial assets. There are also opportunities for the UK to capitalise on a potential wave of green private investment leaving the US. 

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“Come and build it in Britain”. The UK government is trying to counter uncertainty by stabilising business confidence and pitching the UK as a safe place to invest. At a summit of the International Energy Agency this week, Chancellor Rachel Reeves and Secretary of State for Energy Security and Net Zero Ed Miliband joined with the National Wealth Fund and Great British Energy to write to global clean energy companies to urge them to “come and build it in Britain”. They pledged that Britain will be a “safe haven” from global storms with the clarity, consistency and urgency of its clean energy mission, in an attempt to attract some of the capital investment leaving the US. 

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Risks of relying on private finance. The government is bringing forward an initial £300 million investment through Great British Energy to invest in supply chains for offshore wind manufacturing components. They hope this will “directly and indirectly mobilise billions in additional private investment - helping de-risk clean energy projects and supporting thousands of jobs and revitalising the UK’s industrial heartlands.” However, there is a risk that mobilising private capital locks in extractive behaviours as investors seek ever-higher returns, encouraging further profiteering from UK infrastructure and the green economy. (Check out IPPR’s Making Markets in Practice report for more examples of market-shaping policies, and Mariana Mazzucato and Dani Rodrik’s paper on why industrial policy should include conditionalities to ensure public value in public-private investment projects.)

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Trade deals. Politico reports that “the UK is now primarily focusing on trying to get the 25 percent tariffs on British auto and steel exports dropped and to avoid expected measures on pharmaceutical goods” in a trade deal with the US. Much is still to play for, but Global Justice Now’s Nick Dearden warns that the US negotiators may demand many things such as deregulation of the tech sector and dropping the Digital Services Tax. Alternatively, former Treasury Minister Lord Jim O’Neill argues that countries like the UK should coordinate with other G7 countries to stimulate domestic demand, mobilise investment and forge new trade ties to mitigate the economic damage from the Trump Administration’s tariffs.

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Protection of UK industry will require fiscal space.

Looking beyond the nearer-term impacts of tariffs, a protracted global trade war is likely to lead to a recession and supply-side inflation. Reduced aggregate demand could erode the UK's industrial base and preventing this will require countercyclical policy – government spending to mitigate against recession and support demand. Protecting crucial parts of the supply chain from trade disruptions and ensuring consistent demand for key sectors will require fiscal space. But under the current fiscal framework, lower growth instead pushes the Chancellor into a pro-cyclical approach: making politically unpopular and economically counter-intuitive spending cuts, or raising taxes to avoid them. Both options would take demand out of the economy and harm growth. 

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Bringing back ‘securonomics’? Against this backdrop of economic turmoil, the government has stuck to two lines. First, that “the world has changed” and we need to protect UK industry from global instability; and second, that ironclad fiscal rules is the foundation for domestic economic stability. But the tension between these two is already clear and only likely to grow – with borrowing already £14.6bn higher than expected at last month’s Spring Statement, it will become harder and harder to defend the economy while remaining within the government's fiscal commitments. 

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What would it take to trigger the emergency breakout clause? The 90-day pause on tariffs announced by Trump a couple of weeks ago expires in early July. If the tariffs are reinstated the harm to the UK economy will be significant. But even if Trump backs down, the chaos he has already unleashed on the global economy has caused damage that will take a long time to repair. The Chancellor’s difficult position will probably come to a head before the next Budget in the Autumn, when the Office for Budget Responsibility estimates the effects on UK economic growth once again. The New Statesman’s George Eaton has suggested that she could use an emergency breakout clause to “temporarily suspend” her fiscal rules to create fiscal space without having to formally rewrite them. With a "ruthless" Spending Review around the corner and economic uncertainty showing little sign of abating, Rachel Reeves may start finding this option increasingly attractive…

Good afternoon from New Economy Brief.

A week is a long time in politics. Since our last New Economy Brief, where we unpacked Trump’s ‘Liberation Day’ tariffs, the US President has announced a 90-day pause on tariffs above the baseline 10%. This is with the exception of China, Trump’s main target, which at the time of writing has a 145% levy (with some electronics such as smartphones and computers currently exempt), and Canada and Mexico which still face tariffs of 25%.

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So is the panic over? Well, not exactly. Even after the temporary climbdown, a combination of global economic uncertainty, tariff escalation with China and the remaining 10% tariffs means the US still faces a 50% chance of recession this year according to the Chief Executive of JP Morgan, Jamie Dimon. 

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And the economic fallout stretches far beyond US borders. Global South countries – many of which are already facing substantial sovereign debt crises –  are particularly vulnerable to global trade instability. This week, we explore the effect of Trump’s tariffs on these countries, which are often overlooked in discussions about the world economy. 

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How did we get here?

Before the 90-day pause, lower-income economies faced some of the highest levies: 50% for Lesotho, 47% for Madagascar, 40% for Mauritius, 37% for Botswana and 30% for South Africa, Africa’s biggest exporter to the US. In Asia, Bangladesh’s tariff was 37%; Laos’ 48%; Vietnam’s 46%. Trump singled out Cambodia for particular ire, slapping it with a 49% tariff – the highest in Asia. He claimed the country had “made a fortune with the United States of America” because its own tariff on US imports was 97%. The average daily wage in Cambodia is only $6.65. 

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The impact. 

Lesotho has made headlines for reaching the top of Trump’s original tariff list. In recent years the country has exported large amounts of clothes, particularly jeans, to the US. Clothes make up nearly three quarters of Lesotho’s exports to the US, its biggest trading partner after South Africa. With US trade representing 10% of Lesotho’s national income, the country’s clothes manufacturers have described the potential tariffs as “devastating”. On Global South impacts more generally, the economist Jayati Ghosh explains that “the heaviest burden [of the tariffs] will fall on the developing world” and that despite the pause, “canceled or delayed export orders are already undermining production and fueling unemployment. Meanwhile, financial volatility is threatening economic stability long before the full impact of Trump’s tariffs can be felt.” But if the Trump tariff saga is panicking markets and politicians the world over, why is the Global South particularly affected?

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Debt. Since the pandemic, much of the Global South has been immersed in a debt crisis like nothing seen since the 1990s and early 2000s, with 54 countries now in a crisis so deep that “people barely get two meals a day” and “lives are being destroyed” due to the impacts on the cost of living, according to Bernard Anaba of the Integrated Social Development Centre (ISODEC) in Ghana. We explained some of the reasons for this in New Economy Brief last year, including the fact that private lenders have been able to charge extortionate rates to Global South countries, worsening the debt trap. At the same time, large parts of the Global South are already experiencing devastating impacts from climate change. The countries facing the worst impacts are also often those that are most unable to respond to climate-related emergencies due to their debt burdens.

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Dollar dominance. Because the dollar is the global reserve currency, many lower-income countries borrow in dollars rather than their own currency. Exporting to the US – and being paid in dollars – is therefore particularly important for paying off debt, as well as for importing essentials like energy and food, Positive Money explains. 

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But what about the falling dollar? One might hope that the falling price of the dollar could help countries with high debt burdens, as it would lower the cost of their debt payments which are in dollars. However, Debt Justice argues that this potential upside has been wiped out by the fact that currencies in many of these counties have fallen against the dollar. 

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Increased borrowing costs. Global South countries are also being hit by increased borrowing costs. As Debt Justice’s Tim Jones explains: “when negative global financial events happen, speculators move money into what they perceive as safe assets – debts of rich country governments – and away from what they perceive as risky – debts of lower-income country governments.” This pushes up borrowing costs for these countries. Last week the average yield (the return an investor expects from a bond) on government bonds from the 20 lower-income countries with the highest levels of external debt rose from 10% to 12%.

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Global economic downturn. When it was announced that most countries would “only” see 10% tariffs, many pointed out that this would be of little benefit in the context of a global economic downturn. For Global South countries in particular, the global downturn a trade war could cause is an even bigger threat than the tariffs themselves. Many of the countries with the highest debt payments rely on raw materials for their exports, and the prices of these commodities are particularly vulnerable to economic shocks and slowdowns. A global downturn, or even a recession, would be catastrophic for Global South countries’ export revenues – even for nations with lower tariffs.

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Re-writing its own rules.

Trump’s ruthless approach will be devastating for Global South countries. And it’s worth remembering that the reason why Global South economies are so export-led is rooted in colonialism, and this has been further entrenched by pressure from the US, and US-dominated institutions, in recent decades. As in so many other areas, Trump is overturning decades of US policy and punishing others for a position that the US pushed them into. One example is the African Growth and Opportunity Act (Agoa), a piece of legislation introduced by Bill Clinton in 2000 which gave 32 African countries tariff-free access to the US market, which high tariffs on African countries would reverse. Framed as a tool for boosting development, Agoa of course also allowed American consumers to benefit from cheap goods, and was expanded by George W. Bush in 2004. 

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One-sided free trade. It’s hard to remember among all this chaos that tariffs are not in and of themselves always harmful. Global Justice Now’s Nick Dearden has argued that tariffs can be a useful tool for economies to protect domestic industries and that Global South countries have often been forced to accept free trade even though this has harmed them. One notorious example is the impact of trade liberalisation policies on rice production in Haiti, where the IMF pressured the government to slash tariffs on imports, which wiped out Haitian rice farming. Going further back, it is notable that many of the world’s richest countries – including the US and Germany – had high tariff barriers during their period of rapid initial development. 

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‍A unipolar world becomes multipolar. As we have covered before, the tariff saga will potentially accelerate the trend towards a ‘multipolar’ world in which the dollar ceases to dominate. This isn’t a fringe idea – Gordon Brown argued last week that “the way forward can only be for countries in a multipolar order – if there is going to be order – to talk to each other and work with each other and consult with each other”. There is no doubt that Trump’s trade policy has already disrupted the global order; what remains to be seen is if the new order that emerges in its place will allow Global South countries more influence or further entrench global inequalities. One way to tip the balance in a positive direction would be to cancel Global South debts – this is an area in which the UK could take advantage of the City of London’s status as the world’s second biggest financial centre to play a genuine leadership role. Of the countries covered by the G20 debt relief scheme, 90% have contracts governed by UK law, meaning that action here would have a significant impact.

Good morning from New Economy Brief.

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Trillions of dollars have been wiped off the international stock markets, forecasters are warning of stagflation and global depression. Pretty much all economic indicators are flashing red – so why is the Trump Administration doing this? Is there method in the madness, or is it bound to backfire?

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This week’s New Economy Brief explores how Trump’s tariffs could fit into a larger plan to reindustrialise the US and bring about “generational change in the international trade and financial systems.” This is part of a series aimed at helping you understand these potentially seismic shifts in the global economy.

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What were the ‘Liberation Day’ tariffs for?

