Good morning from New Economy Brief.

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

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

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The diagnosis

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

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

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

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

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

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‍Recommendations

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

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

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

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Consensus and conflict?

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

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Contested legacy

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

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Good morning from New Economy Brief.

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

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

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New deal for workers under threat?

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

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

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The economic case for stronger trade unions.

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

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Investment and productivity. 

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

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

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

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Wages and inequality. 

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

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

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

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Stronger workers’ rights = a stronger economy.

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

Good morning from New Economy Brief.

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

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

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How big is the problem?

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

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

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

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

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

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What does this mean for policy makers?

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

Good morning from New Economy Brief.

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

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

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What is QE?

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

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

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

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What is QT?

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

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

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

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What could the government do to mitigate the losses?

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

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

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

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

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

Good morning from New Economy Brief.

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

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Why are farmers protesting?

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

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

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

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Who owns the food market?

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

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

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Climate and the future of farming

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

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What are the solutions?

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

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Good morning from New Economy Brief.

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

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

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Why are countries in debt crisis? 

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

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

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

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Structural causes of the debt trap. 

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

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

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

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The ‘common framework’ isn’t working. 

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

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

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

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Time for a new debt cancellation campaign. 

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

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

Good morning from New Economy Brief.

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

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

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A paper promise?

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

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

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

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

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Childcare and the economy.

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

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

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

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

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Good morning from New Economy Brief.

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

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

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

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

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What is the green skills gap? 

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

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

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So what is driving the skills gap? 

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

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

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

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Enter the National Skilling Wage.

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

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

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

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Coordination is the key. 

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

Good morning from New Economy Brief. 

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

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

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The model.

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

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

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

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Case studies.

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

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The impact.

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

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

Good morning from New Economy Brief.

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

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

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

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

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

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

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

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

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There is evidence of ‘greedflation’ in the UK. 

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

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

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

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The leap across the Atlantic.

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

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

Good morning from New Economy Brief. 

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

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

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

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

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

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

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

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

Good morning from New Economy Brief.

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

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

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Misunderstanding the ‘mini-budget’.

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

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What is the bond market?

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

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

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

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How the bond market reacts to government policy.

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

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

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

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Clarifying the causes of the bond market crisis.

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

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

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

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

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Learning from mistakes. 

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

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

Good morning from New Economy Brief.

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

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Here we go again. 

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

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

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

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

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Restricted headroom. 

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

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

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

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

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

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

Good morning from New Economy Brief,

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

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

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

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

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

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

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

Good morning from New Economy Brief. 

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

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

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

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

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

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

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

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

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

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

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

Good morning from New Economy Brief. 

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

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

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

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

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

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

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

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

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

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

Good morning from New Economy Brief.

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

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

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

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

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

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

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

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

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

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

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

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

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

Good morning from New Economy Brief.

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

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

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The scale of the problem.

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

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

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

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A fire sale of council assets.

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

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

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

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Repairing local economies and local government finances.

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

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

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

Happy New Year from New Economy Brief.

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

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

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The global minimum corporation tax. 

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

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

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The rich world’s solution to curtail tax havens. 

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

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

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The influence of tax havens and corporate lobbyists.

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

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

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Towards a more inclusive global corporate tax framework. 

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

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

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

Good morning from New Economy Brief.

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

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

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The final agreement. 

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

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

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

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Who is going to pay for the energy transition?

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

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

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

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

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

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

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Climate politics and the next general election.

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

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

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

Good morning from New Economy Brief. 

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

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

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

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

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

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

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

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

Good morning from New Economy Brief.

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

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

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Pulling the growth lever. 

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

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

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What is ‘full expensing’? 

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

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

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

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

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

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

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Alternative ways to increase investment.

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

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

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

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

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A policy without a strategy?

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

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

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

Good morning from New Economy Brief.

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

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

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

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‘Headroom’ and political choices. 

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

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

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

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‘Austerity by stealth’ to pay for tax cuts.

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

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

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

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

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

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The great squeeze on living standards

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

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

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

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

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Politics trumps economics?

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

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

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

Good morning from New Economy Brief.

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

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

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Public attitudes on economics and the cost of living.

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

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

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

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

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Cost of living responses.

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

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

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

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

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Longer term thinking for fiscal reform.

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

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

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

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Wider lessons.

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

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

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

Good morning from New Economy Brief.

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

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

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

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

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

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

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

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

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

Good morning from New Economy Brief.

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

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

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

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

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

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

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Why is this important?

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

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

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

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Relevance for UK politics. 

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

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

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

Good morning from New Economy Brief.

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

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

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

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High rates, poverty and inequality. 

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

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

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Low interest rates, poverty and inequality. 

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

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

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Looking beyond monetary policy for solutions.

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

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

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

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Good morning from New Economy Brief.

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

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The National Grid in the spotlight. 

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

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

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

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We all pay for decarbonisation. 

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

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

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

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The case for public ownership.

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

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

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

Good morning from New Economy Brief.

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

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

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

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

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

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

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

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

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

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

Good morning from New Economy Brief.

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

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

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

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

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

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

• Is it landing with voters?. Sam Hall suggests that Sunak’s previous speech on his government’s ‘new approach’ to net zero was a “deliberate attempt to confect climate dividing lines that don’t really exist”. In a separate article, he concludes: “YouGov polling suggested [his speech on climate delay] had damaged Rishi Sunak’s ratings among Liberal Democrat voters, which will not help the party in its blue wall seats. Another poll showed a dramatic fall in the party’s already low vote share among younger voters, a major concern for conservatism’s longer-term prospects.” A new report from Onward concurs that weakening climate commitments will damage the Conservatives at the ballot box, especially among younger voters 
• The public supports stronger social security. Although the Conservatives’ are positioning themselves as a reformed party, they are returning to the Cameron/Osborne era’s ‘strivers and shirkers’ narrative on social security, exemplified by the Prime Minister questioning whether people deemed too sick to work were genuinely ill. Yet the public’s views on welfare have changed since the 2010s. The latest British Social Attitudes survey - the ‘gold standard survey of public opinion’ in Sam Freedman’s words - shows “the perception that benefits recipients are undeserving has reduced substantially since 2010.” 19% agree that most people who get social security don’t really deserve any help, down from a high of 40% in 2005. Responses in 2019-22 are the lowest since the question was first asked in 1987, which the authors attribute in part to the increased prevalence and visibility of poverty in recent years. Where Universal Credit pays £35 a week less than the cost of essentials, more punitive sanctions are unlikely to go down as the Conservatives might like. Conversely, an essentials guarantee (as JRF’s Katie Schmuecker called for) might.
• The economic case against sanctions. Hunt suggested he is looking into reforming the work capability assessment. But economic evidence for benefit sanctions is weak and most studies suggest they don't help people into work - they force people into hunger and drive them to food banks. IPPR’s Harry Quilter-Pinner explains why ramping up sanctions isn’t the answer to our employment challenges. (For an outline of the economic case against benefit sanctions, read our earlier New Economy Brief.)

Good morning from New Economy Brief.

Last week the Government announced delays to critical net zero targets, to widespread condemnation from business leaders, climate experts, cross-party MPs and trade unions alike. Why did they do this? 

This week’s New Economy Brief explores the economics and the politics of climate delay and explains why the government’s risky electoral strategy to pit net zero against the cost of living crisis may backfire. 

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Net zero targets delayed. Last week the government outlined its “new approach to net zero” which was widely perceived as “a string of U-turns” on legal targets - the 2030 ban on sale of new petrol and diesel cars was delayed to 2035, phasing out gas boilers was similarly delayed, and the PM scrapped plans to require landlords to meet new energy efficiency regulations. Alongside these reversals, the government did increase the heat pump subsidy grant from £5k to £7.5k and change the rules about grid connections so new renewables projects can connect faster, but despite this the announcement met widespread condemnation from corporate leaders, business groups, MPs from all parties, climate experts, trade unions and the rest of civil society. 

• Businesses need certainty. Delaying targets sends a mixed signal to businesses who need policy certainty in order to plan investment, develop new technologies, scale up production and create jobs. Consequently, Shevaun Haviland, director-general of the British Chambers of Commerce, noted that the “ambiguity” triggered by the announcement has undone “years of work” in “depoliticising the debate and building investor confidence”. Similarly, the Trades Union Congress warned that the government’s “incoherent” and “reckless climate politicking” risks losing 800,000 manufacturing and supply chain jobs in automotive, steel and other sectors to other countries with more stable and ambitious industrial strategies. 
• A chequered history of Conservative industrial strategy. Industrial strategy - or the process of “coordinating a wide range of economic policies to achieve particular objectives”, according to this parliamentary briefing - was revived in 2017 under Theresa May’s government. The Industrial Strategy Council was set up to provide expert, impartial evaluation of the government's progress, headed by the Bank of England’s Chief Economist, Andy Haldane, with members drawn from business leaders, academia and civil society. But Johnson’s government soon replaced May’s strategy with the Treasury’s Plan for Growth and the scrapped the Industrial Strategy Council - a move that Darren Jones, then chair of the BEIS Committee said “resulted in a short-termist, unclear and unwelcome approach to industrial policy when business is crying out for long-term consistency and clarity.” Last week’s announcements seem to be a continuation of the Conservatives’ decision to “mark a departure from the industrial strategy brand”, despite being seen as the new international consensus, and widely regarded as a pragmatic way to grow the green economy. 

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Economics of crowding-in. Many economists have argued that clear policy signals and ‘missions’, such as decarbonising housing and transport, can help to ‘crowd in’ private investment into strategically vital areas (see our previous Briefing for an explainer of ‘mission-led’ industrial strategy). As UCL’s Green Innovation Policy Commission found “green innovation can dramatically bring down the costs of low-carbon technologies”; increased investment means more technical innovation, allowing firms to find efficiency gains so the cost of production reduces and consumer demand grows. But certainty is a key part of this equation, and the legal targets underpinned that certainty, giving industry and investors confidence about the direction of travel for government policy and de facto creating new markets for products, like heat pumps and electric vehicles. It is easy to see why the UK car industry and other sectors feel that ripping up those targets with little warning and no consultation undermines the whole process. For example, most people will buy second-hand electric vehicles, and whilst prices have been dropping, a later target of banning the sale of petrol and diesel cars means fewer people will switch to newer electric vehicles and the second-hand market will struggle to supply enough used EVs to meet eventual demand. 

• We’re losing industries to other countries. The government’s failures to secure a stable future for the UK’s car battery industry is a case study in how to lose the private sector’s confidence and thereby destroy investment and jobs. The day after the government announced a U-turn on the commitment to ban on internal combustion engine vehicle sales in 2030, Green Alliance highlighted that the absence of clear government direction is why the UK's battery market lacks appeal to potential investors. The report warned that the piecemeal approach to the battery industry has driven manufacturers to seek opportunities abroad, eroding confidence among private sector investors. By contrast, the “biggest climate spending package in US history”, the Inflation Reduction Act, includes $369bn in emissions-reduction spending, including tax breaks aimed at directing private investment into low-carbon energy and electric vehicles. This spending will continue for a 10 year period, signalling policy stability for developers and investors (Read IPPR’s Luke Murphy’s report on Lessons for the UK from the US' Inflation Reduction Act for more). 

• Best resources to understand this concept. Drawing on the analysis of its founder and Director Mariana Mazzucato, the UCL Institute for Innovation and Public Purpose argues that government must explicitly steer the direction of economic activity in order to achieve sustainable, inclusive, investment-led growth. It calls for a 'mission-oriented' approach to industrial and innovation policy. 

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So why are the Conservatives doing this? The economics of the government’s “new approach to net zero” may be questionable at best, but what about the politics? Though most of the public wants more action from the government on climate change, even more people care about their personal finances, and sowing conflict between climate policies and cost of living priorities could help the Conservatives win the support of crucial swing voters. This seems to be the lesson that the Government has drawn from the Uxbridge by-election, where fears around the future cost of climate policies contributed to a shock Conservative hold.

• The green wedge. With Labour already proposing to defend the original target for banning the sale of petrol and diesel cars, the Conservatives may try to portray Labour’s approach to net zero (which, it is worth remembering, was also their own until last week) as a radical stance that will cost voters dearly - for example by forcing them to install heat pumps and buy an EV. They can then position their own plans as more sensible - e.g. “we are still committed to net zero, but with a more balanced approach that will protect your wallet”. (This is probably why Labour has not confirmed it will stick with the government's original target of phasing out gas boilers, saying that their party would not “put people’s bills up”) There is some polling to support this; research by Stop the Squeeze finds that climate change comes behind the cost of living in the policy priorities of ‘disillusioned suburbans’, and argues whichever party wins the argument on the cost of living will win the next election.
• But there are holes in their strategy. There are ways to convey to voters that faster action on climate will make them better off. The Energy Climate Intelligence Unit calculated that households with net zero technologies like electric vehicles, heat pumps, solar panels and good levels of insulation could have saved over £2,000 in 2022 compared to those that rely on petrol cars and gas boilers. Over 100 leading economists wrote to the government over the weekend to echo this point. They argue that these delays will also perpetuate key structural economic problems that underpin the cost of living crisis: “By keeping the UK dependent on volatile and expensive fossil fuels, and by reducing the likelihood of securing high paying jobs in green manufacturing, you are choosing to expose the nation to a high cost of living longer into the future.” Combined with lower energy costs, and the economic benefits of investment (job creation, productivity and wage growth), there is a compelling economic case for climate action both boosting growth and reducing the long term cost of living.‍
• Explaining the connection between climate action and lowering the cost of living is crucial. Round Our Way’s Sofie Jenkinson looks back at previous focus group research with ‘Red Wall’ voters and argues that “being anti-green, anti-net zero isn't, ultimately a vote winner because it misreads where the public are at.” She offers 10 recommendations for persuading voters to support green policy. Similarly, Paul McNamee and Steve Akehurst’s report for Labour Climate and Environment Forum found that “People view climate action as one of the best ways to encourage economic growth and tackle the cost of living crisis. Those who saw Starmer talking about climate were twelve percentage points more likely to think Labour was the best party on the economy…Over three quarters of people view improving housing efficiency and investing in renewables as a key measure to improve growth in the UK economy.”

Good morning from New Economy Brief. 

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Even a quick internet search of “NHS record high waiting lists” brings up a long list of near-identical stories from nearly every month of the past year. They each detail how unprecedented numbers of patients - millions of them - are waiting for NHS treatment. This month was no exception. Last week, the estimated number of people in England waiting to start routine hospital treatment hit 7.68 million - an estimated all-time high. 

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In a bid to meet this rising demand, the government released its long-awaited NHS Long Term Workforce Plan in June. It sets out how the government intends to increase the number of NHS staff in England from 1.5 million to between 2.3 and 2.4 million by 2036-2037.

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Unsurprisingly, this will be expensive - at a time when the health service is already entering a “financial crisis”. Critics warn that these costs are unsustainable and say it’s time to consider an alternative to free at the point of use healthcare. Still others argue that it is NHS privatisation that is driving many of these costs and that it should be reversed. But could more health investment save not just the NHS, but the whole economy? 

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This week’s New Economy Brief explores the ‘cost’ of meeting the growing NHS demand and why, when it comes to the public finances, health is wealth. 

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The NHS Long Term Workforce Plan. The NHS Long Term Workforce Plan aims to “train, retain and reform the workforce, and put the NHS on a sustainable footing into the future”. The Institute for Fiscal Studies (IFS) thinks it means average yearly staffing growth of between 3.1% and 3.4%. For comparison, the workforce only grew by around 1.1% a year from 2009-10 to 2019-20. The IFS also reckons that if this growth is achieved, almost half (49%) of public sector workers will work for the NHS by 2036-7. 

• Other costs. The workforce plan includes £2.4 billion of extra funding to train new staff. However, the IFS says it leaves out “the (much larger) medium-term implications of this large increase in staffing for the NHS paybill, nor the required increase in other inputs if the NHS is to treat substantially more patients”. It also estimates that such a rapid expansion of the workforce will require higher wages for NHS workers, perhaps matching or even exceeding real terms pay growth in the rest of the economy. 

