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.

Good morning from New Economy Brief.

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

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

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What is the New Popular Front?

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

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What does it want to do?

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

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

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

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

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

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

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

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What can other governments learn?

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

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

Good morning from New Economy Brief.

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

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

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

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

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

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‍What has the G20 agreed?

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

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Where do the different countries stand?

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

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So what's next?

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

Good morning from New Economy Brief.

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

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

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What are missions?

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

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

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How do Labour’s plans hold up?

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

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

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

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

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

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What can we expect from mission-driven government?

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

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Good morning from New Economy Brief.

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

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

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The political history of the OBR.

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

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

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

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

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

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

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

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Modernising the OBR.

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

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

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

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

‍Good morning from New Economy Brief.

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

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

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

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The purpose and design of the National Wealth Fund.

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

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

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

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

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

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

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

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

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Maximising public value through conditionalities: carrots and sticks

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

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

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

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

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Things to look out for.

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

Good morning from New Economy Brief.

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

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

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The Conservatives’ economic legacy.

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

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

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The (absolute) state of public services. 

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

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

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Funding the decade of national renewal?

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

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

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

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Where could we see action?

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

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

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

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

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

Good morning from New Economy Brief.

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

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

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The Truss crossover

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

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

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Precarity and public services

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

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

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

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Great expectations

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

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The bigger picture

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

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Good morning from New Economy Brief.

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

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

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

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

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The economic and political case for monetary policy reform.

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

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

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

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Anti-inflationary policy for an unstable global economy.

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

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

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Reforming the UK’s monetary policy regime.

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

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

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

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

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

Good morning from New Economy Brief. 

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

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

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

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The state of poverty in the UK.

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

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

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The policy landscape. 

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

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

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

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

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Will Labour learn from its legacy? 

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

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

Good morning from New Economy Brief.

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

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

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

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Liberal Democrats: “For a Fair Deal.”

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

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

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

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

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

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Green Party: “Real Hope, Real Change.”

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

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

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

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

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

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

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

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

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Reform: “Our economy needs reform.”

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

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

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

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

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

Good morning from New Economy Brief.

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

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

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

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Growth, growth, growth.

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

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

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Investment.

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

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Planning reform.

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

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Devolution

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

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

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Workers' rights

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

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What are the challenges?

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

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

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Is this really a ‘change’ manifesto? 

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

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Good morning from New Economy Brief.

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

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

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It's all about tax.

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

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

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Other key announcements.‍

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

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

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

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

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Paying for it.

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

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

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Who's it for?

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

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Will it make a difference?

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

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Good afternoon from New Economy Brief.

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

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

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How has tax changed since 2010?

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

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

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

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How do parties propose to raise revenue?

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

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

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

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

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

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

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

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The elephant in the room: council tax

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

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

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

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

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We are currently heading for austerity-era cuts. 

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

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

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


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Something's got to give. 

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

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

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Good morning from New Economy Brief.

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

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

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

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

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What is Great British Energy?

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

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

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

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

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


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

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How have other parties reacted?

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

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

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

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It’s all about security.

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

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Good morning from New Economy Brief.

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

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

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

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

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It’s the economy, stupid! 

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

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

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

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

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The Conservative approach: ‘stick to the plan’.

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

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

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

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

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Labour’s approach: ‘securonomics’.

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

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

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

Good evening from New Economy Brief.

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

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

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What actually is inflation?

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

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

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

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

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

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We’re all in this together?

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

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

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

Good morning from New Economy Brief.

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

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

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The diagnosis

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

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

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

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

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

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‍Recommendations

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

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

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

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Consensus and conflict?

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

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Contested legacy

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

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Good morning from New Economy Brief.

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

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

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New deal for workers under threat?

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

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

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The economic case for stronger trade unions.

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

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Investment and productivity. 

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

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

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

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Wages and inequality. 

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

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

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

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Stronger workers’ rights = a stronger economy.

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

Good morning from New Economy Brief.

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

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

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How big is the problem?

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

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

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

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

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

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What does this mean for policy makers?

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

Good morning from New Economy Brief.

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

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

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What is QE?

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

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

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

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What is QT?

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

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

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

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What could the government do to mitigate the losses?

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

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

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

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

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

Good morning from New Economy Brief.

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

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Why are farmers protesting?

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

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

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

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Who owns the food market?

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

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

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Climate and the future of farming

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

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What are the solutions?

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

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Good morning from New Economy Brief.

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

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

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Why are countries in debt crisis? 

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

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

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

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Structural causes of the debt trap. 

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

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

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

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The ‘common framework’ isn’t working. 

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

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

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

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Time for a new debt cancellation campaign. 

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

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

Good morning from New Economy Brief.

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

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

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A paper promise?

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

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

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

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

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Childcare and the economy.

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

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

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

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

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Good morning from New Economy Brief.

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

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

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

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

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What is the green skills gap? 

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

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

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So what is driving the skills gap? 

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

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

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

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Enter the National Skilling Wage.

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

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

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

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Coordination is the key. 

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

Good morning from New Economy Brief. 

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

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

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The model.

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

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

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

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Case studies.

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

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The impact.

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

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

Good morning from New Economy Brief.

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

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

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

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

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

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

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

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

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There is evidence of ‘greedflation’ in the UK. 

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

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

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

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The leap across the Atlantic.

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

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

Good morning from New Economy Brief. 

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

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

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

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

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

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

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

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

Good morning from New Economy Brief.

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

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

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Misunderstanding the ‘mini-budget’.

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

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What is the bond market?

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

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

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

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How the bond market reacts to government policy.

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

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

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

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Clarifying the causes of the bond market crisis.

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

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

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

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

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Learning from mistakes. 

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

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

Good morning from New Economy Brief.

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

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Here we go again. 

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

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

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

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

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Restricted headroom. 

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

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

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

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

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

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

Good morning from New Economy Brief,

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

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

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

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

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

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

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

Good morning from New Economy Brief. 

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

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

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

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

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

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

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

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

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

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

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

Good morning from New Economy Brief. 

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

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

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

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

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

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

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

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

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

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

Good morning from New Economy Brief.

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

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

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

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

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

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

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