Trump's team have been very clear about their intentions from the get-go. Tariffs were a key feature of Trump's election messaging, continuing the trend towards viewing trade in zero-sum terms – as a matter of winners and losers rather than mutual benefit. This began in his first term, continued under Biden, and is particularly clear in the context of competition with China. Last week’s ‘Liberation Day’ brought in blanket baseline 10% tariffs on imports, with higher tariffs for countries with which the US runs a bigger goods trade deficit. Much of the reaction has focused on how simplistic this formula seems. But commentators like Chatham House's Heather Hurlburt warn that many are "missing the bigger picture”.

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A User’s Guide to Restructuring the Global Trading System.

To understand what the administration might be trying to achieve, we need to take a brief detour through the history of the global trading system. As the leading champion of the General Agreement on Tariffs and Trade (GATT), part of the post war Bretton Woods settlement, the US was central in establishing a trading system based on non-discrimination (i.e. broadly equal treatment between products from different countries) and a general push to remove barriers to trade. This system expanded markets for US exports and allowed it to dominate global trade for several decades. But today isn’t the first time the US has threatened to blow up the system it created. In the 1970s, it responded to a cluster of challenges to its dominance (including high inflation and rivals becoming increasingly competitive in manufacturing – sound familiar?) by ending the global monetary system set up at Bretton Woods, in which the value of the US dollar – and through it, of every major currency – was linked to gold. 

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What’s money got to do with it? The monetary system that started in the 1970s – with currencies floating freely on the market, with dollars acting as the 'reserve currency' that others are valued against and that central banks hold their reserves in  – is at the core of the Trump team’s diagnosis of the US’s lack of trade competitiveness. In this view, the ever-growing demand for the dollar increases its value, making exports less competitive while encouraging cheaper imports and driving the US into a trade deficit. This ultimately hollows out the US industrial base, leaving its economy increasingly dependent on finance and consumption-led growth.

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Back to the present. 

In this context, key advisors in Trump’s team want to achieve two things: devaluing the dollar over the long term to reduce the US trade deficit and reindustrialise their economy (seen as key to national security), while also maintaining it as the global reserve currency. 

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How does this all hang together? This plan for a “grand reordering of global finance and trade” has been termed the ‘Mar-a-Lago Accord’. The dollar’s status as global reserve currency is usually seen as a major US advantage, not least because it allows cheap borrowing and unrestrained military spending. But the Trump administration has come to view the provision of international security and the reserve currency to facilitate global trade  as a ‘burden’ whose costs trading partners should share. 

Where do tariffs come in? One way to understand the ‘Liberation Day’ tariffs is as an opening gambit to start bi-lateral negotiations with other governments to force them to rebalance trade in US interests (such as Trump’s demand for the EU to buy $350 billion of American energy in exchange for a lower tariff), allow their currencies to increase in value relative to the dollar and – for US allies – spend more on defence. This plan links trade, monetary and security policies in an explicitly transactional way. 

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Beyond tit for tat. Peter Navarro, Trump’s senior counsellor for trade and manufacturing, has complained about a long list of what he terms "non-tariff weapons" that other countries use to make US exports less competitive, ranging from currency manipulation, VAT and IP theft all the way through to "discriminatory product standards” (think chlorinated chicken…). Removing these may be part of the US’s price for agreeing to lower tariffs in the negotiations. But as the FT’s Gillian Tett suggests, the administration may also look to pull off a more fundamental rebalancing of the terms of trade by pushing foreign investors into longer-term dollar holdings. This could allow the US to have its cake and eat it too, combining devaluation of the dollar and more competitive trade with cheap borrowing, all while safeguarding the dollar’s long-term dominance as the reserve currency. 

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The chaos is part of the plan. Economists like Jason Furman warn that the tariffs will be self-defeating and fail to reindustrialise the US. But it is also important to understand that trade policy is also foreign policy, so this is about geopolitics and not just economics. The tariffs’ economic fallout could be part of the plan: to hold the global economy hostage and force other nations to come to the table and negotiate better terms of trade for the US, or in James Meadway’s words “kick over the table, and demand everyone starts again.” The tariffs also aim to weaken perceived adversaries that run huge trade surpluses with the US, such as China – seen as free riding off the US provision of the global reserve currency (and military defence) that enables that trade. Trump’s team think they can win a trade war with China “even with full retaliation”, based on the evidence from this academic paper, and see the tariff chaos as a way create “negotiating leverage”.

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Will it work? It is early days, and lots of the impacts are uncertain. We will see whether the US financial class has the political power to force a U-turn as tariffs hit stocks, or whether the apparent tensions in Trump’s camp lead to clear victory for either side. Perhaps the most critical question will be how far the rest of the world is willing or able to pay the price that the US demands – or whether enough critical players also start to see the US-backed trade, defence and financial system as more of a burden than a benefit. We will explore impacts and potential responses in more detail in the coming issues, including a deep dive on the potentially devastating impacts on the Global South. But as Heather Hurlburt points out, the Trump administration's plan speaks directly to “two ideas that resonate deeply with American voters: that past decades’ trade and security policies have been net negatives for Americans, and that they ought instead to produce tangible daily benefits. The longer these ideas are dangled in front of voters, the less likely it is we will see a return to a system in which the US plays by any trade rules at all.”

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How is the UK responding?

On Monday, the PM and Chancellor visited a Jaguar Land Rover factory, where Starmer announced a relaxation of phaseout targets for non Electric Vehicles in response to US tariffs on car imports. While Starmer emphasised that this “is not the extent” of their response, it isn’t a promising start. 

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If these tariffs escalate into a full-blown global recession, the UK will face severe economic consequences. Starmer said on Monday that "this is a changing and completely new world”, echoing his language when raising defence spending in February. Yet so far the Prime Minister has stuck to an increasingly tired script, ruling out tax rises or changes to the fiscal rules and peddling the false narrative that weakening climate policy is the route to growth. If the world really has changed so fundamentally, many will be asking what it will take for the government to change course.

Good afternoon from New Economy Brief. 

Last week, we unpacked the Chancellor’s Spring Statement, exploring how her announcements could affect economic growth and the long-term sustainability of the public finances. Many of the Chancellor's decisions were taken in order to meet her self-imposed fiscal rules, and hinged on highly uncertain forecasts from the Office for Budget Responsibility – an approach that has met with widespread criticism from experts.

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But behind this fiscal debate is a very real, very human cost. The majority of cuts come from reforms to disability and incapacity benefits. These include increasing the threshold for Personal Independence Payment (PIP) eligibility and reducing the health element of Universal Credit. According to disability charity Scope, these are the biggest disability benefit cuts on record.

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This week, we explore the scale of disability benefit cuts, the economic and moral arguments around this controversial decision, and the impact it will have on millions of people. 

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The scale of the cuts

The scale of these reforms is huge. By 2029-30, 3.2 million families will be affected, losing an average of £1,720 each. The government’s own figures suggest the cuts will push 250,000 people into poverty by 2030, including 50,000 children, and others think the total could actually be around 340,000. These are the key changes:

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Reducing access to PIP. Central to the government’s reforms is tougher PIP assessments. Personal Independence Payment (PIP) is money paid to those whose disability means they need extra care or help with mobility. It is a non-means-tested benefit and has two components: the daily living part (for example if someone needs help with things like preparing food, getting dressed or managing money) and the mobility part which relates to getting about and leaving the home. The new changes, which will take effect in April 2026, apply to the first part and now require people to score four points in at least one category of daily living activities. For context, things like needing assistance to get in and out of the shower only score a three. Being unable to manage toilet needs without supervision or prompting scores a two. But because these issues are in separate categories on the PIP form, a person with these two needs would not necessarily qualify for payment as neither reaches a score of four. 

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Reducing the health element of Universal Credit. While PIP is provided to help people with the additional cost of having a disability, whether they are in work or not, the health element of Universal Credit (UC) is designed to supplement the income of those whose health condition or disability reduces their capacity to work or engage with employment support. This is otherwise known as the Limited Capability for Work-Related Activity (LCWRA) element. From next year, this will fall from £97 to £50 per week for new claimants, and be frozen at the current level for existing recipients. The government is also considering excluding under-22-year-olds from the health element of UC, feeding into a narrative that the rise in health-related benefit costs is due to young people who could be in work.

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The Work Capability Assessment. The government also announced that it would scrap the Work Capability Assessment (WCA) in 2028 and instead use the PIP assessment to determine if someone receives the health element of UC. Many civil society organisations have expressed concern over this. Disability Rights UK, for example, has highlighted the inaccuracy of PIP assessments. The charity also explained that scrapping the WCA could mean that disabled people would no longer be exempt from work-related conditionality on the grounds of disability. In other words, even those who can’t work could still in theory be sanctioned for not seeking employment, as this would now be at the discretion of Jobcentre work coaches.

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Impacts. How much these cuts will affect households obviously depends on their specific circumstances, but some people may lose catastrophic amounts. According to the Joseph Rowntree Foundation (JRF), a single person losing both PIP daily living and LCWRA could lose £795 a month after housing costs – 57% of their income. Tightening PIP assessments means many could also lose out on carer’s allowance. In this situation, a household in which one person cares for another could lose £1,005 per month.  

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Cold Comfort. Amidst the cuts was a small uprating to Universal Credit – worth an extra £3 per week to a single person aged 25 or over – and the announcement of £1 billion for employment support. While welcome, these policies are dwarfed by the sheer scale of benefit cuts announced and the devastating impacts they will have on disabled people.

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The government’s rationale

While a major driver of the Chancellor's decision to cut benefits was to meet her fiscal rules, the government has maintained that the real rationale is "to get Britain working.” According to official figures, around 9.3 million people are out of work and not looking for employment. One in eight young people (aged 16 to 24) is not currently in work, education or training. But while many of our economic woes stem from global instability that is affecting many other countries too, since the pandemic the UK has become an outlier when it comes to economic inactivity. Most major economies have returned or even surpassed pre-Covid employment rates, but the UK’s employment recovery has remained stuck, according to the Resolution Foundation, with higher rates of disability benefit claimants than our peers. So what’s going on?

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Get Britain working? As the Financial Times’ Stephen Bush points out, we don’t have the complete answer to this question. The Resolution Foundation has suggested that the large gap between the Universal Credit rate for someone who is unemployed (the basic rate or standard allowance) and the rate for someone who is out of work because of ill health creates a financial incentive for people to be categorised in the latter group. JRF research shows that the low level of the standard allowance means that around 5 in 6 low-income households on UC are going without essentials. The small increase to the standard allowance the government announced in the Spring Statement will take it to £106 a week by 2029/30 – still significantly below the £120 a week that JRF calculates a single adult would currently need to cover the cost of essentials.

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is a level as a proportion of average earnings. The government’s assumption is that there are people claiming incapacity benefits who should be working instead and that reducing their incomes will encourage them to find work. The first issue with this is that many disabled people who receive disability benefits are already in work, including one in six PIP recipients. Research also shows that the UK social safety net is among the weakest in the rich world – the poorest households in Slovenia are better off than their UK counterparts. 