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Healthy public, healthy public finances. Expanding the NHS is going to cost. But what about the cost of not meeting rising demand for healthcare? Let’s look at two key trends. Firstly, the UK is getting sicker, with the last century’s progress in morbidity and mortality both stalling or even reversing for some groups. Secondly, it is getting poorer. The combination is no coincidence, argues the Institute for Public Policy Research (IPPR). Rather, “growing sickness is making us poorer, as individuals and as a nation” according to the think tank’s new report. More people are economically inactive due to sickness than ever recorded before. This has a profound effect on individuals: becoming seriously ill cuts the average person’s annual earnings by around £2,200. But the costs of sickness don’t stop there. A combination of foregone tax revenue and higher spending on welfare and healthcare makes sickness “one of the gravest fiscal threats facing the country”. Some key stats from IPPR’s report: 

• Foregone tax revenue. The OBR estimates that since just before the pandemic, rising economic inactivity due to sickness and increasing in-work sickness have combined to reduce yearly tax receipts by some £8.9 billion.‍
• Higher welfare spending. The OBR says the above trends have also increased  annual welfare spending by £6.8 billion.‍
• Higher healthcare spending. Finally, the OBR says that whenever someone becomes economically inactive, this costs the NHS an extra £1,800 per person per year (OBR 2023a).

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Prevention is better than cure. Policies like the NHS Long Term Workforce Plan focus solely on the ‘supply side’ of healthcare policy. In other words, they try to meet  growing need by allocating more resources. There has been less attention to reforms on the ‘demand side’, argues the IPPR. Healthcare services are generally reactive, “inclined towards ‘one size fits all’ solutions” and focus on treating acute sickness. The IPPR argues that as well as treating sickness, the NHS could respond to “the changing nature of health needs and demography” with “the construction of a complementary ‘prevention service’”. It proposes three structural reforms:

• Putting primary and community care at the centre of prevention. Healthcare spending tends to flow to hospitals, rather than to smaller-scale, local services. The IPPR says that this shows a bigger problem - the UK struggles to invest in the right places. Early years, mental health and community healthcare are identified as key priority areas for “smart investment” in prevention.
• Delivering a social care guarantee. The IPPR argues that decent adult social care is a “central pillar in the shift to prevention”. Getting people the support they need at home and helping them live independently and stay healthy may avoid the need for more acute (and expensive) interventions later. 
• Unlocking ‘prevention-first’ services with Integrated Care Systems. Integrated Care Systems (ICSs) are a “promising” route to better prevention. In theory, they encourage providers to focus on cross-cutting outcomes rather than just considering their own specialisms. However, the IPPR warns ICSs “may yet fail to achieve any meaningful change” if they do not embed a mission-oriented approach, focusing on long-term outcomes for public health, rather than short term targets.

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Public spending beyond health. Expanding the health service is expensive, but so is having an unhealthy population. As the IPPR argues, sickness is making us poor. But what about when poverty makes us sick? In many ways, the relationship between Britain’s health and public spending is a vicious circle. According to the Health Foundation, low income, insecure work, debt and poor housing conditions all make illness more likely. All of these issues can be, to some extent, ameliorated with higher public spending. Governments that are afraid to spend money will do less to raise incomes, make housing more affordable or introduce bolder solutions to the cost of living crisis. When fiscal restraint is the political order of the day - as it currently is for the two main parties - policies that could improve people’s health (and therefore reduce NHS demand) are deprioritised.

• Sickness is an economic risk. For many years, healthcare spending has lagged behind demand, leading to falling outcomes and ever-longer waiting lists. Under pressure to curb public debt, politicians of many stripes are reluctant to invest the large sums required to meet healthcare needs and to prevent the conditions that lead to ill health. There is a long-term argument for addressing these conditions: reducing loneliness, poor housing and stagnant incomes. But for the moment, any government that is wary of the cost of saving the NHS - both by meeting existing demand and through better prevention - should know that allowing it to fail could have an even higher price tag. Sickness is an economic risk not just for individuals, but for the country as a whole.

Good morning from New Economy Brief.

Last week, a coalition of over 30 campaign organisations, think tanks and trade unions launched the Early Education and Childcare Coalition (EECC). According to its first report Pulse Check: Public attitudes towards early education and childcare, these issues could be an important factor in the next general election, with 42% of voters saying they will influence their decision.  

But why is childcare so significant for voters? And what are campaigners proposing? This week’s New Economy Brief explores the state of childcare and early education provision in the UK, and why any party hoping for electoral success will need comprehensive proposals for reform.

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The childcare problem. Childcare is expensive - particularly in the UK. So much so that it is a key driver of the cost of living crisis, as New Economy Brief explored last year. A couple with median incomes and two young children pay more than half the mother’s net income for childcare, more than double the OECD average and worse than any other OECD country. In a survey of mothers by the campaign group Pregnant Then Screwed, almost half of respondents had considered quitting their jobs because of childcare issues and a quarter skip meals or heating to pay for it. Clearly, the astronomical cost of childcare does profound harm to many parents’ lives - but also to the economy more generally. It’s no surprise that this is a priority for voters. 

• Why is it so bad? One explanation for why the UK has such a bad childcare problem is that the system relies on extractive ownership models. Christine Berry has described how the private-sector model underpinning much of the childcare sector (“often backed by private equity investors and laden with debt”) is the source of high prices, low pay and working standards for childminders and poor quality provision. A UCL Social Research Institute paper explores how private-for-profit and charity (not-for-profit) sectors differed in their use of public money to subsidise childcare provision. (Check out parent-led cooperative childcare company Friendly Families for an example of best practice.)

Public opinion. Unsurprisingly, research by Claremont and More in Common on behalf of The EECC found that very few people oppose reforming and investing in early education and childcare. And, as we mentioned earlier, nearly half of voters said that early years reform will influence them at the general election. What’s more, while voters generally support the expansion of government support announced in the 2023 Spring Budget, only 18% could explain the government’s plans in detail. Support drops from 68% to just 32% when the public is presented with evidence about funding rates, workforce strategy and lack of floor space, which many say make the plans unworkable without more investment.

• Reservations. The disconnect between headline policy announcements and the lack of funding provided has long been a source of frustration for those campaigning for early years reform (such as free and universal childcare). These campaigners may also be disappointed to learn that a significant chunk of voters aren’t keen on universalism, with over half saying that government support for early education and childcare should be targeted at parents who would otherwise struggle to afford it. Furthermore, most of the public (73 per cent) think parents should pay some of the cost of early years education and childcare.
• How to pay for it. When childcare is so unaffordable for so many, why are voters not clamouring for a free and universal alternative? Essentially, because they don’t know how the government could fund it. Qualitative research carried out for the EECC found that voters worry about “value for money” and are concerned that government money is tight: “Participants wanted to know how much government plans were likely to cost and how they would be funded.” 

Social infrastructure. One of the report’s key findings was that voters do not see longer term, economic benefits to investing in early education and childcare. However, they clearly care about value for money, with around half (47%) saying that increased investment is a good idea only if the economic benefits outweigh the costs. In other words, voters think it is a good idea for the Government to spend money on childcare if we eventually see the returns. According to economists, this is exactly what would happen. Researchers Jerome De Henau and Susan Himmelweit calculated that 30 hours of free childcare for all children aged between 6 months and 4.5 years, with a pay rise for carers, would cost £10.4bn. This investment would create 310,000 new full time jobs and 70% of the spending could be recouped from increased tax receipts as more people were enabled to take on more work. At the moment, spending on public services such as childcare is seen as “current expenditure” or “public consumption”. But because of its positive implications for growth and productivity, think tanks and campaigners have argued that it should instead be viewed as ‘social infrastructure’ and therefore as investment. This would allow governments to spend more on childcare and early years and consider this spending as part of longer term policy.

Clearly, childcare and early years provision is a key issue for the public and a worry for families up and down the country. However, when it comes to solutions, the problem is met with a degree of fatalism, with voters lacking confidence that there is enough money to reform the system. It seems, though, that voters don’t mind spending as long as there is a return on investment. Perhaps a focus on the long term benefits of childcare investment, and its role as social infrastructure, is the answer to persuading more voters to back more structural childcare reform.

Good morning from New Economy Brief. 

It’s no secret that the UK is suffering from an investment gap, consistently ranking lowest in the G7 for private investment and well below average for public investment. In fact, UK investment as a proportion of GDP hasn’t made it above the G7 median since 1990. But in gloomy economic times, investment is exactly what the UK needs. From the US Inflation Reduction Act to the EU’s Green Deal Industrial Plan, governments around the world are realising that investment is the key to boosting growth and stepping up to the challenge of Net Zero. For the moment at least, it seems the UK is getting left behind. 

This week’s newsletter explores different methods of state investment, including a new proposal from the Institute for Public Policy Research (IPPR) for a National Investment Fund. 

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The current state of affairs. So how does a state actually invest? Before we look at the IPPR’s new proposal, let’s explore some existing mechanisms: 

• Sovereign wealth funds. These are a relatively recent concept and have grown rapidly since 2008. The International Forum of Sovereign Wealth Funds (a network of more than 30 IMF member countries which have such funds, define sovereign wealth funds (SWFs) as “special purpose investment funds or arrangements that are owned by the general government”. According to the IPPR, SWFs aim to “maximise the long-term returns of a country’s global investments for future current expenditure requirements”. They typically invest in overseas assets, so their main goal is to maximise financial returns, not to support domestic industrial policy. The UK has been called an ‘outlier’ for not yet having a SWF of its own. 
• State grant funding. Unlike SWFs, state grant funding aims to promote domestic industry, strategically directing investment towards certain industries or activities. It comes in the form of one-off fee transfers, so it does not generate a direct financial return for the state. 
• State investment banks. If sovereign wealth funds exist at one end of a scale and state grant funding at the other, state investment banks can be found in the middle. While the former aims to improve financial returns and the latter to boost domestic industry, state investment banks (SIBs) seek to balance the two, providing “a reliable, longer-term, and lower-cost source of finance that private counterparts may be unwilling to supply due to a lack of market incentives”. 
• The UK’s history of state investment banks. According to the IPPR, the UK has never introduced a state investment bank on a comparable scale to other European countries, and the Green Investment Bank, established in 2012 to help finance the green transition, was privatised and sold to Macquarie five years later. In 2021, the UK Infrastructure Bank (UKIB) was established to plug the gap left when the UK lost access to the European Investment Bank after leaving the EU. But this year, the Public Accounts Committee noted that the Bank's impact so far has been limited by the relatively conventional nature of its investments. Of its 10 deals so far, seven were loans and while the other three did involve taking equity directly, instead making investments via equity funds. The committee questioned whether the UKIB is really financing projects that would be too new or risky for the private sector.

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A national investment fund. To plug the UK’s investment gap, the IPPR proposes the establishment of a National Investment Fund (NIF). This would provide finance to help companies expand green manufacturing activities and decarbonise heavy industrial processes. To access investment from the NIF, companies would have to sign up to specific projects aimed at making them more sustainable - for example, investing in net zero manufacturing technologies. The IPPR says the NIF would not be “picking winners” but instead “picking the willing”. It would publicly outline the kinds of economic activity eligible for funding (according to policy priorities), and companies would then draw up project proposals. 

• Geography. Unlike SWFs, the NIF would only invest domestically. It would also encourage investment in economically weaker areas, as measured with specified economic indicators. All else being equal, a company in less economically prosperous areas would be preferred. 
• Financing. The NIF would operate through equity financing and equity-convertible loans. Although these would be real investments, intended to make a profit, they would also aim to support industrial policy objectives. In some cases this could mean waiting longer for a project to become economically viable and start generating financial returns.. The NIF’s immediate purpose would be to lower the overall financing costs of long-term investment projects, securing their cost effectiveness in advance.
• So, what’s new? The NIF would complement existing public financing institutions, not replace them. It would have similar financial and policy objectives to a traditional state investment bank, but would focus more on industrial strategy less on  financial returns on investment, helping steer the economy towards certain objectives. But what would really set NIF apart from a traditional state investment bank is the equity element, which has been  dubbed ‘Dragon’s Den investment’. Instead of merely offering loans, the state would become a co-owner of the businesses it invests in.

‍The politics of investment. Following the US Inflation Reduction Act (IRA), how to finance the green transition has been a central political question on both sides of the Atlantic. While Labour’s pledge to invest £28bn a year a part of the Green Prosperity Plan has had its fiscal prudence scrutinised, with Shadow Chancellor Rachel Reeves recently arguing that “economic stability, financial stability, always has to come first”, less attention has been paid to how such investment should be made. Last year Reeves argued for a National Wealth Fund, but there is little detail on how it would operate. As IPPR’s paper shows, this question is almost as important as the scale of investment itself. As an election approaches, it will be interesting to see how political parties propose to close the investment gap, and whether any of them seize on the idea of a NIF as a model that would work for the UK.

Good morning from New Economy Brief.

This week’s newsletter examines the politics of the cost of living by exploring new polling from Stop the Squeeze that takes an in-depth look into how voters are processing the policy debates around it, and how important the issue will be to the forthcoming general election.

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The cost of living crisis will swing the next general election. As the summer ends, political parties are gearing up for an impending general election. We may not know exactly when it will happen, but the issues it will be fought on are becoming clearer. The Bottom Line: How Bold Action on the Cost of Living is Key to the Next Election, a new report from the steering group of Stop the Squeeze (a coalition of 50 civil society organisations campaigning for structural solutions to the cost of living crisis), sheds new light on a crucial one. The report sets out to discover what voters, and especially key swing voters, are hearing from the parties, how they are responding, and the kinds of messages and policies on the cost of living crisis that might sway them in 2024.

• Policies to tackle the cost of living crisis are critical to swing voters. The cost of living crisis will be the second-biggest factor in voters' decisions at the next election, just behind the NHS. This is especially true for voters in the vital swing voter demographic which is sometimes called ‘Stevenage Woman’. Here, the cost of living, the NHS, and the economy are the only issues that gain any sort of traction - no more than 17% of people identified any  other issues as important.
• …but voters aren’t confident in either major party on the issue. While the cost of living is a priority for most voters (50%), far fewer (<25%) think the same is true of either of the main parties. For swing voters, this is even lower (<20%). Both parties need to do much more to reassure voters that they really care about the cost of living, and have a clear plan to bring it down. (This supports previous findings by The New Britain Project and More in Common on the lack of trust in politicians to solve the crisis.)
• The Conservatives are losing voters on the cost of living, but Labour could do much more to win them. Labour may be slightly ahead in being seen as the party with a better plan to tackle the crisis, but a Labour majority is certainly not in the bag. Only one in ten (11%) Conservative 2019 voters rate Labour higher on the cost of living, with more than three times as many (37%) not choosing either party. Three quarters of voters don’t have a clear idea of what Labour would do to solve the crisis, implying that Labour has yet to land the message that it has a real plan to improve people's living standards. Overall only 15% of voters have a good idea of what either party would do to address the crisis, indicating that the public have noticed the absence of proactive policies. Lots of voters are still in play, and a stronger policy offer from the Conservatives or Liberal Democrats could have a huge impact on the result. For Labour, the issue is less that the public think the party is focused on the wrong things, and more that they are not sure what its priorities are at all. 

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How to win over swing voters on the cost of living. The voter group dubbed 'Stevenage Woman’ (or ‘Disillusioned Suburbans’) by the think tank Labour Together will be particularly important in the next election. Representing 21.8% of the electorate in England and Wales, these voters are particularly well represented in the East of England, in London’s suburbs, and in the North East and West. They are young, economically insecure, worried about their finances, and unlikely to own their own homes. They are not highly politicised, but are generally socially conservative while leaning left on the economy. How this group votes will decide which party wins the next general election. As Labour Together say: “A working majority depends on Labour’s ability to convert their current support amongst Disillusioned Suburbans into votes at an election.” So how can political parties win over these crucial voters?

• The public support bolder messaging and more ambitious policies. Stevenage Woman wants to be shown practical policy solutions that will make her own personal finances more secure. The Stop the Squeeze report demonstrates that clear, concrete policies to deal with the rising cost of living, such as lowering energy bills, increasing the minimum wage and social security payments, and raising taxes on the super rich, would help Labour win over this crucial target group (policies such as the National Living Income and the National Energy Guarantee proposed by the New Economics Foundation could fit into this bracket, and there are lots of options for increasing taxes on the wealthy, as explained by Tax Justice UK). While putting policies like these on the table might be unpopular with some voters, the report argues that having a political argument around these policies could reinforce the message that Labour does have a plan on the cost of living, strengthening resolve among key voters and increasing the chances of those voters actually turning out on polling day. Conversely, if the Conservatives were to make a renewed offer on the cost of living at the election, this could chip into some soft Labour support and leave the party vulnerable.‍
• What policies do swing voters want? Voters prefer government support for energy bills, which continue to be a major source of pain for many families. Help with mortgage and rent payments also performed very strongly in the polling. Increasing the minimum wage ranks second highest for swing voters, and performs well across all demographics. It is more popular than cutting taxes on wages for everyone, except among right-leaning demographics. ‍‍
• ‍Tax cuts are a red herring. Political debates have focused heavily on the level of taxation over recent years, but there is no real evidence that the public see tax cuts as the answer to the cost of living crisis. Cutting taxes on wages came sixth out of a list of possible priorities for action, only performing strongly among core Conservative supporters. Cutting taxes on goods and services (i.e. VAT) was slightly more popular overall. Overall a party could get significantly more mileage from policies to reduce the impact of escalating energy and housing costs than from offering tax cuts. Voters also overwhelmingly think that cost of living support should be funded by taxing the richest in society, although they remain divided on the question of whether or not additional spending on this would be inflationary.

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The political opportunity for all parties. The report suggests that a party that is willing to make a bigger offer on the cost of living, focused on areas the public care about such as energy bills and housing costs, and funded by taxation of wealth, could reap the rewards with voters who are desperate for government action that could really improve their lives.

• In summary: Voters think the cost of living is one of the most important issues for the next election - if not the most important. They think neither party cares about it as much as they do. And while they lean towards Labour on the issue, they don’t have a clear idea of what either party proposes to do to address the crisis. This creates a significant opportunity for both parties. This matters both because it indicates that a Conservative comeback is still possible, but also because the lack of policy solutions on offer is highly likely to lead to voter apathy and low turnout.‍
• The road to a Labour majority? If Labour were to put forward bolder policy solutions on the cost of living, this could help them win over key swing voters like ‘Stevenage Woman’ in the run up to the next election. This supports an argument made by Alistair Campbell, who says that Labour needs to develop “a positive policy agenda that would persuade the country that Labour was a credible and compelling alternative…in order to turn possible into probable, or move the prospects of a hung Parliament into a good Labour majority”.

Good morning from New Economy Brief.

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Recent changes in inflation and average earnings figures have subtly changed the politics of social security uprating this year, intensifying scrutiny of the state pension ‘triple lock’. 

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This week we explore how those changes feed through the uprating system and ask whether working age social security payments should have a ‘triple lock’ of their own - a policy which new polling shows has broad political support. 

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Falling inflation, rising wages? Last week, media headlines celebrated the biggest six-month fall in inflation in over three decades, proclaiming we’d reached a turning point as monthly CPI showed ‘record pay growth’ outpacing inflation for the first time since the cost of living crisis entered the political lexicon. 

• It's not all good news, though. The Resolution Foundation’s James Smith reminds us that the UK still faces the worst inflation in the G7 (at 6.8%). The Trades Union Congress’s Alex Collinson criticises the ‘misleading’ positive headlines about this month's pay growth and inflation figures, noting that real pay is still falling and remains £22 per week lower than in 2008. As Collinson notes, headline pay growth is mainly being driven by the finance sector, and most people who work elsewhere in the economy are still not receiving pay rises that outstrip inflation. (Real public sector wages are particularly bad - down £51 per week since 2008).

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Pensions will be uprated by (misleading) rising pay growth figures. One consequence of rising headline earnings and falling inflation is that the state pension may be uprated by a higher percentage than working age benefits later this year, because of how the uprating mechanism works. Essentially, under the triple lock, pensions rise each April by whichever is highest: the rate of pay growth (measured in July the previous year), inflation (September figures), or 2.5%. This has protected pensioners’ incomes from inflation since being introduced by the Coalition government in 2010. 

• But social security will (probably) be uprated by lower headline inflation figures. Yet there is no similar legal mechanism that pegs social security (or indeed the minimum wage) to inflation, meaning civil society has to repeat the same battle to pressure the government to protect the real value of social security benefits from being eroded by inflation. The absence of a triple lock for working age benefits means that for the first time in this cost of living crisis, the state pension will almost certainly increase more than working age social security payments.
• Already inadequate. The gap between income received from working age benefits and the cost of living continues to grow. In 2013, social security covered 39% of the cost of living for a single person over 25 after housing costs. This has now fallen to just 28%. Universal credit is now falling £890 a month short of paying for essentials, despite its inflation-linked uprating. This is because “rates are not benchmarked to a meaningful assessment of need,” explains the New Economics Foundation’s Sam Tims.
• Reverse ferret? Interestingly, earlier in the summer when inflation was higher than earnings growth, government sources were briefing that this year the government would save money by starting to use the former as the basis for uprating social security payments. Now the situation is reversed, and though the government has not indicated which metric they will use, it’s still unlikely to be the higher one.

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Triple lock for social security? The government should seek to recreate the success of the triple lock policy by applying it to working-age social security payments, as well as the state pension, argues Paul Waugh in the i. Waugh says the policy’s costs over time would be modest, and that it could “cut child poverty as effectively as it has cut pensioner poverty in recent years”. 

• Politics of the triple lock. Waugh argues that the triple lock should be a driver of social solidarity between generations - rather than used to drive a wedge between them. He cites new polling research from the Stop the Squeeze campaign finding that extending the triple lock to working age benefits would be popular with voters across the political spectrum. (59% back the policy, with only 21% opposed, and twice as many Conservative voters (61%) support the move as oppose it (31%).) 
• The triple lock on pensions comes under pressure. The Office for Budget Responsibility has warned about the soaring cost of the triple lock on pensions as inflation increases its price tag, but last week Rishi Sunak pledged to protect it despite it costing an extra ~£10bn next year. The Conservatives will be reluctant to drop the triple lock due to their need for ‘the grey vote’, as Onward’s Adam Hawksbee explains: “People of pensionable age make up a sizable portion of the Conservative vote, and those who have shifted towards “don’t know” since 2019 are disproportionately of that demographic.”

Good morning from New Economy Brief.‍

Last week the Italian government announced a windfall tax on the country’s bank profits, before, rather chaotically, changing course and watering down the policy the next day, seemingly because of falling share prices of the banks.

This episode isn’t a wonderful advert for policy-making- but the question of whether bank profits should be taxed more highly is a serious one. Campaigners in the UK argue that banks are reaping windfall profits due to rising interest rates, and that taxing them could raise billions to support public services or cost of living support.

This week’s New Economy Brief examines why banks are making huge profits, and the case for taxing them.

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Banking the rewards. The fact that UK banks are making record profits is not contested, but the scale of these profits is eye-popping. According to think tank Positive Money, UK banks made record profits of £33bn in 2022, and are set to blow that figure out of the water in 2023. In the first half of 2023, the Big Four UK high street banks (Barclays, Lloyds, HSBC and NatWest) alone made pre-tax profits of over £28bn, an 80% increase from last year and 725% up on 2020.

• What is going on? There are a number of factors driving bank super-profits, but the crux of the story is the impact of rising interest rates. The Bank of England’s policy of sharply raising interest rates in response to inflation has boosted bank profitability in two crucial ways, one which has received some coverage, and one which has received a lot less.
• Failure of transmission. The first is the way in which banks pass on the impact of rising interest rates to their customers. Broadly speaking this happens through two mechanisms; raising the cost of borrowing (mainly the interest rates on mortgages) and raising the interest rate customers get on savings. Anyone who has been following the mortgage market will know that banks have been very quick to pass on interest rate rises to mortgages (although most existing mortgage holders will be shielded for a time by fixed rate deals). But they have allegedly been less assiduous at rewarding savers with higher interest rates. This delay in passing on the higher rates to savers boosts bank profitability, as banks will be charging higher rates on money they are lending out, without offering those same rates to those depositing money in the bank. This prompted the Financial Conduct Authority to issue a warning to banks last month that it will not tolerate this kind of practice, while Conservative Treasury Committee Chair Harriet Baldwin put it more bluntly: “It is difficult to avoid the conclusion that our biggest banks are taking advantage of their most loyal customers to increase profits and CEO pay”.
• Central bank reserves. Where the picture gets really complicated is when it comes to the issue of central bank reserves, and the messy interaction between monetary and fiscal policy. The story starts with the enormous programme of Quantitative Easing (QE) undertaken by the Bank of England since the financial crisis in order to support the economy when interest rates were at rock bottom. This involved the creation of new money in the form of central bank reserves, which were used to purchase government bonds through the Bank’s Asset Purchase Facility (APF). The reserves that were created are held by private banks, and remunerated by the Bank at the base rate. Given that the rate that the Bank was getting on the bonds it purchased was higher than the base rate, this meant the Bank made big profits, which were recycled back to the Treasury. But now that the base rate has risen substantially, the Bank is actually paying significantly more in interest on its reserves than it is receiving on the bonds it holds. The Treasury is on the hook for these higher interest payments, so in effect what we are seeing is direct transfer from the Treasury to private banks who are holding large amounts of central bank reserves.
• How much are we talking? It’s a lot. The Bank of England created nearly a trillion pounds of central bank reserves through QE. These have started to be unwound as the bonds mature through the Quantitative Tightening programme, but banks are still holding hundreds of billions in central bank reserves. Last year the New Economics Foundation estimated what the impact of rising rates would be on fiscal transfers to the banking sector. They found that over the OBR’s five-year forecast period,taking into account the QT programme, an average base rate of 4% would result in a transfer of £161bn from the Treasury to the banks. Given that the base rate is already over 5%, and expected to remain high for some time, this might be a reasonably likely scenario. Certainly we can expect the transfer from the Treasury to banks this year to be in the tens of billions as a result of higher interest on central bank reserves.

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So is this a windfall? Campaigners argue that, just as energy companies are benefiting from high global gas prices, banks are profiting from high interest rates despite not doing anything to ‘earn’ these profits in terms of productivity gains or being rewarded for risks that they have taken. The point about the central bank reserves is that they are risk-free for the banks, and now they are effectively being given a huge reward for holding them.

• Undermining policy. In fact, some of the ways in which the profit is being made is actively working against government policy. Not passing on interest rates to savers, for example, blunts the effectiveness of interest rates in reducing headline inflation. Similarly, at a time when public services are struggling and politicians are arguing that there is ‘no money left’, it is hard to justify huge income transfers from taxpayers to banks, simply because those banks are holding risk-free central bank reserves.

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To tax or not to tax. For some campaigners this is a slam dunk case. Positive Money, for example, is arguing that this is clearly the case of a windfall that should be taxed. They say the simplest way to do this would be to raise the Bank surcharge from 3% to 35% (the same as the energy windfall tax) and estimate this would raise around £20bn this year from the Big Four banks alone that could be spent on public services or cost of living support. This would still leave banks incredibly profitable by historical standards. The windfall tax idea has gained support from ex Bank of England Deputy Governor Sir Charlie Bean, who has argued that it could raise tens of billions of much-needed revenue for the exchequer.

• International precedent. The botched Italian windfall tax may not be a wonderful advert for the policy, but Italy is far from the only country to impose a windfall tax on banks. A host of European governments including Spain, the Czech Republic, Hungary and Lithuania have imposed such windfalls. The FT summarises how windfall taxes are being used across Europe in response to the cost of living crisis.
• The Lady was for taxing. The main historical parallel for such a such comes from an unlikely source. In 1981 Margaret Thatcher imposed a windfall tax on banks in very similar circumstances (having first levied one on the oil and gas sector). The justification was that: “they had made their large profits as a result of our policy of high interest rates, rather than because of increased efficiency or better service to the customer.”
• The case against. Opponents of a windfall tax have two central arguments. The first is that bank profits are not a windfall, that they are a natural result of raising interest rates, and that bank profits always fluctuate according to conditions in the economy. The second is that imposing such a windfall tax could have negative economic consequences, by lowering bank share prices (as happened in Italy), hitting investment, and causing instability in the sector. US think-tank the Tax Foundation has accused governments of “punitively targeting certain industries” and some have argued for tightening of regulations instead of taxes. On the instability point, Dan Neidle, from Tax Policy Associates, argued that the original Italian proposal was incredibly badly designed and communicated, and it was this, rather than the principle of a windfall tax, which spooked the markets (others would argue that policy should not be determined by what is best for the share price of banks).
• Longer term solutions. Finally, it is worth pointing out that a windfall tax will not solve the underlying issue of the unintended interaction between monetary and fiscal policy as a result of private banks holding central bank reserves. There is arguably no good policy reason why banks should be making huge profits from this, and the New Economics Foundation has argued that the UK should adopt a ‘tiered reserves’ policy where interest is only paid on a portion of reserves held by banks. Both the European Central Bank, and the Bank of Japan operate tiered reserve systems, and NEF argues that the UK should follow suit and stop this problem at source, saving billions and untangling the muddle of monetary and fiscal policy in the process.

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Good morning from New Economy Brief.

The concept of economic security is gaining traction in British politics. The Labour Party have made ‘securonomics’ a central frame for their green industrial strategy, and more of the public, particularly swing voters, are longing for more secure personal finances.

But, aside from energy, what would policy that backs up this rhetoric look like? Couldn’t improving economic security be a successful political frame for a holistic economic strategy to build more secure workplaces, secure childcare provision, secure housing, reformed social security, and more? 

This week’s New Economy Brief explores a new paper from JRF’s Graeme Cooke, who proposes economic security as “a lens through which we can diagnose where we’re falling short as a society, and for inspiring and guiding a project of social reform in response”.

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‘Securonomics’ and secure personal finances. Rachel Reeves made ‘securonomics’ a central plank of Labour’s economic policy platform earlier this year, referring mainly to the use of a more active and interventionist state to improve the resilience of supply chains and disperse opportunities for economic growth across the country. (See our explainer here.) The New Statesman’s Anoosh Chakelian documents how the concept of security has spread around the Labour leadership’s communications and policy development. And now, a new paper by Joseph Rowntree Foundation’s Graeme Cooke argues that improving economic security for individuals could be a valuable frame for a political strategy of social reform and electoral success.

• Economic security. In a comment piece for the New Statesman, Cooke explains that the concept of economic security is “rooted in household finances”, how they interact with income, costs, assets and debt, but also how wider factors such as employment, housing, education and health affect households exposure to risks (“concrete, everyday experiences” such as “a cancelled shift, an unexpected rent hike…childcare falling through…rising borrowing costs”) and their ability to cope in a more uncertain world. 
• Political philosophy. He argues that “economic security puts human agency centre-stage, in pursuit of autonomy, control and individuality, drawing on Isaiah Berlin’s notion of ‘positive freedom’, “where true liberty requires far more than the removal of external constraints”; security is “a precondition for people to feel in control of their life, to have a stake in the future, and to believe that daily efforts can pay off and that hard work will be rewarded.“ Improving the economic security of individuals is a logical progression of Labour’s green industrial strategy, which goes beyond neoliberal ideals of the role of the state (beyond free-market ideals of efficiency, towards personal and collective resilience).

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Policies for improving economic security. In policy terms, a strategy for expanding economic security combines “defensive action to protect against harmful insecurities, by placing limits on markets and entrenching state-backed minimums”, with “positive action to advance the foundations of security”. Cooke argues that longer term trends have undermined the foundations of security - such as precarious employment, wealth inequality, rising poverty and the crisis in care services - and proposes various social reforms for a government to protect personal finances in response. Let's take a look at some of these:

• Secure childcare. UK families face some of the most expensive childcare costs in the OECD, which eats into household incomes and holds back earnings from work. (See our Briefing on childcare as an underreported driver of the cost of living crisis.) Cooke explains that “a pro-security response” to the childcare crisis would invest in a system of social infrastructure to protect parents from losing out and “creating statutory care pay, modelled on maternity provision, to enable people to look after loved ones without losing their attachment to the world of work”. The Women’s Budget Group has proposed a universal and free childcare system, delivered as a public infrastructure service on an equal footing with school education, which can largely pay for itself due to the increased tax receipts from parents being able to return to work. 
• Secure housing. Housing has become increasingly insecure in recent years. The proportion of households in the private rental sector has more than doubled over the last 20 years, and more secure tenures such as owner-occupied or socially rented homes have also been in decline. This exposes more of the population to unexpected rent hikes, evictions and a lack of stability. Cooke suggests a strategy to improve security of housing would involve intervening in markets to increase more secure housing tenures, for instance by “establishing a publicly owned master develop to drive the delivery of major new settlements in the public interest (maximising homes for resident-owners and social rent)” and creating “an institutional vehicle to support social landlords to turn the properties of distressed buy-to-let landlords into homes for social and sub-market rent”. (See JRF’s paper for more on this policy, plus our previous briefing on ‘navigating a housing market crisis’ and the idea of a common ground trust.)
• Social security. The value of unemployment benefits (core working age benefit) is at its lowest in real terms for almost 40 years, and only replaces 12% of average earnings, so more and more people are falling into deep poverty. Cooke proposes that “guaranteeing that Universal Credit is enough to afford the essentials would establish a foundation for economic security, as would addressing state-driven insecurity in the benefits system (like the operation of sanctions and the extent of income volatility for low earners).” (See NEF’s proposal for a National Living Income to cover the rising cost of living.)