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A health crisis. Of course, part of the problem is that so many people are sick. The Institute for Public Policy Research (IPPR)’s Commission on Health and Prosperity concluded that the British population is getting sicker, with a sharp rise in the prevalence of many long-term health conditions. It argues that the ‘disease burden’ is avoidable through better prevention and treatment, and by redesigning services and society around people’s needs. This is another case where upfront investment is needed to save the exchequer money in the long term and boost growth by enabling more people to participate in the labour market. 

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Disabilities or “work-limiting conditions”? Whatever improvements can be achieved through investment in healthcare, some disabilities and long-term illnesses are unfortunately unavoidable. Some feel that this has not been taken into account, and that the government’s rhetoric has been insensitive to people’s needs. As Frances Ryan argues, the language of “work-limiting conditions” reframes disabilities and illnesses away from being conditions that affect human beings, but simply an obstacle to work. Disability charities are calling on the government to “listen to disabled people”. 

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All pain, no gain 

Far from saving money, these cuts are likely to impose higher long-term costs on public services. Reduced financial support will push more people towards NHS services, social care, and crisis support, putting more pressure on already overstretched systems. JRF has previously found that poverty-related expenses, including healthcare and lost productivity, already cost the UK economy £78 billion per year. More recently, the Child Poverty Action Group (CPAG) has estimated that child poverty alone costs the UK an annual £39 billion. By worsening financial insecurity, the government’s welfare reforms could drive these costs even higher. 

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What about the growth mission? There is also the simple economic argument that reducing people’s incomes also reduces their spending power, hitting local businesses and the wider economy at a time when the government is “betting the house on growth”. For example, the New Economics Foundation (NEF) has calculated that cuts could knock £12.6 billion off GDP by 2029/30 through reduced demand and increased poverty, wiping out any savings. 

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Value outweighs costs. Economists at Pro Bono Economics argue that the economic value of disability benefits far outweigh their cost, with every £1 spent on disability support increasing wellbeing by an amount worth £1.48. 

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Increased poverty and hardship. Macroeconomic effects aside, the reality is that these cuts will push hundreds of thousands of people into poverty, with millions more seeing their incomes cut. Disabled people face higher living costs due to medical expenses, mobility needs and assistive technologies. Removing or reducing their financial support will force them to cut back on essentials such as food and heating during an already painful cost-of-living crisis. Charities like Mind, Scope and Citizens Advice have already reported a surge in contacts from people worried about the impact of proposed benefits changes, with calls to Mind’s welfare advice line doubling. Beyond questions about their economic rationale, it is clear that these cuts will have a profoundly damaging impact on millions of people.

Good afternoon from New Economy Brief.

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In her Spring Statement on Wednesday, the Chancellor announced £8.4bn of cuts to welfare and departmental spending in order to meet her fiscal rules. Her decision was based on forecasts prepared by the Office for Budget Responsibility (OBR), which the OBR itself warns are highly uncertain. Most controversially, over half of these spending cuts have come from reducing disability benefits. 

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Over the next two weeks New Economy Brief will be delving into the OBR’s forecasts and the government’s response to them. This week we’re exploring the potential effect of the cuts on economic growth and the long-term sustainability of the public finances. Next week we’ll look at the impact of the cuts on the social security system.  

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Why did the Chancellor cut spending?

The OBR’s latest forecast estimated that, without corrective policy action, government revenues would fall £4.1bn short of meeting day-to-day spending needs by 2029/30. The OBR largely attributes this to the rising cost of servicing government debt, driven by higher interest rate expectations, and to lower-than-expected tax receipts. It would put the government in breach of Reeves’ self-imposed day-to-day spending rule, and to avoid this – to ensure the OBR judges she is likelier than not to meet the rule – she has cut £3.6bn from departmental budgets and £4.8bn more from welfare. These changes leave the Chancellor with £9.9bn in ‘headroom’ – the amount by which government revenue is expected to exceed spending in the OBR’s most likely scenario, and a 54% chance of meeting her rule.

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Why didn’t she raise taxes instead? Despite repeated calls from campaigners, backbench MPs and distinguished economists, the Chancellor avoided plugging the hole with tax increases rather than spending cuts. This was probably due to two manifesto commitments: 1. Holding only one fiscal event per year (the Autumn Budget); and 2. Not raising taxes further on ‘working people’. 

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What are the consequences of this decision? Many economists have argued that spending cuts harm the public finances in the long run, as they suppress growth and therefore also the government's ability to grow its tax base. Analysis from the Trades Union Congress found that spending cuts reduced growth in 32 of 32 advanced economies that tried them over the 2010s, which had self-defeating effects on debt sustainability. New analysis from NEF has calculated that the negative impact of the cuts announced in the Spring Statement could wipe out any 'savings' because to "the cost of poverty and public service cuts are likely to spill over and damage growth."

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Short-term bookkeeping vs long-term planning.

The UK’s current fiscal framework has some strong political incentives for the Chancellor to make short-term decisions in order to satisfy her choice of fiscal rules, even if this harms the public finances in the long term. A major problem is tweaking fiscal policy in order to meet a highly uncertain OBR forecast of how much ‘headroom’ there might be in 2029/30.

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The OBR’s forecasts are extremely uncertain and prone to revision. OBR staff interviewed for their recent external review noted that this focus on short-term ‘fiscal headroom’ is “unhelpful, as it threatens to obscure broader assessments of UK fiscal sustainability… this focus on short-term fiscal space has gone hand-in-hand with very limited attention on long-term fiscal sustainability”. The reviewers also note that estimating the effect of the government’s policies on the rate of productivity growth is ‘notoriously hard’ to predict – and yet this is the prime objective of the £100bn additional spending in the Autumn Budget, and a key driver of fiscal sustainability, as growth leads to higher tax revenues for the government. (IPPR and NEF have challenged the OBR for underestimating the effects of this investment on growth.)

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Why is this a “frankly ridiculous position”? Changing fiscal policy in order to meet highly uncertain forecasts of headroom is a ‘frankly ridiculous position’ in the words of Sir Charles Bean, former OBR Budget Responsibility Committee member and deputy governor of the Bank of England: “The OBR forecast embodies all sorts of adjustments, judgments – it’s pretty flaky … I think we want to get away from this idea that we continually have to be neurotically changing taxes and spending to try and control this OBR forecast so that it’s hitting our target.” A new briefing from Invest in Britain gives a similar warning: “Cutting spending to increase short-term ‘headroom’, based on highly uncertain and contested forecasts, will actively harm growth and undermine the government's missions.”

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Was all this really necessary? As the Institute for Government (IfG) has argued, past borrowing forecasts have an average error of £15bn, more than the total value of changes announced yesterday. Given this, IfG suggests that “Reeves would be wiser to weigh up policy options over the summer and respond more strategically at the Budget.” They note this “would not be entirely without precedent” as George Osborne did not take short-term action to correct a projected breach of his debt rule in March 2016. 

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Where do we go from here? 

The government will be hoping that its growth plans start to bear fruit before the OBR’s next Economic and Fiscal Outlook in six months’ time, and that the economic picture looks brighter by the next Budget in Autumn. This could allow the Chancellor to avoid more cuts and quell further dissent from Labour MPs. But with potentially bruising local elections around the corner in May and a difficult Spending Review to navigate in June, Autumn feels like a long way away. 

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And there have already been media reports of tensions between the government and the OBR. According to the Times, “Ministers and senior allies of Sir Keir Starmer have expressed concerns about the accuracy of its forecasts and the constraints it puts on the government’s attempts to galvanise the economy. Some Labour backbenchers are also frustrated with the OBR, with one anonymous MP telling the Guardian that “The parliamentary Labour party needs to be raising its voice about the OBR and the fiscal rules.”

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Global uncertainty is here to stay. The rapidly deteriorating geopolitical situation and global growth outlook can easily damage the UK’s macroeconomic outlook and derail the government's fiscal plans again (e.g. the OBR thinks Trump's tariffs could knock 1% off UK GDP), necessitating further cuts under the current fiscal framework. Without reform, we could be back here again in the Autumn, and at every fiscal event after that unless growth appears... Something has to give: if the PLP won’t stomach further cuts then it's either the Chancellor’s position on tax, or the fiscal framework itself. 

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The fiscal framework is harming debt sustainability. As previous OBR reviews have noted, the greatest risks to the UK’s public finances come from long-term issues like climate change, declining population health and demographic shifts. Mitigating and adapting to these risks requires preventative spending, with costs likely to be greater the longer we leave it to respond. The current fiscal framework, with its cycle of short-term forecasts driving decision-making, is poorly equipped to help us get ahead of these risks, which yesterday’s outlook warns are “putting the public finances on an increasingly unsustainable path.” 

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Time to review the fiscal framework? The most recent external review of the OBR suggests that the organisation ‘should move towards a broader assessment of fiscal sustainability.’ But it is ultimately the government’s responsibility to reform the fiscal framework and move away from the arbitrary and short-term timescales that discourage past, present and future Chancellors from making long-term improvements to the public finances. The fiscal framework is a tool to help the government balance its growth objectives with the need to keep the public finances on a sustainable footing. Given its ongoing failure to serve either purpose, there is a strong case for review. 

Good morning from New Economy Brief. 

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Last week, the Prime Minister announced that the government would scrap NHS England as part of a speech in which he vowed to reform the civil service by abolishing around 130 regulators and replacing some civil service jobs with AI. 

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But what proposals has the government actually put forward for civil service reform? And is successive governments’ obsession with ‘efficiency’ misplaced? This week, we look at the recent history of civil service reform, this government’s plans, and why quango-cutting is not the most effective route to better public services. 

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A never-ending bonfire of the quangos. 

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Starmer’s government is certainly not the first to promise efficiency savings through civil service reform. In the 1979 election campaign, Margaret Thatcher promised a ‘war on waste’, and subsequently cut the number of civil servants from 732,000 to 630,000 during her first four years in office. New Labour then embraced ‘New Public Management’: importing private sector principles and quasi-markets into public services in an effort to improve performance through incentives and give ‘consumers’ greater choice. Then, under the coalition government, the so-called ‘bonfire of the quangos’ resulted in further cuts to various bodies and regulators. Two thirds of the arms-length bodies that existed in 2010 are now gone. Yet the impetus for root-and-branch reform continued under subsequent Conservative governments, with a new flurry of activity from Michael Gove and Dominic Cummings echoing many of the earlier critiques of the civil service.

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Rhetoric or action – what’s actually going on?

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In his speech the Prime Minister admitted that many will feel they’ve heard this all before, and he is keen to give the impression that this time, he means business. And Starmer’s rhetoric on civil service reform certainly feels like it’s been designed to turn heads. From a “tepid bath of managed decline” to a “cottage industry of checkers and blockers”, his description of the “flabby” civil service has surprised many and attracted praise from unlikely suspects. Some even suggest that Starmer’s new tough stance is inspired by Elon Musk’s drastic state-shrinking efforts, with reform plans allegedly dubbed “project chainsaw” (something Number 10 denies). While this arguably represents more of an evolution from the New Labour push for reform than a radical break, it is still significant to see a Labour leader calling so clearly for a state that is not just smarter, but smaller. 

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Where’s the plan? But many argue that for all the fighting talk, there’s still no actual plan. In the words of the Institute for Government (IfG), “there is a gap between the soaring ambition and some of the specifics that Starmer set out”. But what do we know so far? 

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Eradicating duplication. One of the focuses of Starmer’s proposed reforms is ending duplication. This is his main argument for abolishing NHS England, which Health Secretary Wes Streeting says is doing largely the same thing as the Department of Health and Social Care. The government maintains that this merger will be a simple enough operation. However, the IfG isn’t convinced that it will be so straightforward. It argues that ministers’ role in relation to the NHS will have to be redefined, and that a decision will be needed about what happens to the NHS England staff working across seven regional offices. The IfG says that it isn’t yet clear whether those will become part of the civil service or whether some will remain in the NHS as regional authorities. 

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Cutting regulators. As well as bringing arms-length bodies in-house, the government has also vowed to slash regulation in an effort to cut bureaucracy. This includes folding the Payments Systems Regulator into the Financial Conduct Authority and the Regulator for Community Interest Companies into Companies House. The Chancellor has also announced that regulators will face twice-yearly performance reviews, at which they will be judged against targets that have been agreed with the industries they regulate – for example, how quickly they make a decision on planning applications and new licences for businesses and products – all in a bid to boost growth. However, former civil servant and public sector chief executive Martin Stanley argues that most regulators already do their best to avoid burdening the companies they regulate any more than they need to or, in some cases, have roles that have very little or nothing to do with growth (such as Ofsted or the Care Quality Commission). Critically, regulators also have an important role in protecting the public and ensuring safety. Weak regulations contributed to the Grenfell tragedy, with the Grenfell Tower Inquiry’s phase two report concluding that “the government’s deregulatory agenda … dominated the [Housing] department’s thinking to such an extent that even matters affecting the safety of life were ignored, delayed or disregarded.”

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Performance. Another big focus of the reforms is civil servants’ performance. Minister for Intergovernmental Relations Pat McFadden has suggested that better efficiency can be achieved through better performance management of civil servants. However, this has angered trade unions. Dave Penman, General Secretary of the FDA – the union for civil service senior and middle managers – said that “reform has to have substance” and criticised the government for giving unions no advance notice of recent announcements. What’s more, if the government wants to attract the experts in science and data that it will need for a more agile and capable civil service, it will need to address the fact that they can currently earn far more in the private sector. The kind of reforms to the civil service pay framework that would meet this goal – as argued for by the Prospect union – highlight the dangers of tying reform to a cost-cutting agenda.

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The use of AI. Another controversial element of the government’s plans is their emphasis on AI - echoing another Labour advocate for public service reform in suggesting that technology could replace some civil service jobs. Starmer claimed in last week’s speech that greater use of digital methods could save the civil service £45 billion. Check out our recent New Economy Brief on AI, where we explored plans for its use in boosting productivity in the public and private sectors. 

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A false economy. 

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Starmer says he wants the civil service to be more “productive, agile and Mission focused”. In other words, he wants it to do more with less. And in a world where tax rises and public service cuts are both seen as politically undesirable, public service reform is the go-to strategy for governments promising the public more bang for its buck. But according to the IfG, abolishing public bodies is usually “expensive and disruptive”. So is reform really the cost-saving magic bullet the government claims? 

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Outsourcing. One significant civil service cost that has been somewhat left out of the debate is its reliance on management consultancy firms. From 2023 to 2024 alone, public bodies paid private consultants £3.4 billion – 62% more than four years previously. In their book The Big Con, academics Mariana Mazzucato and Rosie Collington argue that the public sector’s reliance on the consulting industry is dangerous for society and political life. They say that what consultants count as “value” may not align with government missions like tackling inequality or fighting climate change. They argue that this leads to ineffective policy and unaccountable governments. 

‍Prevention is better than cure? Multiple studies show that one of the best ways to save the public sector money and deliver effective services is to spend more money earlier on so that worse problems don’t arise later. For example, spending on preventative healthcare can raise billions for the exchequer. This is both through savings from avoiding more drastic (and costly) medical procedures later, and higher tax receipts later down the line as fewer people are kept out of work by health problems. The Office for Budget Responsibility has highlighted ill health as a major risk to the UK economy. And as the IfG points out, the current UK policymaking process gives too little weight to prevention – another example of the perverse effects of the short-term cost-cutting that our fiscal rules encourage. All of this is to say that ‘streamlining’ the civil service may save money in the short term, but it brings a huge risk of costly problems further down the line if not coupled with investment.

Good morning from New Economy Brief,

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It has been an eventful few weeks for geopolitics, with major knock-on impacts on European fiscal policy. With the US appearing to pull back from support not only to Ukraine but from its wider commitment to Europe, European states – including the UK – have been urgently exploring how to increase defence spending. 

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This week’s New Economy Brief explores the various proposals being discussed in Germany and the EU, and compares them to the policy options on offer in the UK.

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The end of the ‘peace dividend’? 

Western Europe has been under the American defence umbrella since the creation of the North Atlantic Treaty Organisation (NATO) just after the Second World War. With the end of the Cold War, this extended to much of Eastern Europe too. Combined with the absence of major regional threats, this allowed countries across the continent to spend less on defence and more on public services like health, education and welfare. This has been referred to as the ‘peace dividend’.

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American presidents have long argued that European NATO partners should increase their defence spending. Trump, however, has stepped this up a notch, with explicit threats that the US military might not come to the aid of other NATO members who don’t spend enough of their GDP on defence. In recent months, he has spoken of a 5% threshold – a level only nine countries worldwide reach, not including the US itself. Combined with moves away from providing military and intelligence support to Ukraine, this appears to mark a wider shift in the geopolitical positioning of the US. This has led to speculation about the end of the Transatlantic Alliance and sparked a wider debate about the future of European security. Many commentators are speculating that this geopolitical instability will cause military spending demands to grow, with a risk that this comes at the expense of other policy priorities.

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How much is needed, (if any)? Bloomberg estimates that if Europe’s major powers want to protect Ukraine without US support and bolster their own defence capabilities, they could have to find over $3 trillion over the next 10 years. In short, a lot; or for comparison, more than the combined value of the current six-year EU budget and special pandemic response fund. Various critics, including Common Wealth’s Khem Rogaly, are sceptical of the benefits of or need for increased military spending. There is a risk that the focus on spending as a proportion of GDP obscures the overall size of military budgets (which have already grown significantly in real terms), what they are spent on, and who stands to benefit from this spending. Wherever you stand on the debate about defence funding, these assumptions are currently making the political weather across Europe, so the next section will dive further into how they are playing out.

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How are other governments responding to the crisis?

Lots of big numbers are floating around. The European Commission is planning to allow member states to draw upon up to €800 billion in loans to increase their defence spending without breaking the EU’s strict fiscal rules, whilst the French government has floated funding extra defence spending by taxing “those with substantial savings” while promising to protect social spending. However, developments in Germany have caused the biggest shock so far… 

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The German Special Defence Fund. The likely incoming German coalition government has proposed an investment package worth nearly €1 trillion, split roughly between defence and infrastructure projects like energy, transport and hospitals. To enable this, the conservatives and social democrats have jointly proposed changing Germany’s notoriously strict constitutional debt brake, i.e. loosening its fiscal rules. These rules previously limited annual government deficits to 0.35% of GDP, but if approved, the changes would exclude any extra defence spending above 1% of GDP from the calculation of national debt.. This means any amount of defence spending would be compatible with the rules. They also want to convene a commission on the debt brake’s long-term future. 

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…It's big.... It's important to understand the scale of this: the package could be around 10-20% of the German economy’s GDP and is “the biggest and fastest fiscal policy shift” since German reunification, in the words of a strategist at Deutsche Bank. News of the deal has been making waves in global financial markets as investors bet on German growth. Europe’s largest economy has stagnated since Covid-19, with the debt brake compounding the damage caused by long-standing fiscal conservatism to leave Germany with a legacy of underinvestment. Relaxing the rules has widespread support; all 41 economists who responded to a survey agreed with easing the debt brake, with one respondent noting that the extra borrowing could push the German economy, and Europe as a whole, towards “high-tech sectors and an effective green transition.” 

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…but it’s about to get even more interesting. A lot of the package still needs to be negotiated, and the clock is ticking. Economic historian Adam Tooze explains that the incoming coalition has less than two weeks to rush through a deal that can win the support of two thirds of the outgoing German parliament, before the new parliament comes in with its blocking minority of the left and the far-right. This can't be done without the support of the Green members of the Bundestag, which could give them a lot of say in the deal's eventual shape.

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Could climate spending also be exempt from fiscal rules? The incoming German chancellor Friedrich Merz justified loosening fiscal rules on national security grounds, but as Tooze asks: “is Russia really a more serious threat to the security of Germans than the global climate crisis or the fact that an alarmingly large share of children in Germany grow up in poverty?” He suggests that the Greens should use their leverage to reshape the deal to put more focus on climate and social priorities. While detail is still emerging, it now looks like the Greens will take exactly this approach. 

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What’s on the table in the UK?

So far, the UK government’s approach has been to trade off spending priorities against each other. Increasing the defence budget – to 2.5% of GDP – will be financed through an equivalent cut to the international aid budget. This has led to the resignation of Anneliese Dodds and growing backbench dissent about the government’s approach. Welfare spending looks next in line to be cut, with widely trailed cuts to disability benefits also provoking internal opposition. Climate spending, via GB Energy or the National Wealth Fund, could be at risk too as the government looks ahead to its goal of spending 3% of GDP on defence. 

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The road ahead looks bumpy. In her resignation letter, Dodds noted: “I also expected we would collectively discuss our fiscal rules and approach to taxation, as other nations are doing. Even 3% [of GDP on defence spending] may only be the start, and it will be impossible to raise the substantial resources needed just through tactical cuts to public spending.” IFS boss Paul Johnson agreed that she was “unequivocally right”, noting that “we are not going to fund higher defence spending through piecemeal cuts elsewhere”. As the government plans departmental spending for the coming years through its first Comprehensive Spending Review, meeting its commitments on defence and public services without increasing tax or revisiting the fiscal framework itself looks increasingly difficult.