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Security as a frame for a ‘retail offer’. The concept of economic security is an interesting political strategy that justifies ambitious interventions in markets, whilst aligning with how the public’s views have changed after successive economic crises and linking to their day-to-day concerns about their finances. NatCen’s latest Society Watch has found that concern about money or debt, mental health and work-life balance have all risen since 2018, where 40% of Brits are now “very or extremely worried” about money or debt. A political programme and economic strategy to improve economic security could be a helpful frame for pinning a ‘retail offer’ to voters on the cost of living. Crucially, this framing can help to place the burden of risk onto the status quo, meaning that solutions that might otherwise seem radical are seen in a different light by voters. 

• Swing voters and economic insecurity. The Onward report that identified ‘Workington Man’ as the swing ‘red wall’ voter which could win the Conservatives the 2019 General Election argued there was a “sea change in British politics away from freedom and towards security”. Whilst Labour Together has more recently identified ‘Stevenage Woman’ as the swing voter Labour needs in order to win the next general election, and found that she could be won over with “a politics grounded in providing ‘security’ in the form of secure work, safe streets and a strong nation”. Anoosh Chakelian argues that “security on the left means strengthening the state, protecting the country from geopolitical shocks, enhancing social bonds, and sheltering individuals and places from market forces”, whilst Graeme Cooke argues that social reforms which are justified on grounds of improving economic security can mobilise support from across the political spectrum. 

Good morning from New Economy Brief.

In the words of Joss Garman (Director of the European Climate Foundation), decarbonisation has become “the dominant question in British politics” and this week, the Prime Minister is keen to tell us which side he’s on. The PM kicked off the Government’s ‘Energy Week’ on Monday by giving the green light to hundreds of new oil and gas licences. This followed a weekend in which he branded himself as on the “side” of motorists. 

What is the logic here? Time and time again, polls show that the British public is growing increasingly concerned about the climate crisis. But there’s a caveat - polls also show that voters only back Net Zero policies when it doesn’t cost them too much. The government’s answer is to talk the language of cleaner energy, while simultaneously trying to draw a dividing line with Labour on energy security. How do they square that circle? Carbon capture and storage. By capturing the carbon dioxide that is released in the process of using fossil fuels, then storing it back in the ground, the Government argues that you can have your Net Zero cake and eat it. But is it all too good to be true?

This week, we take a look at the political debate around decarbonisation and whether carbon capture is the silver bullet the Government claims it to be.

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What actually is carbon capture? Carbon capture and storage (CCS) is often promoted as a useful tool to mitigate the use of fossil fuels during the transition to more renewable energy sources and is seen by some as a vital part of Net Zero strategy. It encompasses a range of technologies which take two basic forms. One type of CCS relies on human-made processes to capture carbon and store it deep underground. This may involve giant air filters to capture CO2 directly from the atmosphere or pre-combustion methods which separate CO2 from hydrogen before fuel is burnt. Once the carbon is captured, it must then be stored. This may involve the use of saline aquifers: underground formations of sedimentary rock filled with salt water that are injected with CO2 to be stored permanently. The other main type of CCS involves taking advantage of nature’s capacity to absorb CO2, using ‘carbon sinks’ such as forests and wetlands to remove CO2 from the atmosphere. Sometimes, the use of natural materials is taken one step further, using a technology called bioenergy with CCS (BECCS). More on this later… 

• Does it work? So, CCS can take many forms - but is it effective? Its supporters would say so, pointing to Norway’s CCS operations that have been running since 1996, storing “close to a million tonnes of CO2 every year”. Many, including climate change think tank E3G, say that the large-scale deployment of CCS is critical for the transition to Net Zero greenhouse gas emissions by 2050. However, even advocates of CCS, argue that while the technology can play a vital role in net zero transition, it must be considered as a last resort to complement other decarbonisation policies (such as rapid expansion of renewable energy).
• A distraction? One of the main problems with CCS, critics argue, is that it is a “distraction” from other decarbonisation methods such as renewable energy, energy efficiency and consumption reduction. While it may be a useful tool to mitigate the harm caused by fossil fuel use in the meantime, some say that it deflects precious resources away from the mission of transitioning to fully renewable energy altogether. And as we’ve seen with Rishi Sunak’s announcements this week, it can often be used as a sticking plaster policy by Governments who are reluctant to fully transition from fossil fuels to renewables, rather than as a helpful interim tool.
• A long way off. Another issue with CCS is that it might not actually be ready to use at scale. Research commissioned by Friends of the Earth Scotland and Global Witness found that “significant CCS cannot be expected in the energy sector until the 2030s at least”. In 2021, when this research was published, global operational CCS capacity was 39MtCO2 per year - about 0.1% of annual global emissions from fossil fuels. The research also highlights that to reach the Climate Change Committee’s projected CCS capacity of up to 176MtCO2 by 2050, the UK would have to quadruple the entire global CCS capacity. 
• The “scam” of CCS and its history. Some critics of CCS argue that it can help energy companies to produce even more fossil fuels and profit from higher production, all while receiving Government support for using a ‘green’ technology. Greenpeace describes CCS as the “Great Carbon Capture Scam” - a scam that can be dated to as far back as 1972 when US energy company Chevron used waste carbon dioxide from a gas field to extend the life of another field 400 kilometres away. After using the CO2, the company vented the gas, meaning that there was “no real climate advantage”, but the technology did help to produce more oil. CCS has since been used in several cases “primarily” to “enhance oil production” rather than to offset or capture emissions, even in cases where companies have received huge Government grants for the storage. Greenpeace has described this practice as socialising costs and privatising profits. 
• The dangers of BECCS. One method of carbon capture is Bioenergy with Carbon Capture and Storage (BECCS) which often involves the capturing of carbon via the photosynthesis of biomass crops. The biomass is then harvested and taken to a power plant where it is burned for energy. Some of the carbon released during the burning process is then recaptured and stored underground. Friends of the Earth has argued that not only does BECCS distract from “taking real action”, but will also “have unimaginable social and ecological impacts” due to the “deforestation” and “land-grabbing” required to provide biomass for BECCS at scale.
• Energy security. Even if CCS was perfectly effective, it still means that we’re reliant on oil and gas. As we’ve seen recently, this reliance exposes us to energy insecurity and volatile international markets. Just because the drilling happens just off our shores doesn’t mean that we reap all the benefits - much of the oil and gas is exported. 

‍Can we transition without CCS? Obviously, less reliance on CCS means more reliance on other technologies or major shifts in behaviour. As part of the Paris Agreement, Integrated Assessment Model scenarios “with low or no CCS deployment require considerable increases in energy efficiency and near-term rapid fall in energy demand”. Reducing energy demand or increasing efficiency obviously require huge investment and behavioural change to have as effective an impact as possible. According to the think tank Ember, reaching “clean power” by 2030 means adding 90GW of wind and solar in the next 8 years. Currently, wind and solar have a combined total installed capacity of 42GW. Bridging that gap requires a lot of investment. However, many argue that investment in renewable energy is more cost effective and more efficient than investment in carbon capture which, as we’ve explored, has had limited proven success so far. According to research by Nature Energy, even moderately efficient renewable locations (e.g. for wind and solar power) “provide a better energy return than the majority of carbon capture technologies”. 

• Ecosystem restoration. While chemical carbon storage, as promoted by the UK Government this week, has had limited success in recent years and could take a while to provide any benefits, some argue that the natural alternative could be the answer. Ecosystem restoration (for example of woodlands), would boost the country’s natural carbon sinks at relatively little cost. According to Green Alliance, new woodland is “expected to play a significant role” in carbon capture, with woodland “the only removal method deployed as scale in the UK” so far. Carbon markets, in which farmers and land managers are incentivised to plant trees and protect woodland can help to ensure that woodland is protected as a natural carbon sink. A total of 3,421 hectares of woodland were planted under the Woodland Carbon Code (WCC) in 2021-22, according to Green Alliance.
• Batteries. The problem with a lot of renewable energy is that its efficacy relies on the weather. Batteries, however, can store surplus energy for a rainy day (or rather, a less windy or sunny day) and therefore adjust supply and demand to balance the system. The Climate Change Committee has argued that not only do we need batteries, but the use of surplus generation “to produce hydrogen through electrolysis (‘green hydrogen’), providing long-term storage so it can later be used to generate electricity”.‍

‍So what does this all mean? The announcement of this week should be seen as primarily driven by politics, and the attempt by the government to create a dividing line on climate that positions themselves on the side of energy security and lower bills. Whether it will work or not remains to be seen, but whatever the political situation after the next election the debate about which technologies to pursue in the green transition is unlikely to go away. If victorious next year, the Labour Party will inherit the same “dominant question” of our times - decarbonisation - and will have to decide how it answers it. As the PM positions himself firmly on one side of the debate, Sir Keir Starmer will have to decide whether to join him or to take a different approach.

Good morning from New Economy Brief. 

Almost all Belgian workers have their wages automatically uprated by the rate of inflation, which ensures their standards of living are maintained and not eroded by rising prices.

Critics of the scheme argue that this should have produced a wage-price spiral…but it hasn’t. In fact, inflation in Belgium is dropping faster than many other economies. Why?

In the context of ongoing public sector strikes across the UK and slightly better than expected inflation figures last week, this week’s New Economy Brief looks at the system of wage indexation in Belgium and draws some lessons for the UK government.

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Belgian workers are insulated from the rising cost of living. Despite wages being eroded by inflation across the world, Belgian wages have been the most resilient across the OECD. Real wages have actually risen by 2.9% in the first quarter of 2023, where the OECD average was a 3.8% fall. This is due to Belgium’s unique system of wage indexation, which protects workers pay packets from any rise in inflation. Critics say this will lead to a wage-price spiral, but this is yet to materialise - in fact, CPI inflation in Belgium has been falling much faster than comparable economies this year; inflation peaked at 10.3% last year, and the European Commission forecasts it to fall to 3.4% in this year. What’s going on here?

• How does indexation work? The Belgian system of wage indexation insulates households from inflationary shocks and shifts the burden of adjustment to firms and the government, as employers and the state are legally mandated to uprate public and private sector salaries. Since 1996, the Law on the Promotion of Employment and Maintaining Competitiveness obliges ‘social partners’ to negotiate salary increases over a two-year period within the bounds of an upper limit set by anticipated hourly wage developments in key export markets (France, Germany, the Netherlands) and a floor determined by expected inflation in Belgium. A good explainer on wage indexation systems by UNI Europa explains that nearly all Belgian workers have some form of automatic wage adjustment to account for inflation due to the almost 100% collective bargaining coverage rate and state-facilitated sectoral bargaining.
• Inflation triggers automatic increases in wages. Wages are linked to inflation by a ‘health index’ - a calculation of the price of a basket of goods that excludes energy and unhealthy consumption items like tobacco and alcohol. Whenever a 4 month moving average of the health index increases by 2% or more, all public sector wages, most private sector wages, pensions and social security benefits are uprated by an equivalent amount.
• Stronger purchasing power has bolstered Belgian growth. Wage indexation has led to a more resilient economy in Belgium, as it “cushions the blow of higher prices on the purchasing power of consumers to a considerable extent” in the words of a recent paper by the International Monetary Fund. The European Commission also reports that: “Economic growth in Belgium is expected to reach 1.2% in 2023 and 1.4% in 2024, on the back of resilient private consumption… The automatic indexation of wages and social benefits is set to continue to contribute to maintaining the purchasing power of households, especially as headline inflation is projected to substantially slow down”. 

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Why hasn’t it led to a wage-price spiral? Critics warned that indexation would lead to wage-price spiral, where consumer prices and nominal wages rise simultaneously as firms are forced to put up their prices to maintain profitability, triggering a ‘second-round’ of inflation, further rounds of automatic wage indexation and thus spiralling prices. But analysts from Belgium’s central bank found that “Interestingly, markups appeared to play no role in driving up prices and in fact decreased or even offset the contribution of wages…To keep inflation under control, profits and/or wages should rise at a rate lower than overall price increases, and at least one side must be willing to accept a decline in purchasing power.” As the Belgian wage indexation system requires companies by law to increase wages, companies’ profits were forced to take the hit. “We however found that even in a country with automatic wage indexation, the profit-wage dynamics did not fuel prices increases in 2022.”

• International competition prevented firms from hiking prices. The answer lies in the highly competitive nature of Belgium’s export-led economy - where exports account for one of the highest proportions of GDP in the world. Belgian economist Henri Bogaert explains that “companies exposed to competition, and in particular international competition, cannot pass on this double increase in production costs [wages and energy prices] in their selling price, since the latter is, by definition, constrained by the prices charged by international competitors”. Essentially, export-oriented firms had to keep prices stable to maintain their market share, which cut into profitability but limited the second round effects of inflation. 
• But profits are still high. However, this has not led to a large reduction in profits. 3.95% of the 8.2% inflation in 2022 was still due to ‘unnecessary price hikes’ to finance the profit margins of companies (between €35-40bn over 2021-22), costing the average Belgian €3,200 over the past two years. In fact, a group of Belgian economists wrote to the countries’ business press arguing that 60% of energy intensive firms with the ability to protect their margins (due to their inelastic products) by passing on the increase in costs to their customers should reduce their excess profits by increasing wages further. The Belgian central bank also argued last year that “the impact of energy was ten times greater than the impact of wages on business costs”.

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Takeaways for the UK economy. As governments, central banks and businesses in the UK and other countries continue to argue that increasing wages risks stoking inflation further, Belgium’s system of automatic wage indexation is an important lesson for the debate on the risks of wage-price or profit-price spirals. Since the UK already has some limited semi-indexation - of social security payments through benefit uprating, the minimum wage through the Low Pay Commission, and full indexation of the state pension via the ‘triple lock’ - is embedding wage indexation into collective bargaining agreements the logical next step for making households, workers and the economy more resilient to inflation? 

• Increasing UK public sector pay won’t fuel inflation. A timely report from IPPR finds that “Contrary to claims made by the government and others, a real-terms pay rise for public sector workers would not meaningfully increase inflation”. Authors Joseph Evans, Carsten Jung, Henry Parkes and Pranesh Narayanan explain that public sector wages do not feed into pricing decisions of public services, and therefore can’t ‘pass on’ inflation into the rest of the economy by ‘second-round’ effects, and that there is no evidence that public sector pay growth puts upward pressure on private sector wages either, pointing to the Treasury’s own analysis. They calculated that an additional stimulus of £7.2bn in 2023/24 to increase public sector pay by 10.5% would not stoke inflation, especially if funded through taxation, but even if it was financed via borrowing.
• But it could solve many problems in the economy. Even if public sector workers receive a 6% pay rise on average, they will still be £1,400 worse off this year in real terms than before the pandemic. But “a stronger pay settlement would help to address four problems facing the public sector: declining living standards, a workforce crisis, the decreasing quality of services and the reality that pay for the UK’s public sector workers lags behind our international peers” argue the authors. Increasing public sector pay in the NHS in particular is likely to help ease labour shortages there but also in the private sector due to the rise in long-term sickness.‍
• Labour market architecture. Finally, it is worth pointing out that implementing large-scale wage indexation outside of the public sector in the UK would require the creation of new labour market institutions. The UK lacks the tripartite labour market structures that exist in Belgium and many other European countries and which bring government, unions, and employers together. The calls for sectoral collective bargaining from unions, some of which have been adopted in Labour’s New Deal for Working People, would be a step to recreating these institutions and bringing more workers under the umbrella of collective wage agreements.

Good morning from New Economy Brief.

A punitive social security policy introduced by the DWP in 2017 has been in the news this week after Keir Starmer announced that Labour would not repeal the ‘two-child limit’ over the weekend. 

It’s caused a row at all levels of the Labour Party, including in the Shadow Cabinet. New research this week has found strong evidence that the policy fails on its own terms and only serves to increase child poverty.