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Security for the long term. The OBR has warned that spending demands will keep growing throughout this parliament and beyond, whether on defence or on climate change and health. And just as in Germany, these issues cannot really be separated in the UK, with recent IPPR research showing why climate change presents a major security risk – and still-high energy bills an ever-present reminder that “energy security is national security”. If the government wants to claim the mantle of being “the security party”, then it may need to look to Europe for inspiration, taking the kind of bold steps on either tax or the overall fiscal framework that are being considered in France and Germany. As Sam Freedman put it: “The current crisis contains many dangers but at least it creates scope to do things that seemed impossible before.”   

Good morning from New Economy Brief. 

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Last week the Climate Change Committee (CCC) published its latest statutory report, advising the UK government on the level of its Seventh Carbon Budget – the legally binding limit on the UK’s maximum emissions. 

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This week, we unpack the CCC’s recommendations, the outlook for net zero and why public investment is key to reaching climate change targets. 

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Background.

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The Climate Change Act (2008) requires the government to set carbon budgets, which are milestones on the path to reaching net zero greenhouse gas emissions by 2050. The CCC advises the government on what these carbon budgets should be, and each one sets a limit on emissions for a five-year period. This seventh budget covers the years 2038-2042 and sets a limit on emissions of 535 MtCO2e, including emissions from international aviation and shipping, equating to a reduction of 87% below 1990 levels. This works out to mean the UK's annual average emissions need to stay beneath 107 MtCO2e over this period. For comparison, emissions were around 400 MtCO2e in 2023 alone. MtCO2e stands for ‘million tonnes of carbon dioxide equivalent’ and is a unit of measurement that is used to compare the emissions from various greenhouse gases based upon their global warming potential. 

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The government has until 30 June 2026 to put the seventh carbon budget into law. All previous governments have followed the CCC’s advice. However, this budget is expected to attract more parliamentary scrutiny than usual, given the increasing politicisation of net zero. 

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The path to net zero. 

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The CCC has identified five key ways the UK can keep within the emissions limits set out in this carbon budget: electricity; low-carbon fuels and carbon capture and storage (CCS); nature; engineered removals; and demand. 

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Electricity. Electricity's key role in moving from oil and gas to renewables means that to be on track for net zero in 2040, we'll need twice as much of it as today. To meet this need, the CCC assumes that  offshore wind capacity grows sixfold over this period, that onshore wind doubles, and that solar increases by more than five times. It also assumes that by 2040, three quarters of vehicles will be electric, that half of all homes will have a heat pump, and that electricity will power 61% of industry (up from today’s 26%). 

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Low-carbon fuels. The CCC says low-carbon fuels will be vital for reducing carbon in aviation and shipping – difficult sectors to electrify. It estimates that by 2040, 17% of flights will run on sustainable aviation fuel. However, as the debate around Heathrow’s third runway shows, many are sceptical of low-carbon aviation fuel. Carbon Brief analysis shows that such fuels will only cut the sector’s emissions 0.8% below current levels in 2040, because relentless growth in air travel will wipe out the benefits. The International Energy Agency also expects these fuels to remain more expensive than kerosene for some time. 

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Carbon capture and storage. The CCC “cannot see a route to Net Zero that does not include CCS”. However, it acknowledges that this relies on establishing CO₂ storage and rapid construction of pipelines to connect sites. As we explained in a previous New Economy Brief, many experts are sceptical about CCS. While it may have a role in managing emissions from industrial processes, it depends on unproven and undeveloped technologies and risks becoming an expensive and inefficient excuse to keep burning fossil fuels for power far longer than we need to.

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Nature. Nature-based measures such as planting new woodland and restoring peatlands are also vital for meeting net zero targets, according to the CCC. It estimates that by 2050, nature-based sequestration will offset the remaining emissions from the agriculture and land use sectors. This estimate assumes that by 2040, 16% of the UK will be covered in woodland, up from 13% today. It also assumes the proportion of UK peatlands in natural or rewetted conditions will rise from 26% in 2023 to 55% in 2040. 

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Engineered removals. The CCC also argues that we can't rely only on cutting the carbon we emit. Some emissions will remain, from hard-to-eliminate sources like aviation. To counterbalance them, we need to actively remove carbon from the atmosphere. This is different to carbon capture, which aims to stop CO₂ entering the atmosphere during production rather than remove what’s already there. Once again, this relies on CO₂ transport and storage infrastructure being developed in time to meet these targets. 

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Demand. Finally, the CCC assumes that demand for high-carbon technologies will fall and assumes our meat and dairy consumption keeps falling. It also assumes we start using energy far more efficiently and that by 2040 there will be advances in home insulation as well as in how we deal with commercial, household and food waste. 

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The price is right.

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It is often assumed that one of the biggest barriers to reducing carbon emissions is cost –  whether that’s the cost of building renewable energy infrastructure for the government, or the cost for consumers of switching to greener technologies like EVs and heat pumps. So it is encouraging that the CCC has estimated that "the net costs of Net Zero will be around 0.2% of UK GDP per year on average" – a huge 75% reduction from its previous assessment of £16.1 billion per year in 2020. The reason? “Technology has continued to innovate between the last time we issued advice to the government and today”, according to CCC Chief Executive Emma Pinchbeck. The rising cost of fossil fuels also makes not transitioning much more expensive, even if you ignore the cost of repairing the damage done by climate change. For comparison, the UK has spent £140 billion buying gas since the Russian invasion of Ukraine, while the net cost of achieving full net zero by 2050 is £108 billion. What’s more, the CCC estimates that moving away from fossil fuels will cut average household energy bills to £700 below today’s levels by 2050, with household motoring costs falling a similar amount.

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Who’s contributing? The CCC estimates that the private sector will cover 65-90% of the investment required to achieve net zero. However, research from think tank Common Wealth argues that private capital is “ill-suited to delivering investment of this scale on its own”. In fact, it thinks relying on private investment and private profitability to reach net zero will be slower, more unequal, costlier and less secure than an approach based more on public investment and coordination. 

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The need for public investment. The CCC does acknowledge the importance of public investment too, particularly earlier on in the transition when it can “drive investment in technologies at their early stages and… foster innovation and commercialisation of early-stage technologies”. It estimates that the country (i.e. the total share between public and private sectors) needs to invest an average of £26 billion per year between 2025 and 2050 to achieve the ‘balanced pathway’ that the CCC thinks is the UK's best and easiest route to net zero. While the CCC leaves the government to decide on how to balance public and private costs, the government will need to take on a greater share if it wants the costs and benefits of transition to be spread fairly – for example by helping low-income people with the high upfront costs of low-carbon technologies. Recent moves to drop climate commitments by key players in the financial sector also show the dangers of relying solely on private capital.

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Where does this leave us? The new cost estimates in the report should put paid to any suggestion that the UK has to choose between the economy and the climate. But there is still a case for substantially increasing public investment in the transition. The recognition that climate change presents ‘potentially catastrophic’ risks to the public finances and to our security has led to new thinking on how it should be more closely integrated with the UK’s fiscal framework and the way we think about national security. 

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We must also remember that this is not an issue the UK can solve alone, and that there are international as well as national equity concerns. Many civil society groups have argued that 2050 net zero commitments by developed countries like the UK are insufficient. They argue that we should also make massive financial transfers to developing nations to account for our outsized historical responsibility and the damage that climate change is already doing in the Global South. The UK’s recent cuts to the aid budget are a major setback and highlight the need for a more joined-up approach to climate justice at home and abroad.

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‍Good morning from New Economy Brief.

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We recently explored the government's plans to accelerate the adoption of Artificial Intelligence (AI) across the UK economy and what this could imply for productivity, growth and jobs.  

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This week’s New Economy Brief asks what AI’s environmental implications could be, particularly after a new innovation by a Chinese company (DeepSeek) wiped a trillion dollars off the US stock market by showing how AI could be trained much more efficiently. 

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Turbocharging AI in the UK.

Governments across the world are investing huge amounts of money in infrastructure and R&D to accelerate the development of AI technology and its use in their economies. Last month New Economy Brief explored the UK government’s plans to ‘turbocharge’ AI and accelerate its rollout across the economy to increase productivity. (Read for more on the potential economic implications of an AI-led disruption to jobs, and whether the UK’s regulatory system is prepared for this.) 

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What is compute? The government’s latest plans included a goal to increase the UK’s AI compute capacity twentyfold by 2030, through AI sector growth zones, new data centres and other digital infrastructure. Compute is the processing power needed to train a Large Language Model (such as ChatGPT) on vast quantities of data. It is a mix of hardware, software and other infrastructure – most of the calculations are done on GPU chips in data centres, but these depend in turn on everything from servers, miles of cabling and special cooling equipment to carefully optimised algorithms. Multiplying the UK's compute capacity by 20 is likely to have environmental consequences due to the amount of resources needed to manufacture, train and use AI systems.

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Projections of AI’s resource use.

A recent report from the National Engineering Policy Centre (NEPC) warns that “growing demand for AI and data centres could have far-reaching consequences, such as competition for renewable energy or drinking water sources.” 

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Energy. In some jurisdictions, electricity consumption by AI systems is projected to “outstrip renewable generation capacity” within the next 10 years. Last year the head of the National Grid warned that total energy demand from the UK’s data centres could grow sixfold over this time, which will mean the UK needs to generate more renewable energy to meet the government's Clean Power 2030 target. A recent study found that “If additional renewable capacity cannot be deployed quickly enough, the UK might face a scenario where AI-driven electricity demand increases overall emissions.”

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Water. Data centres withdraw and consume potable water from nearby sources, putting local businesses and communities at risk of water scarcity. Even without the extra demand from new data centres, seven regions in England are already predicted to be severely water stressed by 2030. This includes London, which already has a high concentration of data centres (more than three quarters of the UK total). Water is also consumed to make components needed for compute: an average chip manufacturing facility uses as much water per day as 33,000 US households. Local communities in Chile and Uruguay are resisting new Microsoft and Google data centres being built by Microsoft and Google due to fears of exacerbating water shortages.

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Critical materials. Hardware components needed for compute capacity, such as computer chips, need a variety of rare earth metals. Mining these causes many environmental harms such as habitat and biodiversity loss, as well as leading to conflict, exploitation and devastating impacts on local communities, often in the Global South. Demand for these materials is rising with the complexity of AI technology development, and the UK is particularly bad at recycling – a 2022 study of how much e-waste a group of countries produce ranked it as the second-worst offender. (The UK government is expected to release a Critical Minerals Strategy this year, detailing its plans to shore up supply chains.)

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Is AI likely to become less resource intensive?

Governments have thrown significant financial resources into winning the race to develop better AI models. Decisions like the Trump administration’s $500bn ‘Stargate’ investment are partly bets that demand for compute power will continue to grow exponentially. Expensive computer chips have been the main physical bottleneck for AI development so far, which is why governments are investing so much in digital infrastructure like new data centres – to stay in the competition to be global leaders in an industry they think will define the 21st century. 