This week’s New Economy Brief analyses the policy at the heart of the row, and outlines  why many are pushing for its abolition.
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Labour row over the two-child limit. Over the weekend Keir Starmer confirmed that a Labour government would keep the two-child limit in Universal Credit and child tax credits, which removes support for third and subsequent children born after April 2017. Senior Labour figures have previously attacked the policy in public and a broad coalition of civil society organisations, such as Save the Children, Barnardos, the NSPCC and others, have signed an open letter to party leaders opposing the policy. This has sparked a fresh row within Labour, as the Leadership is keen to show its commitment to fiscal responsibility, but Labour MPs with constituents in more deprived areas may find the policy difficult to defend.

• History and background. The two-child limit was introduced as part of the Conservative government’s efforts to reduce spending on social security. The two-child limit prevents families from receiving additional income for their third or subsequent children (worth up to £3,235 a year per child in 2023/24), affecting 1.5 million children in April 2023 (10% of all children, this includes all children in families subject to the cap). This is often confused with the benefit cap, which places a cap on the amount of social security paid to households if they have no or low earnings and where they do not have a disqualifying criteria, including having caring responsibilities or a disability. Both policies are ‘highly unusual’ in an international context: only Denmark has an equivalent benefit cap in the EU and only 3 other EU countries have a cap imposed on financial support relative to the amount of children a claimant has (and none of these are as low as two children). 
• Part of a move towards a sanctions-led social security system. The reform of benefit conditionality in the 2010s reflected a shift in welfare policy towards a punitive system that aimed to improve work incentives by sanctioning claimants and reducing their entitlement to means-tested benefits. A 2016 report from the National Audit Office found no evidence that benefit sanctions are an effective way of helping claimants find a job, while “the overall impact of sanctions on wider public spending is unknown.” Peer-reviewed academic research has found many flaws in the economic case for benefit conditionality in the UK welfare system, such as that it is “largely ineffective in facilitating people’s entry into or progression within the paid labour market over time” and that businesses held negative views on conditionality as it led to them “receiving large numbers of unsuitable and unfiltered job applications, with associated negative resource impacts…which undermines their chances of securing employment”. We will explore welfare conditionality more generally in a future edition of New Economy Brief.

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Fiscal prudence? The decision not to scrap the policy, as with so many of Labour’s recent policy proposals, has been driven by a desire to demonstrate ‘fiscal prudence’. The argument from the leadership is that the economy that Labour might inherit is in such a dire state that ‘good Labour policies’ need to be sacrificed on the altar of fiscal rectitude, and that any spending commitment needs to be ‘fully funded’. Given the party also has no interest in going into an election talking about tax rises, this in practice means that new policies need to be ‘funded’ by finding savings from other departmental budgets. (We have discussed the debate around fiscal rules elsewhere.)

• Will it happen? A note of scepticism is sounded by the FT’s Stephen Bush, who argues that, while Labour is arguing that they will stick rigidly to Conservative spending plans in their pre-election communications, the chances of them doing so in office are limited. It should be noted that most commentators do not seriously believe that even Jeremy Hunt plans to stick to his own spending plans (which pencil in a large post-election spending squeeze). Likewise, the Guardian’s Polly Toynbee argues that Labour will ‘do’ more than they feel able to promise, and she bets that “Reeves and Starmer will be bolder than anyone now expects”.

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Has the policy been working on its own terms? The government’s rationale for implementing the two-child limit is to change work incentives and influence low-income families’ decisions to have children, ensuring that “families in receipt of benefits face the same financial choices as those supporting themselves solely through work”.

• Strong evidence says ‘no’. A timely report from academics studying Benefit Changes and Larger Families found “no evidence of any increases in employment among families affected by the two-child limit” and that “the two-child limit has had only a very small effect on fertility, meaning its main effect is to push families with three or more children further into poverty.“ (Mary Reader and Jonathan Portes provide a good explanation why in an article for the Guardian.) The Child Poverty Action Group also found that most families subject to the two-child limit are already in work. 
• It disproportionately affects minoritised groups. As the policy is targeted at larger families, households from marginalised backgrounds are hardest hit, particularly women and lone parents from ethnic minorities. The cumulative impact of tax and welfare reforms, published by the Equality and Human Rights Commission, found that changes to policy between 2010 and 2017 disproportionately and adversely affected women, ethnic minorities, low-income households and disabled people.
• And risks increased violence against women and girls (VAWG). Women's Budget Group argue that the policy fails to recognise the impact of domestic abuse and can leave survivors trapped with an abusive partner, as claimants are often forced to choose between poverty and personal safety.

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Political case for scrapping the two-child limit. Whilst one poll has shown the majority of the public still back the policy, pollster John Curtice suggests that the public has been more supportive of income support for working age people since the Covid-19 pandemic. He thinks that “an opportunity will indeed open up for the [Labour] party to create a narrative that persuades voters that it should be given the task of running an enhanced welfare state in post-Covid-19 Britain.“ The ‘scrounger’ narrative about benefit claimants has also been in decline: the proportion of people disagreeing with the statement that “many people who get social security don’t really deserve any help” in the British Social Attitudes survey has been over 40% since 2018, whilst those who agree has dropped to around 20%. Further, between 40-50% of the public think that the benefit system offers too little support for people on low incomes bringing up children, around double the proportion of those who think that it offers the right amount of support and triple the proportion of those who think it offers too much support.

• The economic case for abolition. It is important to remember that social security spending has an economic, as well as a social benefit. IPPR and the TUC have previously calculated that abolishing the two-child limit, alongside uplifts to the child element of universal credit and the child tax credit, would increase GDP by 0.5% (£14 billion a year). The Child Poverty Action Group argue that “unless the policy is abolished, the number of children affected will reach 3 million, as more children are born under the policy.” Their analysis finds that abolition would cost £1.3 billion and lift 250,000 children out of poverty completely and reduce poverty for a further 850,000 children. The Women’s Budget Group calculated that lifting 250,000 children out of poverty could save £2.3 billion in future ‘societal costs’ - through higher demand for public services, lower earnings potential and higher unemployment - “nearly twice as much as it would cost to remove the policy”. “If there is a cheaper child poverty reduction policy out there, I’d like to know what it is” notes Sam Freedman, podcast host and former senior policy adviser to Michael Gove.
• Communications strategy. The Fabian Society has argued that scrapping the policy altogether would require communications that appeal to fairness between children of different ages and explain the policy on the basis of the parents' circumstances, such as parents who are working, disabled or caring for young children. Their research found that these arguments are “likely to be more effective than saying that children are not to blame for their parents’ choices or that supporting children is an investment in the country’s future”.

Good morning from New Economy Brief.

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Spanish inflation is now below 2% - the 3rd lowest in the Eurozone behind Belgium and Luxembourg - and it has been falling faster than in other Eurozone economies. Spain has also been implementing interesting policies to shield their citizens from the rising cost of living, and Spain’s President has claimed these have played a role in driving down inflation.

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This week’s New Economy Brief explores the Spanish government's use of ‘unconventional fiscal policies’, their role in reducing inflation, and the lessons that can be learnt for other governments. 

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How unconventional fiscal policies can help tackle inflation. There are growing calls for governments to use fiscal policies to tackle current high inflation levels, as opposed to relying on interest rate rises. The IMF’s Chief Economist, Pierre-Olivier Gourinchas has argued that ‘unconventional fiscal policies’ have played a significant role tackling inflation in the Eurozone by reducing inflation expectations and preventing inflation ‘passing through’ from areas hit with supply shocks into core inflation in the rest of the economy. 

• E.g. The energy price cap reduced UK inflation. Here in the UK, the energy price cap is an example of such an inflation-busting fiscal intervention, explained here by IPPR’s Carsten Jung 

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Spain’s policy interventions on the cost of living. The evidence does suggest that Spain has gone further than many European countries, and certainly further than the UK, in terms of intervening in its economy to hold down the prices of certain essentials and shield citizens from the rising cost of living. Let's have a look at some of these interventions.

• Insulating essentials from the rising cost of living. Economist Phillipp Heimberger has highlighted that the Spanish government was quick to implement price controls in the energy and rental market early on in response to this recent wave of high inflation. A peer-reviewed study by Jorge Uxó explores these interventions: “The authorities have adopted significant measures to reduce inflation, especially in energy (capping gas in the electricity market, limiting the gas price for consumers in the regulated tariff, lowering indirect taxes, or discounts for vulnerable households) and public transport and housing rents. Other measures include transfers to the most affected households and economic sectors to offset the effects of inflation.” (See page 24 for a table detailing each policy implemented until 2022.) 

• Making housing more affordable through rent controls. Since 2022 the Spanish government has prevented landlords increasing their rental prices by more than 2% higher than their previous contract as a measure to contain inflation. This has since been extended until 2024 and a new Housing Law has been introduced. Eduardo González de Molina, policy adviser at Barcelona City Council and affiliate academic at UCL IIPP, explains how the new housing law is informed by the idea of a ‘Right to Housing’ and the Catalan government’s experiments with rent controls. A new peer reviewed paper provides robust empirical evidence showing that the rent controls in Catalonia reduced average rents paid by between 4 and 6% without lowering the supply of housing. (UK Mayors have also been calling for powers to implement rent controls recently.)

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How have they impacted inflation? Spain’s President Pedro Sánchez claimed at the end of 2022 that the Spanish government’s use of various policy interventions had been successful in driving down Spain’s inflation rate to the lowest level in the Eurozone (nearly half the average, at the time), and protecting families from the cost of living crisis. 

• ‘Second-round’ effects may be lower. Reducing the ‘second-round effects’ of inflation passing from energy prices, and the other interventions undertaken to hold down prices will definitely have impacted the rate of inflation. Economist Jo Michell notes, “We have to be careful with causation, but the experience of other European countries suggests that unconventional tools are helping to bring down inflation”, also citing the Spanish case

• …but real wages have also taken a very big hit. However, Michell has warned about fully attributing Spain’s low inflation to these progressive policies. Other, more concerning particularities in the Spanish economy are also at play, most notably the fact that Spain suffered the worst erosion of real wages of any large economy in the Eurozone over 2022. This means Spanish workers lost more purchasing power as inflation swallowed any nominal wage increases. This major erosion of real wages could explain a lot of what’s behind Spain’s experience of lower inflation, and why the government is trying to use fiscal policy to offset the impacts of inflation on workers by protecting the cost of essentials. 

• Tackling profit-driven inflation? Spanish trade unions have agreed to lower than inflation level wage increases over a number of years but argued that any ‘social pact’ to tackle inflation should not just be borne by workers, but by companies' profit margins too. Firms are passing on higher costs to consumers via price rises, and protecting, or in some cases increasing, their profit margins. An annual report from the Spanish Economic and Social Council concluded that increases in Spanish corporate gross profits drove 90.7% of domestic inflation in 2022, with wages only contributing to 10.9% of the general price rises. Consequently, the Spanish government is launching a ‘Corporate Profits Observatory’ which will analyse corporate profits to aid collective bargaining processes and ensure a fairer distribution of surplus value between workers, shareholders and senior executives. This could help reduce future bouts of ‘greedflation’ spreading around the economy. 

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Lessons for the role of the state in an insecure world. While it remains unclear whether Spain’s unconventional fiscal policies have played a significant role in keeping down its inflation, the Spanish experience does illustrate the potential for the state to play a bigger role in protecting people's disposable incomes by ensuring they can afford the basic essentials. As climate change makes extreme weather events and supply-shocks much more common (e.g the El Niño weather event is expected to re-inflate global commodity prices another couple of percent), inflation is likely to become a more permanent feature of the global economy and a much bigger ongoing problem for government policy. ‘Unconventional fiscal policies’ can prevent second-round effects of inflation moving from supply shocks and becoming embedded into other sectors of the economy, and can redistribute its impacts more fairly. With elections only a week away, we will see whether Spain’s strategy to tackle inflation is also a solid political strategy.

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Good morning from New Economy Brief.

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Last week, reports emerged that the Government was on standby to put Thames Water into special administration. Despite the initial promise of efficiency and investment following privatisation in 1989, critics argue that Thames Water and other privatised water companies have neglected essential infrastructure upgrades, leading to pollution and mounting corporate debt. With debts reaching approximately £14 billion (roughly 80% of the value of the assets of the business), Thames Water faces the risk of collapse, prompting concerns about the continuity of water and sewerage services for its 15 million customers. While the UK government may step in to manage the company temporarily, many see this as a much needed opportunity to renationalise. 

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In this week’s newsletter, we explore the lessons from Thames Water, the problems with water privatisation and what can (and can’t) be done about it.

A lost three decades? The potential collapse of Thames Water isn’t the first time that water privatisation has been deemed a failure from across the political spectrum. Amid droughts last summer, former David Cameron advisor Camilla Cavendish wrote that it was “time to admit that water privatisation has been a failure”. One of those who actually worked on the privatisation of water in 1989, Jonathan Portes, has called the policy an “organised rip-off”. 

• A list of failures. Whatever your politics, it would be difficult to argue that England’s privatised water companies have done a good job in recent years. According to Ofwat, water companies in England and Wales lost more than one trillion litres of water via leaky pipes last year. Since privatisation, water companies have sold off 25 reservoirs (and not replaced them). And of course, who can forget sewage dumping. In the words of the Environment Agency, the environmental performance of England’s nine water companies is “the worst we have seen for years”.

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Investment has declined since privatisation. Privatisation has failed to deliver what it was supposedly introduced to achieve: increased investment, argues Professor David Hall of the University of Greenwich. In fact, companies have invested “no net additional shareholder funds (equity) since privatisation” meaning that “money has been taken out, not put in”. 

• Debts are climbing. At the beginning of privatisation, all water companies were debt free. Now, however, they are collectively in debt of nearly £52 billion and a large (and increasing) bill for interest. Analysis by Karol Yearwood in 2018 found that any investment that does occur is almost entirely financed through income from customers, “usually with sufficient cash remaining to cover interest payments”. As Professor David Hall argues, companies are essentially getting further and further into debt simply to pay huge shareholder dividends. 

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Who are the shareholders? The privatisation of water has been described as “a cash cow for investment firms and private equity companies”. According to Professor David Hall, English water companies paid shareholders a total of £18.9 billion in dividends from 2010 to 2021. Thames Water alone has paid out a total of £7.2 billion in dividends since privatisation. But who are the shareholders receiving these payouts while failings continue? Well, the answer to this question has been described as “as murky as the water in the river”.

• Overseas investors. Since 2006, Thames Water “has been owned by a consortium of institutional investors, including funds from China and Abu Dhabi”. Infamously, it was managed by the Australian Macquarie Capital Funds, notorious for its “focus on profits”. However, Macquarie sold its shares in 2017, leaving Thames Water “with an extra £2bn debt burden”. Now, the largest share (26%) of Thames Water belongs to Kuwaiti and Canadian investors, represented by the Kemble Water Holdings holding company. This is where it gets murky - there are about seven other intermediary companies between Kemble and Thames Water customers (helpful diagram here). England is unusual in having all of its water companies in private ownership, but most of the beneficiaries of this system are based overseas. Research by the Guardian found that 72% of English water is owned by offshore investors which include “private and state-owned international funds, banks, multinationals and billionaires headquartered outside the UK”. 
• “An experiment in complex financial engineering”. The huge debts we see at Thames Water and other companies may in fact exist by design, not by accident. England has been “at the forefront” of the ‘financialisation’ of infrastructure in which “diverse physical structures have been transformed into financial assets”. According to Kate Bayliss, this can be traced back to the 2000s when “a new kind of financial investor began to dominate the [water] sector”. By 2021, nine out of 15 English water and sewage companies were owned by “special purpose companies”. These investors, made up of private equity funds, pension funds and sovereign wealth funds, have been able to generate significant shareholder returns by “hiking up debts”, Bayliss argues. Increased debt has been used to refinance water companies “so that investors could repay themselves part of the original cost of buying the water utility”, she explains. However, a “perfect storm” of inflation, high interest rates and pressure to improve performance mean that the high levels of debt we see now, as in the case of Thames Water, are becoming increasingly unsustainable.

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So, what now? It is possible that the shareholders of Thames Water could bail out the company. But failing that, the government will have to step in in some way. One option is that Thames Water will be put into special administration, a power outlined in the Water Industry Act 1991 which can be used when a private company is on the brink of collapse. This would enable the company to carry out its functions and provide a public service until either being transferred to another private company (in the case of Bulb in 2022) or into public ownership. 

• Renationalisation? Many view the current situation with Thames Water and the apparent failure of privatisation more generally as an obvious case for renationalisation. Of course, public ownership would eliminate profit motives and dividend obligations. However, this isn’t necessarily so straightforward. Opponents of renationalisation argue that taking Thames Water into public ownership would require transferring corporate debt onto the government's balance sheet, which some would argue is unfair for taxpayers to foot the bill and pay the debts incurred under poor management. Additionally, the administration process typically involves asset sales to repay debts, but in the case of a water company, the integrated and complex infrastructure makes breaking up assets impractical. Buying the assets from the shareholders would entail an enormous cost, necessitating adequate compensation for existing shareholders, including pension funds.
• Reducing the costs to the Treasury. Think tank Common Wealth argues that the answer to this problem lies in the 1991 Water Industry Act. Under the act, they argue that the government could trigger special administration proceedings and use these to facilitate the transfer to public ownership: “the special administration procedure enables secured debts to creditors to be reduced, subordinated, or removed, where they would not be “consistent with the purposes of the special administration order”. Such an order’s purposes include ensuring a water company’s “functions... may be properly carried out” such as stopping leaks or pollution. This will reduce or eliminate the cost of transfer to public ownership.”
• Regional ownership. Nationalisation does not have to mean direct ownership by central government. All three failing water companies (Southern Water, South East Water and Thames Water) could be taken into special administration but then, instead of being renationalised, could be “transferred into public ownership under the councils in the region as the first regional publicly owned water company”. 
• Enforcement. The Water Industry Act 1991 also enables ministers and regulators to issue enforcement orders to control the company’s behaviour. They could order the company to pay down debts, restructure, reduce payouts or keep bills down. Critics of this approach argue that this is essentially renationalisation but without the same level of accountability. 
• Let it go bust. Some have suggested that the government could let Thames Water go bust and take it back into public ownership then. However, this would have profound implications for customers and as the Guardian’s Environment Correspondent Sandra Laville explains, is “simply… not allowed”. 
• The Welsh model. Academics Robert Branston and Phil Tomlinson propose that Thames Water follows the “unusual” example set in Wales. “Welsh Water has a unique corporate structure, with no shareholders and is run solely for the benefit of its customers. It is commercially run, with professional managers held to account by 62 independent trustees. While not perfect, its performance in recent years compares favourably with that of the other privatised water companies”, Branston and Tomlinson argue. They admit that creating such an organisation “would not be easy” but does have a precedent in the case of Network Rail “which was created when its commercial predecessor Railtrack went bust”. Railtrack’s debts were subsumed into Network Rail and underwritten by the government. Branston and Tomlinson explain that “while it is true that these public-interest companies are funded by debt, a government debt guarantee helps keep the costs of servicing this debt down (while costing the government very little)”.
• Regulation and social purpose. Purposeful Company co-chair Will Hutton argues that through good regulation, water companies like Thames Water can deliver social purpose while remaining in the private sector. “The sunshine of accountability” could ensure that Thames Water gets serious about its environmental responsibilities, invests properly and banishes “opaque ownership structures”, says Hutton.

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Lessons from Thames Water. You’d be hard pressed to find anyone who could enthusiastically defend the record of water privatisation over the last 34 years. As the climate crisis worsens and debt becomes more expensive, reforming the water sector so that investment is put before shareholders has never been more urgent. The legacy of years of privatisation can be difficult to unravel, with high debts and the need to make up for historic deficits in infrastructure investment both providing significant barriers to action.

• Funding the future. Ultimately the question of how necessary future infrastructure upgrades will be financed is the long term challenge facing the sector. Common Wealth argues that if the industry remains in private hands, even with additional stakeholder responsibilities, bills will rise significantly. This is because such capital demands a return, and this return can only be extracted from consumers. In contrast they argue that the public sector can borrow for upgrades at lower rates, making public ownership “a cheaper and more strategic mechanism to fund the water industry’s future”.
• Voice and value. But who gets a say in the industry's future is also a vital question. For example newly renationalised water companies could be structured so that consumers, workers and other stakeholders are represented on the board as with the newly remunicipalised Eau de Paris in France (where bills fell by 8%). This would end the domination of shareholder interests, which has arguably led to the current mess in the industry.

Good morning from New Economy Brief.

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The mortgage crisis has dominated the UK news cycle for the last week, but the relationship between inflation, interest rates, and mortgages is not always well understood. 

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In this week’s newsletter we look at the impact of rising rates on mortgages, the political fallout, the solutions being proposed by the main parties and some progressive alternatives, before considering what this all means for the debate about how to tackle inflation.

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Mortgage misery. Last week’s decision by the Bank of England to hike interest rates by 50bps to 5%, the highest since the 2008 financial crash, has sparked a wave of panic in Westminster over what Money Saving Expert Martin Lewis has dubbed the ‘mortgage time-bomb’. It isn’t hard to see why. Mortgage holders who are on tracker products or whose fixed terms are coming to an end face significant increases of hundreds of pounds a month to their interest payments. These increases will intensify the cost of living crisis for millions, and put many families at risk of defaulting on their mortgage.

• A feature, not a bug. The intensification of the cost of living crisis is not a side-effect of the Bank’s actions, it is the intended consequence. Rate-setters continue to argue that high core inflation can only be tackled by removing excess demand from an economy which is ‘running too hot’. According to the theory, there are a number of ways that raising rates reduce inflation such as by encouraging saving, but a core plank of the theory is that rising mortgage costs force homeowners to cut back on other spending, thereby reducing inflationary pressures in the economy. 
• Delayed transmission. The Bank has taken action in response to stubbornly high inflation numbers which have seemed immune to previous interest rate hikes. Part of the reason for this is the structure of the mortgage market itself. Firstly, a large amount of (mainly older) homeowners own their homes outright and do not have mortgages, meaning that they are unaffected by changes to the base rate. (An important statistic comes via the FT’s Sarah O’Connor: in every region of England and Wales bar London, there are more homes owned outright than those owned with mortgages or rented). Of those that do have mortgages, only a small number are on ‘tracker’ products which are sensitive to changes in the base rate set by the Bank of England. The vast majority are on fixed rates deals which typically last between two and five years. Those homeowners unlucky enough to be on trackers or coming to the end of their fixed rates are seeing steep rises to their monthly repayments, but a significant amount of the mortgage pain is yet to be felt as fixed rates insulate many people from rate rises for a time.
• The risk of overshoot. The fact that much of the monetary tightening has yet to work its way through the system is one of the reasons that many have criticised the decision to continue hiking rates, arguing that it risks going too far and causing unnecessary damage and instability. Two members of the Monetary Policy Committee voted against raising interest rates for this reason, and the Bank’s decision has heightened fears of a recession (some commentators have been explicit in their belief that the Bank should be trying to cause a recession in order to tackle inflation). Others have argued that because inflation is being largely caused by supply issues (including the war in Ukraine, bad harvests relating to climate change, and Brexit trade barriers) and corporate profits, efforts to crush inflation by suppressing demand will be ineffective.

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Political fallout. The immediate political fallout has been three-fold. First, Labour have seized on the opportunity to brand the crisis as a ‘Tory mortgage penalty’, sensitive to the fact that middle-aged families with mortgages are exactly the demographic of people that the party hopes to win back from the Conservatives at the next general election. YouGov’s Patrick English has mapped the mortgage crisis and found a significant overlap with the most marginal constituencies in the country, while in the Times, Emma Duncan argues that this could spell the end for Conservative hopes in Barratt Britain (a demographic of northern homeowners largely thought to be responsible for Conservative victories in the ‘Red Wall’). Also sensitive to this fact are Conservative backbenchers in marginal seats who have been calling on the government to do something, anything, to alleviate the pain their constituents are feeling. And remember, the structure of the mortgage market means that the vast majority of homeowners have not yet felt the effects of monetary tightening on the mortgage payments yet, meaning that as millions of fixed rate deals expire between now and a likely general election next year, the political pain of this crisis is only going to intensify.

• Just blame the Bank. Thirdly, the Bank of England has come in for (occasionally contradictory) criticism from the Conservative backbenches, with the Bank being simultaneously accused of having lost control of inflation by being too slow to raise rates, and having caused the mortgage crisis by raising rates too quickly - with the central message being that angry voters should blame Andrew Bailey for their rising mortgage bills, rather than Rishi Sunak and Jeremy Hunt. Some have even gone as far as to question the independence of the Bank of England (although others would argue that the ability to blame the Bank for rising rates is one of the key political motivations for keeping the Bank independent of government).
• It’s hurting, but it’s not working. There are two unfortunate realities for MPs pushing this line however. The first is that the government has inextricably linked itself to the mortgage crisis by pledging to halve inflation this year (a pledge which now looks set to be missed). The second is that, as Jeremy Hunt has set out, the government has absolutely no intention of providing direct support to mortgage holders, arguing that doing so would defeat the object of interest rate rises and therefore prolong the inflation crisis. The logic of the government’s argument about inflation has always been that the cost of living crisis needs to be intensified for many families in order to re-anchor price expectations. It has so far largely avoided making this argument explicitly, and it appears that many of its own MPs are simply unwilling to tell their voters that the pain they are feeling is not just an unfortunate side effect of the fight against inflation - it is the explicit mechanism by which the Bank and the government intend to meet the pledge. In short, a pledge which was intended to ensure the government was rewarded for falling inflation while avoiding the blame for rising interest rates, now looks set to result in the government both suffering the embarrassment of missing its pledge while also becoming the focus for irate mortgage-holders.

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Help for homeowners? Caught between the voters and the pledge on inflation, Chancellor Jeremy Hunt has attempted to walk a difficult line between being seen to respond to the crisis whilst not undermining the government’s central argument on inflation. The result is a ‘mortgage charter’ voluntarily agreed with some of the UK’s main mortgage lenders. The deal involves lenders offering various forms of temporary relief such as short-term switches to interest-only repayments, as well as a longer period between missed payments and forcible home repossession.

• Labour attack. This plan is not enough for Shadow Chancellor Rachel Reeves who has labelled it as a “bad cover version” of Labour’s own plan. The central difference is that Labour would force lenders into offering these forms of relief, as opposed to a voluntary charter.
• The conservative debate on intervention. The package also falls short of the expectations of MPs on Hunt’s own side of the House who are scrambling for solutions, from Cabinet minister Michael Gove suggesting 25 year fixed rate mortgages to Trussite backbenchers Jonathan Gullis and Jake Berry calling for the reintroduction of mortgage tax relief (a scheme introduced by Thatcher’s government in 1983 and later scrapped by Gordon Brown). The tax break is known as a mortgage interest relief at source (Miras), allowing borrowers to claim tax relief for interest payments on their mortgage. However, as the FT’s Stephen Bush points out, this would both cost a lot of money and defeat the purpose of rate rises, making this an unpopular suggestion among the majority Conservative MPs. As Bush highlights, this speaks to a significant ongoing problem for the Conservatives - how to stick to their pledges while assuring vulnerable marginal constituents that they may actually be able to alleviate the cost of living crisis.
• Equity stakes for mortgage relief. An alternative idea comes via a Joseph Rowntree Foundation paper earlier in the year by Toby Lloyd, Rose Grayston and Neal Hudson. They proposed that the government should “provide an exit route” for highly leveraged and low-income homeowners by establishing a new version of the Mortgage Rescue Scheme launched in the wake of the Global Financial Crisis, which would fund social landlords to buy the homes of mortgaged homeowners in distress: “Beneficiaries would see their mortgage debts cancelled by the purchasing social landlord with any negative equity gap funded by the Government, but, as social renters, they would not retain any equity". Having the government take public equity stakes socialises the risk of financial crisis and creates a new kind of tenure: co-ownership between the state and households, where the government receives a stake or income flow.
• ‍Rent controls. Of course, mortgage holders aren’t the only ones feeling the squeeze. A paper for the US Federal Reserve found that higher interest rates also increase housing rents, despite reducing house prices. Renters tend to pay around 30% of their income on rents, much higher than the predictions that mortgage holders will have to pay over 20% of their income as the current crisis unfolds, and many mortgage holders have benefited from the era of ultra low interest rates and rising house prices. In this context, Mayors such as Sadiq Khan and Marvin Rees are calling for powers to implement rent controls alongside any government support for mortgages. 

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Alternative strategies for controlling inflation. Ultimately, the mortgage-timebomb is caused by a combination of high levels of housing debt, and a policy choice of trying to control inflation primarily through interest rate rises. The result is a very big squeeze on one particular cohort of homeowners, which may prove to be politically unsustainable (and economically ineffective).  This also illustrates what UCL IIPP economist Josh Ryan-Collins calls ‘the paradox of contemporary monetary policy’: the tension between the Bank of England’s mandate to maintain both price stability and financial stability. As many commentators are starting to note, monetary tightening is far from the only tool for tackling inflation, and excessive reliance on it leads to political problems because the distribution of the pain is felt so unevenly. So what are the alternatives?

• Taxing those who can afford it. It may be political heresy in some quarters to suggest that taxes could rise, but this is one of the options available to the government to cool demand in a way that avoids penalising those worst affected by the cost of living crisis. Writing in the FT, former MPC member Adam Person suggests “taxes on high income workers, and capital gains, as well as on property”. A paper from IPPR demonstrated how the government can use fiscal policy to stabilise the UK macroeconomy, and, in order to tame inflation, “taxes will need to play a larger role, taking demand out of the economy”.
• Stopping ‘Greedflation’. Politico’s Esther Webber has suggested that “One alternative option would be to go after “greedflation”, where profits outpace costs among suppliers of goods and services, by asking the competition regulator to investigate the scope of the practice. Last year, IPPR’s Carsten Jung and Common Wealth’s Chris Hayes proposed that the Competition and Markets Authority (CMA), launch “pre-emptive investigations into the potential for excess profits in the most concentrated sectors in the UK economy.” (Pressure is also building to tackle corporate profit-driven inflation in the Eurozone…from the IMF, of all places.)  ‍
• Tackling profiteering in the banking sector. John McDonnell argues that UK banks have been profiteering from the rise in interest rates, citing analysis by Unite the Union that UK banks made an extra £7bn by refusing to pass on higher interest rates to savers. It is this kind of profiteering that has led some to call for excess profit taxes on the banking sector. McDonnell says that banks should "accept that mortgagees are struggling to pay and cut their interest rates, covering the cost from their profits. But if the banks are not willing to act, the government should intervene and levy an excess profits tax on the sector." He calls for a windfall tax of 15% on the UK's big 5 banks to fund a mortgage interest relief scheme of £5.5bn .

Good morning from New Economy Brief.

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The Bank of England's Monetary Policy Committee is set to raise interest rates again tomorrow. 

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This risks limiting private sector investment and pose a political problem for a government wanting to ‘ramp up’ capital investment to grow the green economy.

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But what if the Bank had a lower interest rate for green projects (as they do in Japan)? Read on for an explanation of how green credit guidance - a policy solution championed by the Monetary Policy Committee’s newest member, Megan Greene - can keep finance flowing towards net zero.

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Raising interest rates harms the economy in various ways…Markets are pricing in further interest rate hikes before the Bank of England’s Monetary Policy Committee meeting tomorrow, as the UK’s persistently high inflation rate is expected to stay higher than comparable economies, for much longer than expected. Media commentary is focusing on the negative impact of higher interest rates on people trying to repay their mortgages and on the higher costs of government borrowing, but less attention is being paid to another consequence of rising interest rates; the impact on business investment. How will the UK meet its legally-binding Net Zero targets, when financing the investments needed for the green transition are becoming more expensive?

• …but green investment will particularly suffer.  Achieving an environmentally sustainable and Net Zero economy requires a significant increase in investment in green technologies and sectors. Unfortunately, the UK has an absolutely dire recent record on investment, both public and private. As new research from the Institute for Public Policy Research explains, the UK is at the bottom of the G7 league table for business investment. If the UK had invested at G7 average levels from 2006-2021, an extra £562.7 billion in public and private money would have been invested in our economy. Higher interest rates will be particularly detrimental for investments in the green transition, given that those projects, while generating operational savings over a longer term, typically have high upfront capital costs.
• Is monetary tightening self-defeating? Higher interest rates will be particularly detrimental for investments in the green transition, given that those projects, while generating operational savings over a longer term, typically have high upfront capital costs. The irony of this is that the Bank’s aims of price stability are being further hindered by its own blunt tool of monetary tightening. Green investment can reduce the exposure of the UK economy to future bouts of ‘fossilflation’ - inflation that was primarily caused by fossil fuel-related energy price shocks - e.g. by providing more lending for building retrofits and clean energy projects. Further, green investments will also protect longer term financial stability from climate-related risks, but it is green investment that will suffer the most from higher interest rates.
• How will the government fill the green finance gap? The UK government’s Net Zero Strategy outlines their plan to meet their legal emission reduction targets. It estimates that additional capital investment must grow to “an average of £50-60bn per year through the late 2020s and 2030s”, which the Climate Change Committee (CCC) assesses is “an ambitious, credible path for UK decarbonisation…in line with the Paris agreement”. (Keep an eye out for the CCC’s latest analysis of the government’s progress on Net Zero report, due out next week...watch this space!). Higher borrowing costs then pose a political problem for the Conservatives and Labour Party, both of which have emphasised the importance of ramping up private sector finance to stimulate green investment.