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Will ‘DeepSeek’ make AI more efficient? In January the Chinese company DeepSeek launched a new AI large language model and demonstrated how to train AIs that perform like OpenAI’s ChatGPT4 in much more energy- and resource-efficient ways than was previously thought possible. Professor Ben Ansell from the University of Oxford estimates they achieved similar results at “around a thirtieth of the cost… roughly the same as the decline in the cost of light in the UK between 1925 and 2005, as we moved from coal and gas lamps to LED bulbs. Except this happened over a few months.” Before this, Nvidia, a manufacturer of computer chips, had become the world's largest company at one point last year, as investors believed the exponential growth of compute capacity (and thus demand for its computer chips) would need to continue to service growing demand for AI. But DeepSeek's launch suggested that future AI models might need much less of Nvidia’s hardware than had been assumed, wiping $600bn (18%) off its market capitalisation in one day, though it has since recovered some of these losses.

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What about Jevons Paradox? History shows that technological developments which make resource use more efficient tend to go one of two ways. If a new breakthrough lets us do something more cheaply and efficiently, we sometimes do the same amount of it as before while enjoying the fact that it now costs less. But the lower price can also encourage people to consume more. For example, as cars get more fuel-efficient, drivers tend to drive more so their overall petrol consumption goes up – what's known as the Jevons Paradox. Training AI models has previously had very high barriers to production, as only huge tech firms that can afford expensive compute capacity could develop them. On the one hand, after DeepSeek, much lower costs of production could make AI less resource intensive and increase competition in the market from smaller players. But on the other, it could allow more powerful AI models to be developed and applied more widely. This is why the Big Tech moguls are arguing that the huge investments in AI infrastructure were not a mistake. In short, as Macrodose’s James Meadway explains, DeepSeek is unlikely to be the “best environmental news we have had in a long time”. Tech firms are competing to build and disseminate the most powerful AI model, and they will likely continue to need more and more compute capacity to stay in the race.

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What does this mean for the UK government?

When announcing plans to accelerate the rollout of AI systems across the UK economy, Prime Minister Keir Starmer talked about the UK becoming a world leader in AI development and championed using the technology to make public services more productive. Aside from the regulatory issues explored in our previous digest, recent technological developments may have significantly reduced the cost of deploying AI in public services. As Ben Ansell notes, “the worst thing that could happen to this plan is for Labour to get continually snookered by high-paid IT consultants recommending extremely expensive proprietary AI systems, run by Big Tech…If the government can instead use a basically as good set of AI models for, let’s say, three percent of the cost, well why wouldn’t they?”. For a Labour government desperate for rapid productivity growth and under significant spending pressures from multiple directions, AI’s potential benefits could now look even more attractive. 

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Managing AI’s resource intensity. The government is developing an AI Energy Council to discuss balancing supply and demand for energy and compute. But as the NEPC report notes, the sustainability challenge for AI systems includes critical materials and water too. It recommends forcing data centres to report on energy, water use and e-waste recycling to improve our understanding of their environmental impact. Strong regulation will be needed to ensure growing compute capacity and demand for AI doesn’t exacerbate water shortages or come at the expense of either the government’s clean energy mission. 

Good morning from New Economy Brief. 

On Sunday, Germans will go to the polls to elect the 630 members of the Bundestag and decide who will run the next government. The snap election comes after Olaf Scholz’s government was dissolved in December and has brought some uncomfortable dynamics in German politics to the surface. 

Migration and the rise of the far right have dominated media coverage, but as always there is an economic context to all this. This week, we explore the economic backdrop to the German election and the economic policies of the many political parties contesting Sunday’s vote. 

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Shifting allegiances

The upcoming election represents a dramatic reset in German politics. According to YouGov, two in five Germans plan to vote for a different party to the one they supported in 2021. The coalition that took power four years ago – Scholz’s centre-left Social Democrats (SPD), the Greens and the liberal FDP – now faces a dramatic downfall. With the ‘Union’ (a coalition of the centre-right parties CDU and CSU) predicted to win the most seats and CDU leader Friedrich Merz in line to become the new Chancellor, some polls indicate that the SPD may come third behind the hard-right Alternative for Germany (AfD) 

At the same time, left-wing party Die Linke has had a tumultuous few years. It suffered a breakaway in the form of the Sahra Wagenknecht Alliance (BSW), which combines left economics with social conservatism. Until recently, Die Linke appeared at risk of falling out of Parliament entirely, though it has seen a recent surge in support. Nonetheless, the far right will probably be the big winner, with the AfD predicted to take a fifth of the vote and 23% of seats. 

The likeliest outcome is that the centre-right Union will have to form a coalition with the SPD and/or the Greens. This could mean more of the kind of inter-party disagreements over fundamental policy questions that characterised – and eventually brought down – the outgoing three-party coalition government. Another potential source of instability is if a minority ‘blocking coalition’ manages to get over a third of seats (two thirds are needed for any major constitutional reforms). A few politicians have warned that the AfD and BSW could do this, but it now looks unlikely that their combined vote share will get anywhere near a third. 

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‍The economic backdrop

Dramatic shifts in the political landscape often accompany a bleak economic backdrop, and Germany is no different. Not long ago, it was held up as Europe’s  economic success story. But now, the country has been in a technical recession for two years and, since the start of the Covid-19 pandemic, has lost almost a quarter of a million manufacturing jobs. German industry has proved vulnerable to global economic shocks, particularly to the energy crisis sparked by Russia’s invasion of Ukraine. This industrial decline has been a central topic of the election, with CDU leader Merz warning that Germany faces ‘deindustrialisation’, with manufacturing investment moving abroad. 

‍Cost of living. Thanks in large part to the war in Ukraine and falling real wages, Germans have seen living standards fall over recent years – the most severe drop since the Second World War, according to economist Isabella Weber.  She argues that while the AfD’s rise has many causes, it is “impossible to ignore how this unprecedented slump in German living went hand-in-hand with the rising popularity of the far right”. Weber and Tom Krebs have also noted that the slowness of the German government slowness to implement energy price controls in 2022 coincided with growing approval for the AfD. 

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Proposals

‍Investment and fiscal policy. It is estimated that Germany has an investment gap of at least €600 billion over ten years to provide the public infrastructure that’s needed and to hit energy transition targets. In the face of ongoing recession, increasing investment might also seem the obvious growth-boosting choice. However, the constitution has constrained effective public policy. Under Chancellor Angela Merkel, a constitutional ‘debt brake’ was introduced in 2009, forbidding the federal states that make up Germany from taking on new public debt and limiting federal government debt to 0.35% of GDP. 

The current economic and social pressures are leading to calls to reform the fiscal rules. In particular, pressure to increase defence spending is making the idea of reforming the debt brake more palatable even to the centre right, who are likely to win the most votes on Sunday. Options for reform include replacing a hard limit on budget deficits with more general guidelines and exempting public investment from borrowing limits. However, as the debt brake is constitutional, changing it would need the backing of two thirds of the Bundestag. 

‍Tax. With the debt brake so dominant in the election debate, calls for tax reform have taken a back seat. Nevertheless, left-wing party Die Linke has said that billionaire wealth must be tackled and has proposed a sliding scale wealth tax, with a 1% levy on fortunes worth over €1 million, 5% on those higher than €50 million, and 12% above €1 billion. The party has also called for higher inheritance tax and reforms to capital gains tax. (It’s worth noting that Germany did have a wealth tax until it was ruled unlawful in 1995). On the other hand, the CDU is promising large scale tax cuts, which critics say mainly benefit the top 10%.

‍Climate. Climate has been another divisive topic in German politics in recent years: as part of the outgoing ruling coalition, the FDP has consistently pushed for less ambitious green targets. So what will happen to climate policy post election? On the surface, there are reasons to be optimistic. Current poll-leader the CDU has committed to Paris Agreement goals in its manifesto – as have its possible coalition partners the SPD and Greens. 

• But… it all comes back to the debt brake. Despite manifesto commitments, recent history doesn’t suggest that green investment will be high on Friedrich Merz’s to-do list if he becomes Chancellor. In 2023, Germany’s highest court ruled that the government’s green spending plans were unlawful because they were incompatible with the debt brake, following a lawsuit filed by the then-opposition CDU/CSU Union. Though the latter seems increasingly open to debt brake reform, climate is a long way from the top of its list of priorities.
• What about the others? Smaller parties vary in their approach. The Greens have disappointed their younger members by not going far enough with climate policies. The Left has outflanked the Greens by committing to reach net zero by 2040, compared to their current 2045 target.
• The threat from the far right. The climate-sceptic AfD says the country is in the grip of an “eco-dictatorship” and rejects any environmental policies. If the party has a good showing on Sunday its aggressive climate stance will become more prominent in German debates and may become harder to rebuff.

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An uncertain future

Germany’s story feels all too familiar. Industrial decline, falling living standards and hostility towards immigration is a sequence that keeps being repeated across Europe and beyond. Failure to provide adequate support with the rising cost of living has contributed to a rightward shift in Germany just as it did in the US. The complexities of the German electoral system make many election outcomes possible. What is already clear, though, is that the growing frailty of Germany’s economic model and the AfD’s rise in recent years have had a hugely destabilising effect on German politics. Whatever the result on Sunday, this instability looks set to continue. 

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Good morning from New Economy Brief. 

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4.3 million children in the UK are living in poverty, according to the Joseph Rowntree Foundation (JRF). That equates to 30% of all UK children – nine in each classroom. 

The government has promised to publish a child poverty strategy this spring, with ministers saying that tackling the problem is “both a moral imperative and crucial to building a stronger society and economy”.

The Prime Minister has also promised to deliver “higher living standards in every part of the United Kingdom” through economic growth. But JRF’s analysis suggests that economic growth by itself will not be enough to reduce child poverty. 

So what will? This week we look at why child poverty is rising in the UK, and what can be done to fix it.  

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The state of child poverty in the UK

Child poverty has been increasing in the UK in recent years, and children have consistently experienced higher poverty rates than pensioners and working-age adults. Poverty levels for children in single-parent families are particularly high (44%). In fact, a third of all children in poverty live with a single parent. 90% of single-parent households are headed by women, as a new report on the links between child poverty and women’s poverty from the Women’s Budget Group (WBG) points out. 

Larger families – those with three or more children – have a higher poverty rate than the average too, at 45%. Children living in Bangladeshi, Pakistani and Black African households are also much more likely to be growing up in poverty (67%, 61% and 49% respectively). 

The level of child poverty varies between different UK nations and regions. 30% of children in England are living in poverty; in Wales it’s 29%. It’s noticeably lower in Scotland (24%) and Northern Ireland (23%). The End Child Poverty coalition has calculated that two thirds of parliamentary constituencies have a child poverty rate of 25% or higher. The picture is especially worrying in the North West of England, where 90% of constituencies have breached this threshold. 