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Is green credit guidance the answer? One proposal for making green investments cheaper is to have a lower interest rate for borrowing for low-carbon projects. The policy has been championed by the newest member of the Monetary Policy Committee, Megan Greene. This ‘dual interest policy’ is part of a wider framework called ‘green credit guidance’. 

• How it works. Monetary policy can ‘shield’ green investments from interest rate hikes by offering banks refinancing at preferential rates for financing clean investments in the real economy. Interestingly, offering lower costs of credit played an important role in supporting economic and industrial policy during the 1945 – 1973 ​‘golden age’ in the West, and more recently in aiding the rapid development of East Asian countries. 
• The experience of other countries. Green Central Banking’s David Clarke has covered how the Bank of Japan (BoJ) have been “providing zero-interest financing to lenders supporting action to address climate change” since early 2022. The BoJ’s governor justified taking action on climate by arguing that doing so falls within the BoJ’s price stability and financial stability mandates. Christine Lagarde has also put green credit guidance as one of her top priorities for her presidency of the European Central Bank.

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Implementing a dual interest rate policy in the Bank of England. The New Economics Foundation’s (NEF) Frank van Lerven and Lukasz Krebel have proposed that the UK could adopt such a scheme by repurposing the Bank of England’s Term Funding Scheme (TFS) - which currently providers cheaper credit to businesses and households - to provide cheaper credit to banks to lend for sustainable investments. This would keep interest rates lower for green investments. (The question of which investments qualify for the lower interest rate, and how to determine if they are actually sustainable, will be explored in a future Digest.)

• How it works. The authors illustrate how the policy would work in practice with accelerating investment in building retrofits: “The interest rates for the TFS green credit lines to banks could be set at 0%, or in all cases below the Bank rate, to ensure lower costs of green credit. The refinancing rate could be made negative (echoing the European Central Bank (ECB) on the condition that commercial lenders pass on a minimum predefined rate discount to retrofit borrowers – for example, by offering loans to households and businesses at 0% interest.” (Watch their video explainer.)

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A holistic strategy for green finance and decarbonisation. Whilst more interventionist credit policies would be particularly useful for political parties looking to stimulate private finance as a way to fill the green investment gap in the UK and ‘ramp up’ spending on Net Zero without using public money, economists have warned that “fiscal policy must lead the way on the green transition” and green credit guidance should be not be seen as a ‘silver bullet’, but part of a holistic strategy of discouraging ‘dirty’ investments as well as ramping up both public and private green finance. 

• The importance of public investment,… The scale of the funding gap in addressing the environmental emergency has led many to suggest that private finance alone is not enough, and that public finance is particularly important. Indeed, public investment can play a crucial role by directly investing in critical projects that the private sector is reluctant to support, as well as those that are socially important but do not generate high returns. Furthermore, many economists have argued that direct public investment can help to ‘crowd in’ private investment into strategically vital areas. A principally market-coordinated transition that is overly reliant on private finance also risks normalising extractive behaviours in the green economy, such as profiteering and greenwashing. (Read our previous Digest explaining the risks of relying on private finance to decarbonise the economy.) Common Wealth’s Melanie Brusseler explains that publicly-led coordination is necessary for a timely and effective transition. She argues that “Market coordination—premised on private investment and profitability—cannot effectively deliver this in line with climate targets and economic functioning” and that “building institutions to coordinate the transition should be Labour's first term focus”. NEF have argued that the UK’s state-owned financial institutions (such as the British Business Bank, UK export finance and the CDC group) should also be given Net Zero mandates to redirect their ~£7bn annual investments and scale them up to help grow the green economy.
• …industrial strategy,... The experience of green credit guidance policy in France and Japan showed that it worked best when the state made clear policy directions through a solid industrial strategy, giving the private sector more certainty to make the necessary investments. Economists Katie Kedward, Josh Ryan-Collins and Daniela Gabor explain how an ‘allocative green credit policy’ regime can be organised around green industrial policy objectives and democratically agreed green ‘missions’. 
• …and discouraging dirty investment. Penalising loans that promote high carbon activity and phasing out investments in fossil fuels will also be important for meeting the UK’s climate targets. A key part of the green finance equation is ending government support for fossil fuels, e.g. through tax relief for oil producers in the North Sea. This week, the Labour Party released a briefing outlining how it plans to ‘make Britain a clean energy superpower’, including a pledge to ban future licences for oil and gas exploration. 

Good morning from New Economy Brief. 

This morning, The Crown Estate, one of the UK's largest landowners, releases its annual report. Who owns land and how they use it is at the heart of some of the most pressing policy issues of our time. Any serious attempt to improve problems like the housing crisis, food shortages, climate change and inequality require changes to how land is used. Land ownership is a key issue which often goes underexplored. This week, we take a deep dive into the question of who actually owns land in the UK, the economic and political consequences of this, and what can be done about it.

Who owns land? The answer to this question - at least in a UK setting - has been described as “one of the most closely-guarded secrets in the thousand-year-old history of this country”. The Who Owns England? project, run by Guy Shrubsole and Anna Powell-Smith, attempts to solve this very mystery. Through the use of public maps and data released through the Freedom of Information Act, it finds that half of England is owned by less than 1% of the population. The aristocracy and gentry alone own 30%. That’s significantly more than the amount of English land owned by the public sector, homeowners, conservation charities, the Royal Family and the Church of England put together (a total of 17.4%).  After the aristocracy and gentry, corporations are the second largest landowning group, with an 18% share of English land. Oligarchs and City bankers own 17%. Crown estates and the royal family own considerably less than these groups, however their land share of 1.4% still results in increasingly large revenues for royal family members. For example, King Charles and the late Queen Elizabeth II have received total payments equivalent to more than £1 billion from the duchies of Lancaster and Cornwall. The profits made from the farmland, hotels, medieval castles, offices, shops and real estate owned by the royal family have increased substantially since the beginning of the late Queen’s reign. 

• Hidden landowners. 17% of land in England and Wales remains undeclared at the Land Registry. Someone owns it - we just don’t know who. There is a strong likelihood that the owners of this undeclared land are members of the aristocracy and gentry, meaning that their combined share of the country may in fact be far higher than 30%. Because aristocratic estates remain in families for centuries, they are not generally sold on the open market, and will not have needed to be recorded with the Land Registry. According to Anna Powell-Smith, the Land Registry has committed to comprehensive registration by 2030, though it is unclear how this will be achieved. Powell-Smith and Shrubsole propose a government requirement to make all land registered, with details of its beneficial owner, before it can receive farm subsidies. Given the amount of land used for farming, it is hoped that this would incentivise owners to register the land and help solve the mystery of England’s undeclared land.
• And why does this matter? The question of “who owns land?” matters because, as Shrubsole and Powell-Smith explain, “who owns land gets to choose how it’s used… Where we build our homes, how we grow our food, how we protect ourselves from flooding, how much space we set aside for wildlife”. As the connected crises of climate, nature and food continue, what we do with our land takes on an even greater significance. Often, important natural resources are “mismanaged” by those who own the land, argues Guy Shrubsole. Peat soil, for example, is often set fire to for grouse shooting, releasing 11 million tonnes of carbon dioxide per year. About one million acres of peat is owned by just 124 individuals and organisations. 

Politics, policies and rentierism. One of the most direct consequences of concentrated land ownership in the UK is housing. Landowners can often decide where homes are built and can earn rents from them. Home ownership should in theory allow people to achieve a degree of financial independence and security. It’s no wonder then, that the promise of home ownership plays a central role in British politics. It is often accepted (though increasingly questioned) that home owners generally vote Conservative. Meanwhile, the Labour Party says it wants to be the party of home ownership. Of course, this wasn’t always the case. Shifts in fiscal policy during the second half of the twentieth century saw the state’s involvement in housing move from the provision of social housing to the promotion and subsidisation of home ownership. While social housing still exists, provision remains 25% less than in 1979. Home ownership is promoted as the ultimate aspiration, offering security and longevity to voters. Policies like Right to Buy provide the hope of financial independence - an opportunity to have an economic stake in a political system in which state provision of security is not guaranteed. 

• But… The irony of home ownership politics is that, without significant structural intervention in the housing market on both demand and supply-sides (which would require a huge shift in the fiscal consensus towards much higher government spending), the home ownership dream becomes less and less accessible the more it is promoted. Instead of directly providing affordable housing, governments increasingly intervene on the demand side, “supporting would-be homeowners to buy in the private market”, hoping (in vain) that the private sector will pick up the supply-side slack and get building. But, as economist Josh Ryan-Collins explains, this leads to a “damaging feedback cycle” between finance and housing. Instead of promoting security and independence for ordinary people, the market becomes increasingly inaccessible and profitable only for a small number of landowners and property owners. As the role of banks shifts towards mortgage lending rather than capital investment, “credit creation for the purchase of existing property and land increases property prices without stimulating investment or wages”. As a result, household spending shrinks and debt rises. In turn, the demand for mortgage debt rises too, “generating a positive feedback cycle where increasing mortgage credit effectively creates its own supply”, says Ryan-Collins. Houses become more unaffordable, and land more concentrated in the hands of a few. 
• Rentierism and the leasehold system. The vicious cycle of the financial system and housing contributes to what is often referred to as ‘rentier capitalism’. This describes the system in which concentrated property ownership allows owners to extract increasingly high rents. Those paying the rents are then prevented from gaining wealth of their own due to extortionate property prices and the fact that large portions of their disposable income is spent on paying such rents. Though this often affects those literally paying rent, i.e. in the private rented sector, archaic laws mean that even homeowners can be on the sharp end of such rent extraction. The “feudal” leasehold system (Michael Goves’ words, not ours) is yet another thorn in the side of politicians who want to be able to promote home ownership as a means to achieving security. However, the Government announced that it is scrapping plans to abolish the leasehold system in England just last month. 

‍So what do we do about it? 

• Making homes available. Building more affordable homes is of course one solution that would redistribute property ownership to some degree. However, policies that more generally shift the balance of power away from landlords could have a similar effect. Rent regulations, stronger renters rights and high taxes on second homes are all policies which may lead to many more houses ending up on the market without new ones even being built. 
• Taxation. One proposal which attempts to address rentierism incrementally is that of a land value tax. The FT’s Martin Wolf has described the policy as “economically efficient and morally just”. The idea is that it is unjust for landowners or homeowners to increase their wealth (or potential wealth) because their assets have become more valuable through no effort on their own part. Someone living in a house for several decades may see the value of it increase massively having made zero renovations because a train station has been built nearby, for example. Without attempts to redistribute this “unearned” wealth, land ownership and the potential to earn economic rents becomes further consolidated. Economist John Muellbauer has proposed a Green Land Value Tax in which those eligible to pay the tax would receive discounts for making green developments to their homes. Campaigns like Fairer Share also propose replacing council tax with a proportional property tax in which property owners would pay a simple flat rate of 0.48% on the value of properties. Fairer Share’s interactive map demonstrates how this would redistribute wealth from the South East to the rest of the UK. 
• Community ownership. Taxing those who benefit from land ownership is one method. Another is to find a more equitable distribution of land in the first place. A transition towards community ownership, for example via Community Land Trusts and a Community Right to Buy, has been proposed by both left and right in recent years. In 2003, Scotland introduced a Community Right to Buy in which communities are given first refusal when local land goes up for sale. Campaigners argue that this should be replicated elsewhere in the UK. 
• Compulsory Purchase Orders. One of the most direct ways to redistribute land is not only to allow communities the right to purchase land when it is voluntarily up for sale, but to actively pursue it. Compulsory Purchase orders would grant public authorities the power to require land that has been left vacant or derelict for a defined period to be sold at public auction, offering community groups the right of first refusal. Just last month, the Labour Party announced that it would introduce a new law which would give ​​local development authorities in England the power to buy up land via compulsory purchase orders at a fraction of its potential cost if they want to build on it.

‍Now what? The political incentive to offer security feels increasingly important. Recent geopolitical events have turned the issue of renewable energy into one of economic security. The cost of living crisis too has shone a light on just how many of us are financially insecure. The Labour Party clearly sees the need to appeal to the nation’s desire for security with its new language of ‘Securonomics’. Of course, there are plenty of examples of where security can be offered without the promise of home ownership. In theory, social housing and social security can provide this. But no matter what kind of homes people live in, who owns land will always be politically significant. The concentration of land ownership has implications for what we eat, our natural environment, our climate and whether more homes can even be built in the first place. Inequality in land ownership sits at the intersection of so many challenges we face. We have set out above how policies do exist to shift away from the current imbalance, whether the political will to do so exists is another question.

Good morning from New Economy Brief. 

As the Covid-19 Inquiry dominates the headlines, the TUC conducts its own investigation into the UK’s Covid response and preparedness. But rather than dodgy WhatsApps, this new report explores how austerity left the country “hugely unprepared” for the pandemic across four key pillars: 

• Safe staffing levels in public services
• Public service capacity and resources
• A strong safety net through the social security system
• Robust health and safety protections at work

We take a look at each of these pillars and how greater economic resilience could mitigate future crises. 

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Safe staffing levels in public services. The report finds that “multiple years of pay caps and pay freezes” left both health and social care “dangerously understaffed” during the pandemic due to low recruitment and increased staff turnover. Between 2010 and 2020, the number of nurses per capita in the UK grew by less than one per cent compared to the OECD average of 10 per cent. The report states that in the months before the pandemic, the average NHS worker was earning £3,000 less in real terms than in 2010 and that in social care, the turnover rate for staff in England increased from 22 per cent in 2012/13 to 31.8 per cent in 2019/20.

• Safe staffing and the law. The Royal College of Nursing is campaigning for legislation to guarantee nurse staffing levels in England across all sectors and settings as currently there is no such law in England. Wales implemented the first safe staffing levels law for nurses (The Nurse Staffing Levels (Wales) Act 2016), requiring health boards to provide sufficient nursing staff “so that all patients can receive sensitive care”. However, Section 25B only covers certain healthcare areas, with the RCN Wales continuing to to campaign for the extension of Section 25B to new settings, particularly mental health inpatient wards, community nursing, and care homes. Scotland implemented the first UK safe staffing law covering both health and social care (Health and Care (Staffing) (Scotland) Act 2019). However, implementation was delayed due to the pandemic with Act due to come into force in 2024. 

Public service capacity and resources. In 2020, spending per capita on transport, housing, childcare, schools, higher education, police, fire services and environmental protection was lower than in 2010. The TUC argues that these limited public services had a negative impact on “civil contingencies” and children’s education during the pandemic. 

• Children’s social care. One particular area where underfunding arguably led directly to lack of support for vulnerable people during the pandemic was children’s social care. Ofsted found that the pandemic “exacerbated existing challenges” such as delays in the family justice system and “existing staffing issues”. The number of council-employed social workers in 2021 was 1.5% lower than in 2020, and the number of social work jobs in local authorities fell from 17,455 to 17,280 over the same period. BASW, the union representing social workers, has highlighted the negative “consequences of the Covid-19 pandemic on funding, on services and on wellbeing” but have highlighted that behind this, there was a “backdrop of long-term underfunding of social services”. Care leavers, who normally should be supported by local authority teams in finding education and employment, are entering the workforce and education at lower rates than pre-pandemic. 

A strong safety net through the social security system. Benefit cuts largely made between 2010 and 2016 damaged the social security safety net and caused increases in poverty levels, argues the TUC. It highlights that “living in poverty was associated with greater risks of exposure to Covid-19, and greater levels of vulnerability to more serious health consequences from being ill with Covid”.