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‍What’s behind the increase?

Cuts to social security. Last year Mel Stride, the Conservative Secretary of State for Work and Pensions, pointed to high inflation as one of the main reasons behind rising child poverty.

Stride did not, however, mention the impact of the Conservatives' changes to the social security system, which many charities, campaigners and think tanks argue have been a key driver of the increase in child poverty. Analysis from the Institute for Fiscal Studies (IFS) shows that overall, benefits now provide low-income households with children less support than they did in 2010. Indeed, benefits entitlements for the 7.6 million households in the UK with children have reduced by £2,200 a year on average. Meanwhile the Child Poverty Action Group (CPAG) calculates that “the government now spends £50 billion a year less on social security than it would have spent if cuts, freezes and other changes since 2010 had not happened.”

The two-child limit. Some policies have had a particularly significant effect. In April 2017 the “two-child limit” was introduced, whereby households in receipt of Universal Credit or Child Tax Credits can only claim support for up to two children. Research by the Resolution Foundation found that as of April 2024, 38% of all large families (those with at least three children) are affected by the policy – around 450,000 families and 1.6 million children. These families “are losing up to around £3,500 a year in support for their third and each subsequent child.” And while 41% of large families were in poverty in 2016/17 (before the two-child limit was introduced), this is predicted to reach 51% by 2028/29. It is this rise in child poverty among large families that is the main driver of the increase overall. 

Housing costs. The cost of housing is another important driver of child poverty, as new research from the Institute for Public Policy Research (IPPR) makes clear. While 3.2 million children live in poverty before housing costs are taken into account, that figure rises to 4.3 million after these are included in the calculation. The picture is particularly stark for children who live in the private rented sector, where the child poverty rate almost doubles once housing costs are factored in. In large part this has been down to the sharp increase in private rents in recent years alongside repeated cuts and freezes to Local Housing Allowance (LHA) - which sets the rate of housing benefit for private renters. This means the link between rents and the support low-income households receive to pay them has been broken.

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Tackling child poverty effectively

So how can the rise of child poverty be halted and reversed? Experts and campaigners agree that ending the two-child limit is a good place for the government to start. 

Ending the two-child limit. CPAG estimates doing this would lift 300,000 children out of poverty straight away. The IFS has calculated that reversing the policy would cost around £2.5 billion a year. But this cost is significantly less than the savings generated by scrapping it, according to the New Economics Foundation (NEF). Its analysis suggests that doing away with the two-child limit “would reduce the economic cost of child poverty by £3.2 billion a year by the end of the current parliament”. Save the Children has gone further, calling on the government to introduce a ‘child lock’ to ensure that children’s social security payments increase by whichever is higher of earnings or inflation. 

‍Addressing the housing crisis. In order to provide low-income private renters with more support, both JRF and IPPR recommend unfreezing LHA and relinking it to the actual cost of local rents. The Renters’ Rights Bill, currently progressing through Parliament, should give private tenants greater security. However, groups representing private renters, such as the Renters’ Reform Coalition, have been calling for the government to go further on affordability, arguing that the bill should include stronger mechanisms for limiting rent increases. 

Supporting parents. The Women’s Budget Group has a host of recommendations for lifting children out of poverty by supporting mothers. These include ensuring that childcare is high-quality, affordable and accessible; improving transport; providing better training opportunities; and making changes to social security payments so mothers aren’t discouraged from working more hours or taking better jobs.

Scotland’s example. The UK government could look to Scotland for ideas. One of the reasons why child poverty is lower there is that the Holyrood government introduced the Scottish Child Payment in 2021. Eligible children now receive an extra £26.70 a week, and there is no limit to the number of children within a qualifying family who can receive the payment. This means that it is still paid for a child affected by the two-child limit. 

‍Structural change. Ultimately though, more systemic reform of the social security system is needed. JRF and the Trussell Trust have called for the UK government to implement an 'essentials guarantee' to make sure the basic rate of Universal Credit actually covers life’s essentials. NEF’s plan is for a Living Income: an income floor which no-one can fall below. 

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‍All eyes on the government

Details of what this spring’s child poverty strategy will include are still light, although a decision on the future of the two-child limit is likely to feature. This has already been politically controversial: Ministers have resisted pressure to abolish it since the general election, with seven Labour MPs suspended in July 2024 for voting for an opposition amendment to end the policy. The whip has now been restored to four of the rebels, but many Labour MPs remain deeply unhappy with the two-child limit.

Former Labour Prime Minister Gordon Brown has called rising child poverty “a stain on the soul of our country”. It also does enormous, long-lasting and ever-growing economic and social damage. The longer we wait to address the problem, the larger these costs will grow. 

The government itself has acknowledged that “ensuring millions of children and young people are not held back is also crucial to economic growth.” Yet so far, the Government’s growth mission has not focused on tackling child poverty. For some years there has been widespread agreement that scrapping the two-child limit is an effective and economical way to start addressing the problem. It is hard to see how the government will drive down child poverty if the policy is left in place.

Good morning from New Economy Brief.

US tariffs on Canada, Mexico and China were due to come into effect on Tuesday following an executive order from the President. Following last-minute negotiations, the threatened 25% tariffs on the USA’s closest neighbours have been suspended for 30 days. Meanwhile, a 10% levy on Chinese imports is still planned, with China announcing retaliatory tariffs of between 10% and 15% on US liquefied natural gas, coal, crude oil and farm equipment.

This week, we explore the potential international economic impacts of Trump’s tariffs, the possible consequences for the UK, and the need for a progressive conversation on trade protections. 

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‍Impact on the US 

Tariffs play an important role in Trump’s protectionist and low tax agenda. Along with claiming that they will curb undocumented migration and the flow of drugs into the US, he has argued that tariffs can raise the income needed to make tax cuts. He has even floated the idea that tariffs could replace federal income tax altogether (many experts dispute this, with some estimating that a 70% tariff across the board would be needed). 

However Lori Wallach, Director of Rethink Trade at the American Economic Liberties Project, argues that tariffs will do little to “rebuild American manufacturing” or raise wages unless they are paired with policies that boost investment and stop price-gouging. Tariffs will also likely raise prices for US consumers, costing middle-income American families an estimated $2,500 to $3,900 per year and hitting the lowest earners hardest. Governments all over the world have been ousted for failing to tackle the cost of living; time will tell if US voters continue the pattern and punish Trump. 

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Impact on the UK

It is still unclear whether Donald Trump will impose tariffs on the UK. Speaking to the BBC on Sunday he said that “the UK is way out of line but I’m sure that one… I think that one can be worked out.” But tariffs on our trading partners could still hurt. For example, the National Institute of Economic and Social Research (NIESR) estimates that if the 25% tariffs on Mexico and Canada go ahead, they could cut UK GDP growth by 0.1 percentage points in 2025 by reducing the purchasing power of countries the UK exports to. In its 2022 risk assessment, the Office for Budget Responsibility (OBR) calculated that an all-out global trade war could lower UK GDP by as much as 5%. And this is before we consider other Trump policies that could impact the global – and UK – economy – such as how the President’s approach to deregulating oil and gas extraction is likely to slow the green transition and exacerbate the economic consequences of climate change. 

‍The danger of a deal. Despite these knock-on effects, avoiding direct tariffs will be  considered a win for the UK. The Prime Minister has said that he is pushing for a “strong trading relationship” with the US. And Trump’s tone towards the UK has been noticeably softer than his rhetoric towards the European Union – not to mention Canada, China and Mexico. But campaigners warn that a trade deal with the Trump administration would harm British food standards, public services and our ability to regulate the Big Tech giants, with a former White House negotiator saying last month that food standards and the NHS would likely be “on the list” in negotiations. 

Difficult choices ahead? With rather awkward timing, Trump is threatening the EU with tariffs just as Keir Starmer is attempting to reset the UK's relationship with it. The Prime Minister has said that the UK is “not choosing between the US and the EU”, but how long Starmer can walk this tightrope remains to be seen. 

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Trade as a tool of power 

Clearly, Trump’s tariffs are being used to extract concessions from other countries. His threats make it easy to view tariffs as an inherently regressive policy. However, as Global Justice Now’s Nick Dearden argues, tariffs are “neither the work of the devil nor of the angels”. Tariffs are an important tool for governments to protect domestic industries and jobs, and as Dearden argues, ‘free trade’ and the insistence that countries should avoid tariffs has in many cases served Western imperialism and disempowered Global South countries. One notorious example of this is the impact of trade liberalisation policies on rice production in Haiti, where the IMF pressured the government to slash tariffs on imports, resulting in Haitian rice farming being wiped out. 

‍South-South trade and a ‘multipolar’ order. US isolationism could motivate increased South-South trade as Global South countries re-orientate themselves away from the dollar and from reliance on raw material exports to richer, industrialised nations. This would align with Global South civil society calls for reduced economic dependence on countries like the US. Macrodose has more on the trend towards a ‘multipolar’ world. What is clear is that international economic uncertainty is unlikely to disappear any time soon, and Trump’s actions may even accelerate the end of the unipolar order in which the US dominates the global economy.

Good morning from New Economy Brief.

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Last week world leaders gathered at the World Economic Forum (WEF) in Davos to discuss global issues including geopolitical shocks, economic growth and living standards, and the just transition. As usual, wealthy investors and businesspeople were there too, rubbing shoulders with the politicians. So it’s no surprise that once again, wealth inequality was a hot topic in and around Davos this year – especially given the proximity of tech oligarchs to US President Donald Trump. 

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This week’s New Economy Brief looks at the state of extreme wealth, its consequences on democracy and what governments can do about it. 

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The state of extreme wealth.

The ultra-rich have been accumulating wealth more and more quickly in recent years. According to Oxfam, their wealth has risen three times faster in 2024 than in 2023 (creating almost four new billionaires per week), while the number of people living in poverty has barely changed since 1990. Oxfam found that, on current trends, the world could have its first trillionaire this decade, while poverty won’t be eradicated for another 229 years.

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How much is too much? A new report developed by the New Economics Foundation in partnership with Patriotic Millionaires International explores whether there is a “point beyond which the concentration of global wealth, such as income-generating land, properties, and financial assets, in the hands of relatively few people, is harmful – to individuals, to society, and to the environment.” 

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The researchers interviewed a cohort of policymakers and millionaires, who explored initial insights into the perspectives of key stakeholders in the establishment of a line. A third of the millionaires interviewed for the report thought such a line should be drawn at $10 million per person. The report follows an earlier report, Risks of Extreme Wealth, that identified seven ‘domains’ where extreme wealth poses a risk, ranging from democracy and the economy to the media and the environment.

“Extreme wealth is extreme control…” Further research from Patriotic Millionaires UK was also published last week: a Survation poll of nearly 3,000 millionaires from G20 countries. Nearly 70% of them believe that extreme wealth buys undue and disproportionate power, posing a threat to their countries' democratic stability that politicians lack the will to tackle. (Closer to home, the picture is similar – new Fairness Foundation polling found that nearly two thirds of Britons say the very rich have too much influence on politics.)

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“...We must draw the line”.  This year at Davos, a group of 370 of millionaires and billionaires from 22 countries signed an open letter to world leaders warning that extreme wealth is becoming so concentrated that the super rich have undue control over democracy: “A handful of extremely wealthy human beings control the media, which cajoles, persuades, and sometimes misinforms; they unduly influence our legal systems, transforming justice into injustice; and are helping manage our democracies into decline.”

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What can be done about it in the UK?

So the problem is well understood, but what about the solution? The signatories of the open letter mentioned above point to tax as the most politically feasible way to address extreme wealth inequality: “We have to draw the line and call time on extreme wealth. And you have to deliver that for all of us. Start with the simplest solution: tax us, the super rich.” (A reminder that 60% of billionaire wealth comes from either inheritance, cronyism or monopoly power; it is “taken, not earned”, in Oxfam’s words.) But few of the 3,000 millionaires who took part in the survey have much faith that political leaders are up to the task of tackling extreme wealth.

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Tax wealth more. Tax Justice UK is campaigning for wealth taxes on the super rich, including a 2% tax on UK fortunes above £10 million to raise £24 billion a year for public services, as well as an end to British tax havens in places like the British Virgin Islands and Cayman Islands. The Fairness Foundation has a comprehensive evidence base on the harm extreme wealth does in the UK, as well as evidence on public attitudes towards both the problem and policy solutions. Their set of short briefings explains how wealth inequality obstructs each of the government’s missions - for instance, undermining productivity and growth by suppressing investment.

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What about in the international arena?

The geopolitical impact of Trump’s re-election has complicated international tax processes. One of the (many) Presidential Memoranda Trump issued last week confirmed that the US would not be participating in the OECD’s long-negotiated global minimum tax rate proposal. He outlined plans to require countries to essentially cede their tax sovereignty over multinationals operating within their borders – or face threats of sanctions for any measure that the US views as ‘extraterritorial’ or ‘disproportionately’ affecting US companies. 

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And the number of billionaire leaders of US multinationals attending Trump’s inauguration didn't go unnoticed. The OECD estimated the global minimum corporation tax would increase annual tax revenues by 9%, raising $220bn from multinational corporations worldwide - which now looks under threat. 

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Is the UN Tax Convention the best hope? At the end of 2024 the UN General Assembly passed a historic vote where countries overwhelmingly decided to begin a formal negotiation of a UN framework convention on international tax cooperation. For the next two and a half years, countries will work together to set new rules and standards relating to taxation of both corporations and ‘high-net worth individuals’. 

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Tax Justice Network’s (TJN) Alex Cobham called for countries like the UK, EU member states and others to “join together and work to defend each country’s tax sovereignty, by committing to ambitious and inclusive progress in the negotiations of the UN Framework Convention on International Tax Cooperation which begin in just two weeks.” TJN points out that the UK has so far acted as a ‘blocker country’ along with 8 others including the US, Israel and Argentina. So will the UK cooperate with others to strengthen international tax rules on the super rich and start to turn the tide on extreme wealth inequality?  We’ll be keeping an eye out. 

Good morning from New Economy Brief.

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As part of its plans to improve productivity in both the public and private sectors the UK government has revealed more about how it proposes to accelerate the adoption of Artificial Intelligence (AI) technology across the economy. 

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As well as looking at these plans in more detail, this week’s New Economy Brief explores forecasts of the potential impact of AI on the economy and whether the government is ready for the regulatory challenges it will bring, and the threat it could pose to jobs.

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The AI Opportunities Action Plan.

Last week Prime Minister Keir Starmer unveiled the government’s plan to “turbocharge growth and boost living standards” by “mainlining AI into the nation's veins”. He also confirmed that the government would adopt 50 recommendations from the recently published AI Opportunities Action Plan, which was led by entrepreneur Matt Clifford. Clifford was appointed as the Prime Minister’s AI Opportunities Adviser earlier this month.

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What’s in the plan? The plan aims to accelerate the adoption of AI in both the public and private sectors to boost productivity, through a variety of measures including: 

• creating new “AI Growth Zones” to speed up planning permission and give companies the energy connections and infrastructure they need to use AI; 
• increasing public compute capacity (read: processing power) twentyfold; 
• creating a new National Data Library to “safely and securely unlock the value of public data and support AI development”; 
• developing new immigration schemes to attract skilled workers; and 
• rapidly piloting applications of AI across the public sector, and encouraging businesses to do the same.

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Boosting productivity. The government has set its sights on raising the UK’s dismal productivity growth rate in both public and private sectors. According to the Central Digital and Data Office (CDDO) almost a third of tasks in the civil service could be automated to free up time for other work. Meanwhile, the Tony Blair Institute (TBI) has argued that embracing AI could save up to £40 billion in public sector productivity gains, by helping workers “accelerate processing of planning applications or benefits claims, communicate with citizens better through chatbots, collect and process information for transactional services, expedite research and support tasks, manage diaries, draft notes and much, much more”. The Ada Lovelace Institute, however, warns that we simply don’t know enough about AI use in the public sector – because it’s poorly tracked and evaluated – to make firm predictions about the scale of productivity benefits, and that rolling out AI across government and public services should not be seen as a ‘quick win’.

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What are the likely economic impacts?

As with many new technologies, economic forecasts of the effects of AI are uncertain and vary widely. 

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The government points to IMF research which calculates that “if AI is fully embraced”, productivity could increase by 1.5% a year – amounting to £47 billion each year over the next decade. The TBI estimates that more adoption of AI across the economy could raise UK national income by anything between 5% and 14% by 2050, depending on how this is done, with 11% being the most likely outcome – equivalent to around £300 billion a year. In the nearer term, the TBI estimates are more modest, predicting GDP is between 0.1% and 1% higher over the next five years, and 0.6% - 6% higher  by 2035. 

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On the other hand, Imogen Parker from the Ada Lovelace Institute warns us to take many predictions about AI’s effects with a pinch of salt. This cautious messaging is echoed by some in the business community, with Goldman Sachs’ Head of Global Equity Research pointing out that ‘eighteen months after the introduction of generative AI to the world, not one truly transformative—let alone cost-effective—application has been found.’

Who are the winners and losers? The Big Tech sector is infamous for its concentration – a small number of powerful companies own most of the data and computing infrastructure that modern AI depends on, and are likely to realise huge financial gains if these technologies are rolled out across the public sector. These companies are also notoriously untransparent about how the technology works, which is a problem for regulators – more on this below. Interestingly, Sam Altman, the CEO of OpenAI (the company that launched ChatGPT), warned that the AI “revolution will create phenomenal wealth” and “price many kinds of labour…toward zero”, calling for higher taxation of assets in response. Many organisations adopting this labour-saving technology might bank any increased productivity by cutting staff or pocketing the extra profits without raising wages, although the TUC has published proposals to give workers more of a say in how AI is used at work. There is also an important question of whether increased use across the public sector improves productivity at the expense of the quality of service provision, as there are risks to service users if mistakes are made by automated systems.

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What about jobs? 

The Institute for Public Policy Research (IPPR) also warned that there are possibilities for huge job disruption in the future, depending on how the government manages the transition. It found that back office, entry level and part-time jobs are most exposed to automation, with women, young people and those on lower wages significantly more at risk of being replaced. IPPR modelled different scenarios ranging from ‘full displacement’ (nearly 8 million jobs lost and no GDP gains), to ‘full augmentation’, where all jobs at risk from AI are augmented to adapt to it, so there are no job losses and GDP grows by 13% (£306 billion a year).

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Limiting disruption. IPPR’s report offers a variety of helpful suggestions on how more jobs can be augmented rather than lost as AI is adopted more widely in the workplace. For instance, the government could offer tax incentives or subsidies to encourage job augmentation over displacement, or implement a more active labour market policy to promote job creation in areas more resilient to automation, including under-resourced sectors such as social care or mental health services, as well as increasing demand for these jobs through higher wages. 

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The role of regulators. 

The government has adopted many of the AI Opportunities Action Plan’s recommendations  to strengthen regulatory bodies so they can “mitigate AI risks and drive growth”. But the Ada Lovelace Institute warned the government to be “cautious” about giving regulators formal growth goals. “Regulators’ primary role should be to protect the public,” argued its Director Gaia Marcus, adding that “just as the Government is investing heavily in realising the opportunities presented by AI, it must also invest in responding to AI’s negative impacts now and in the future.” (IPPR’s Carsten Jung was interviewed for Joe making a similar point – governments should be “super vigilant” with regulation and “aren’t worried enough about the job impacts”.) 

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Ringfencing public service provision? Imogen Parker’s response to the government’s announcement reminds us that whether the issue is self-driving cars, police use of facial recognition technology or chatbots giving out medical advice, AI adoption can only succeed if the public trust that it will be used safely. IPPR also recommends ringfencing certain tasks and occupations to ensure “continued human involvement and work augmentation”, such as those involving interpersonal relationships and trust, ethical sensitivity and moral judgements, originality and artistic expression, as well as high-stakes decision-making. This should encourage “more careful thinking about where human involvement is desirable and for what reasons – rather than rushing to automate all things that are technically possible to automate”. 

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Shaping innovation in the public interest. Many economists believe that strong regulation is needed to ensure disruptive technologies like AI develop in the public interest. Mariana Mazzucato and co-authors argue that governments looking to prioritise innovation in AI should  look at improving not just the rate of technological development, but also its the direction. They call for the government to shape AI markets actively through competition policy to avoid “value-extractive economic futures that will lead to important socio-economic harms, such as the concentration of market power and negative effects on labour markets”. They also suggest other measures, such as through innovation policy – for instance, by using government procurement to create demand for R&D in uses of AI that benefit the public. (For more, check out Common Wealth’s briefings on corporate governance in AI, democratising data ownership, and more.)

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Managing the transition safely

The government is keen to demonstrate that it is delivering its plans and making progress on achieving its missions (like growth in living standards and shorter NHS waiting lists). AI may help do that, but many of the benefits tech companies are promising have yet to be proven – and will likely bring serious risks that need to be managed carefully. It is also important to consider the UK is positioning itself in a global race for developing AI technology - one of US President Trump’s first actions was to invest $500bn in AI infrastructure, in an announcement surrounded by the CEO’s of some of the world's most powerful tech companies. Former IMF Chief Economist Olivier Blanchard commented that: “We may have reached AI singularity. Not the one you think about. But political singularity in which AI players control the government and eliminate all AI regulation.” In this context it is important to ask whether it is worth rushing the development of AI in the UK before stronger regulation and oversight have been implemented.

Good afternoon 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.