• Systemic change. The pandemic exposed a vast number of people to job insecurity who may not have had previous experience of the social security system. With the backdrop of a weakened social security system following austerity policies, the government was forced to introduce a number of quick measures to guarantee people’s incomes such as an uplift in Universal Credit and the furlough scheme. Social Policy academic Ruth Patrick critiqued these measures as failing to implement “systemic” or “enduring” reforms which could provide much-needed resilience in the face of future crises. The New Economics Foundation suggests that a Living Income scheme, guaranteeing a minimum income level beneath which nobody can fall, could provide a more robust social security system. The good news for proponents of such systemic change is that attitudes to social security seem to have changed because of the pandemic. A peer-reviewed study in 2021 found that the pandemic had led to an increase in support for Universal Basic Income both in the US and UK.

Robust health and safety protections at work. Health and safety took on a new meaning during the pandemic amid the presence of such a contagious and in some cases deadly disease. But according to the TUC, “the enforcement of rules to keep workers safe at work was compromised by cuts that decimated public health and workplace safety regulator” which particularly affected those who couldn’t work from home. Staffing numbers at the Health and Safety Executive, for example, have been cut by 35% since 2010, and the number of workplaces investigated by a safety inspector fell by 70% from 2010 to 2020. To avoid such issues in the future, the TUC proposes “long-term, adequate funding of health and safety regulators”, “a realignment of health and safety regulation is needed to ensure independence” and better “regulatory clarity”, ensuring “greater level of awareness among employers, the public and stakeholders.”

Austerity on trial. The wider significance of highlighting the relationship between austerity policies and Covid is twofold. First, the Covid response highlighted cracks in state capacity that normally go under-analysed, whether that is lab capacity, sick pay levels, or number of health and safety inspectors. These areas were often the target of cuts precisely because they got little attention and therefore less public backlash. This inquiry is an important opportunity to shine a light on these decisions, and provides an important example of the link between public spending, state capacity, and economic resilience. Perhaps the more important reason is more forward-looking. State capacity in the UK is likely to be stretched in similar ways again in the near future, whether by other pandemics, by the effects of climate breakdown, or other unforeseen events. At the same time, the government has pencilled in yet another round of public spending squeezes in the middle of the decade in order to comply with their fiscal rules. With UK public spending levels back at the centre of national debate, this inquiry’s verdict could have a significant impact on wider attitudes towards public spending.

Good morning from New Economy Brief.

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With Rachel Reeves setting out her economic philosophy in a big speech in Washington last week, we take a deep dive into the origin and substance of Labour’s emerging economic policy.

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Read on for our explanation of ‘Securonomics’, where it comes from, the electoral and economic problems it seeks to solve, as well as two key lessons from the US: the scale and delivery of public investment and questions of power and control over critical infrastructure and the green economy.

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Rachel Reeves’ ‘Securonomics’. Last week, Shadow Chancellor Rachel Reeves gave a speech in Washington outlining Labour’s economic policy platform, framed by the term ‘Securonomics’. Reeves provided more detail in a policy report released by Labour Together: A New Business Model for Britain: Building Economic Strength in an Age of Insecurity. 

• Post-neoliberalism and paradigm shifts. The speech was the clearest sign yet that the Labour Party are serious about accelerating an economic paradigm shift beyond neoliberalism, as Reeves explained the need for a new model for economics and a more interventionist role of the state. This follows an emerging global consensus that economies have suffered from an over-reliance on market mechanisms, rather than the power of the state, to solve deep rooted structural issues, and that previous economic models have contributed to widening geographic inequalities. Reeves emphasises these two failures in her speech. 
• Bidenomics, modern supply-side economics and productivism. In the US, ‘Bidenomics’ is characterised by a more active role for the state in its industrial strategy to make and shape markets central to domestic industries of the future, particularly, reshoring (or ‘friendshoring’) supply chains to secure the supply of critical materials and create good quality jobs. (See our previous briefing on Bidenomics and what the UK can learn from the US.) Reeves drew explicitly on this model which is referred to variously as ‘Bidenomics’ or ‘modern-supply side economics’. IPPR’s George Dibb notes that a more accurate term would be what Harvard economist Dani Rodrik calls ‘productivism’: “a “major shift from the last-gasp-neoliberalism currently being offered by the Conservative government” and “also a shift from the approach of previous Labour administrations”. Dibb’s paper for Renewal explains why the UK economy needs a more active and strategic state to “meet our carbon emissions targets whilst also capturing the economic upside through domestic reindustrialisation.” Demos’ Ben Glover provides an explanation of ‘productivism’ - “An approach that prioritises the dissemination of productive economic opportunities throughout all regions of the economy and segments of the labour force.” - and argues that this “wider vision, if adopted by Labour, could deliver a genuine economic paradigm shift”.
• Securonomics in Britain. The substance of this shift is not especially new, but this is perhaps the clearest Labour have been to date about the intellectual underpinning of their economic policy. Reeves’ paper and speech argue that Labour would make two fundamental economic shifts in government, the first is a move away from free market economics and towards the idea of a strategic state working in partnership with business on an industrial strategy, the second is away from an economic model focused on growth in London and the South East, towards a model of growth that actively seeks to disperse growth opportunities throughout the country. The substance here is mainly found in Labour’s Green Prosperity Plan including public investments made through an initial £8bn National Wealth Fund, a publicly-owned Great British Energy renewable generator and, importantly, that “throughout, we will use public investment to underpin and unlock further private investment” pointing to the Inflation Reduction Act and the CHIPS Act in the US. IPPR’s George Dibb commented that "this is a smart move which leans into a new international consensus, aligns the UK with a global economic hegemon, and positions Labour with a powerful narrative of reform & renewal." 
• How new is this? Critics might say that lots of these themes have been around for a while in British politics, including on the right. After all, in recent years the UK government has experimented with industrial strategies, taken a strategic role during Covid, and have famously committed to ‘levelling up’ the country. This shift has been driven partly from the inability of old economic models to address challenges, and partly from the new electoral reality of the so-called ‘red wall’. However none of these nascent ideas have really translated into serious policy, partly because they have not been rooted in a serious critique of modern British capitalism. Reeves’ speech indicates Labour are approaching this agenda in a more strategic way.

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Learning from the US 1: fiscal challenges. Reeves was keen to emphasise that Labour’s ‘Securonomics’ and £28bn Green Prosperity Plan would be subordinate to their fiscal rules, which could threaten the amount of spending available for their industrial strategy, and ultimately, its chances of success. Since their rule is to have public debt falling as a percentage of GDP, a Labour government would be constrained by the level of growth in the economy, which could make it hard to break out of the ‘doom-loop’ of low growth and low investment . (A previous report from IPPR’s Carys Roberts and Carsten Jung explains how debt:GDP ratios don’t have to be a hard constraint on government investments so long as they generate growth.)

• Green industrial strategy on the cheap? The US’s green industrial strategy is characterised by huge increases in state spending to direct capital into new industries and catalyse massive growth in the green economy. John Chowcat explains how Labour’s current climate spending pledges “seem disproportionate to the existing scale of rival Western financial ambitions”, “even allowing for currency differences and the small size of the UK economy compared to that of the US, China and the EU”. IPPR’s George Dibb explains why a ‘modern supply-side economics’ “must be maintained in parallel” with stimulating demand. Consequently, Labour may need to rethink its fiscal framework to allow for more government spending for its green industrial strategy to be successful.
• Rewriting the rules. Is there a way of squaring Labour’s stated fiscal rules with the need for higher investment? Future Economy Scotland and IIPP academic Laurie Macfarlane has previously explained how governments could spend far more on capital investment without increasing debt:GDP ratios if they change the accounting rules which remove liabilities of publicly-owned corporations, like state investment banks, from measures of public debt. Germany targets general government debt rather than public sector net debt to exclude the liabilities of its public investment banks, which enables their publicly-owned banks to increase capital investment; their government has a below average general gross government debt (71% of GDP), but if they included the liabilities of public corporations in their accounting of the public finances - as we do in the UK - their debt would account for 181% of GDP, the third highest in the EU. (For more on state investment banks, read our resource bank page.)
• Taxing wealth. Keen observers of Joe Biden’s Administration would note that Bidenomics also included increasing taxes on the rich and the largest corporations. Reeves was keen to draw attention to the UK’s tax burden in saying she wouldn’t raise taxes. However if there is no changing of fiscal rules then the serious amount of revenue that could be raised via taxation of wealth is another option for increasing investment. Even former US Treasury Secretary Larry Summers now believes “there is capacity to raise revenue from the wealthy on a quite substantial scale – far more than is politically imaginable – without doing any appreciable damage to economic growth”. 

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Learning from the US 2: carrots and sticks. In recent months critics of the Inflation Reduction Act in the US have warned that the approach of using public subsidies to catalyse further private investment is risks embedding corporate power in the green transition, rather than challenging the primacy of shareholder interests. 

• Derisking vs the big green state. In her speech, Rachel Reeves suggested mobilising more private capital from UK pension funds to help fund green infrastructure. (Read our recent briefing for critique and alternatives.) The US’s Inflation Reduction Act embodies a ‘derisking approach’, which grants and tax credits to boost corporate profits and companies’ market shares for those that invest in the green transition. Brett Christophers warns that by allowing active asset management firms to gain control over crucial elements of America's infrastructure such as the road network, electricity grid, and housing stock, the state is inadvertently strengthening their power and enabling them to extract excessive profits. Political economist Daniela Gabor contrasts ‘de-risking’ private capital in the green transition to a ‘Big Green State’ approach that exercises close control over credit flows as an instrument to discipline private capital: “derisking and capital discipline are fundamentally at odds because former relies on private profitability to enlist private capital while latter forces capital into pursuing strategic objectives of the state”.
• Democratic industrial policy?. The Times’ Mehreen Khan explains how “concentrating more power in the hands of multinationals and private capital, which will be in charge of executing the green transition”, may pose problems for Labour, but also suggests that their plans for a National Wealth Fund to take direct public equity stakes in clean energy projects and a publicly owned renewable energy producer “could put the UK at the forefront of a more democratically controlled industrial policy that does not cede power to the private sector to manage the transition from fossil fuels.” Common Wealth’s Melanie Brusseler explains how Labour's proposals for a National Wealth Fund and a publicly-owned renewable energy generator breaks with the market-led approach of Bidenomics and could avoid the perils of a derisking approach if designed correctly. 
• Corporate power shouldn’t direct the green transition. IPPR’s George Dibb highlights the importance of strong competition policy to ensure the green transition is not directed at the expense of workers and consumers: “A mission-oriented, supply-side approach means being pro-business, but not pro businesses that work against the interests of society or extract from it. It means recognising the power of the private sector when it works with purpose, but acknowledging that not every firm in every sector does that.” Dibb concludes that Bidenomics includes both “carrots and sticks for firms, not just handouts. Examples include robust competition policy and clawback clauses on excess profits, as well as making support conditional upon union recognition, good pay, and a commitment to decarbonisation. These are the sorts of solutions that Labour should consider to boost the British economy and confront concentrated markets.”

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Building economic strength in an age of insecurity. Inevitably, much of the reaction to Reeves’ speech has focused on the merits of the word ‘securonomics’ - one of a long list of ‘onomics’ that UK politicians have used to characterise their economic policy. The interesting point here is not whether the phrase itself is any good, but what it says about the way Labour is framing the economic debate. The frame of insecurity is politically savvy as it marries the worries of voters about job security and personal finances with a wider narrative of climate disruption and the need to bolster the UK’s resilience to external shocks. With the cost of living crisis yet to dominate politics for a while longer (and is still top of voters priorities), there is an electoral logic to Labour using this frame to link their longer-term plans to the immediate pain voters are feeling. Whether or not ‘securonomics’ lasts the distance as a phrase, we should expect labour to be speaking the language of economic security in the run in to the next election. 

Good morning from New Economy Brief.

Pay may be the hot issue for workers and their unions at the moment due to inflation, but it is far from the only topic to gather momentum recently. 

One trend in recent policy discussions over work has been the centrality of time, with the 4 Day Week campaign the most famous example. 

This week we explore another proposal around working time, the ‘Right to Disconnect’, explain how and why this issue has shot up the agenda, and offer some thoughts about the evolving politics of workers’ rights.

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‍Labour backs new laws to improve work-life balance. The news that the Labour Party are set to propose the introduction of a new "right to disconnect" policy caused a stir in Westminster last week. This policy would grant employees the ability to disengage from work-related communication and tasks outside of their normal working hours, with the objective of addressing work-related stress and promoting a healthier work-life balance.

• Combatting the ‘always on’ work culture. The objective of the "right to disconnect" is to establish boundaries between work and personal life, ensuring that employees have designated periods of rest and leisure. A report on the right to disconnect from the trade union Prospect notes that ‘always-on’ working cultures and poorly managed remote work arrangements can give rise to various concerns for workers. These include undisclosed overtime, heightened work intensity, challenges to mental health and well-being, musculoskeletal disorders resulting from strain on muscles, joints, and bones, unequal treatment and discrimination against women and individuals with disabilities, increased utilisation of monitoring and surveillance technologies, as well as instances of remote and digital bullying.
• Rationale. The Labour Party argues that this measure would help alleviate the negative effects of constant connectivity and enable individuals to better maintain their mental well-being in an ‘always-on’ culture of checking emails and taking calls away from work. The right to disconnect seeks to enforce clear guidelines and regulations to protect employees from excessive work demands beyond their official working hours. Allowing individuals the right to disconnect fosters a more sustainable and balanced approach to work, safeguards against burnout and enhances overall productivity. Andrew Pakes, Research Director and Deputy General Secretary at Prospect Union explains the rationale for the right to disconnect after the pandemic accelerated trends in digital surveillance and abnormal working conditions: (e.g. one-in-five companies are now using digital surveillance to monitor workers or planning to do so.)

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‍Part of Labour’s ‘New Deal for Working People’… The proposed policy is part of Labour’s wider package to improve working conditions and pay: the New Deal for Working People. The plan focuses on strengthening workers’ rights, improving job security, fair pay, work-life balance, health and safety and providing more education and training opportunities at work. 

• …and a fraught politics of working time. The proposal should also be seen as part of a struggle against working longer hours. Reducing working hours has been a longstanding proposal to improve working life and the balance between work, leisure and important unpaid activity such as care. As Novara Media’s Polly Smythe notes: “In Economic Possibilities for Our Grandchildren, John Maynard Keynes speculated that technological advancement would soon precipitate a 15-hour workweek, and eventually do away with the need for human labour altogether. Yet the consequence of our hyper-connected lives has not been a reduction but an increase in hours.” The TUC’s online calculator made for Work Your Proper Hours day back in 2019 found that workers in the UK put in more than £35bn in unpaid overtime. Since the pandemic accelerated trends towards remote working, there has been a rise in digital surveillance of employees and a blurring between work and home life, where workers are expected to work longer hours and always be contactable. A Harvard study analysed the emails and meetings of 3.1 million individuals in 16 cities worldwide during the pandemic, it was discovered that the average duration of a workday had grown by approximately 48.5 minutes in the early stages of the crisis.

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‍How would it work? A 2020 guide from Prospect looks at different approaches to the “right to disconnect” and how to ensure unions are involved in safeguarding workers’ well-being and rights as new technology changes how we work. There are three primary methods of implementing a Right to Disconnect:

• Enterprise agreement. This approach involves employers and unions negotiating and reaching an agreement on the Right to Disconnect. Unions can advocate for this right either as part of collective bargaining or through a separate agreement. An example is Telefonica, which established its own Right to Disconnect in collaboration with its Works Council and unions.
• Directive approach. This method entails enacting a legislative framework that requires organisations to engage in negotiations with their workforce or unions to establish a Right to Disconnect. This approach is similar to the French model, where companies with 50 or more employees are obligated to negotiate rules suitable for their industry.
• Prescriptive approach. This approach involves the establishment of specific details about the Right to Disconnect through legislation or statutory regulations. Similar to the Irish Code of Practice implemented in April 2021, this approach outlines the necessary components and guidelines for implementing a Right to Disconnect within an organisation. A 2019 paper from Autonomy discusses the international precedents of such a proposal, as well as outlining the legislative wording of a hypothetical ‘Right to Disconnect’, thereby providing an off the shelf option for policymakers.

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‍Political analysis. The FT’s Stephen Bush thinks that the ‘right to disconnect’ “is a talker that, whether you are shaking your head at the prospect or counting the days until a Labour government implements it, will be broadly recognised by people in most workplaces. For good or for ill, it is going to define how a lot of people see Keir Starmer’s Labour party…ultimately the biggest change that Starmer’s Labour proposes to make to the UK’s economic model is to significantly increase the power of workers and trade unions”, which could be one “area of friction” for a minority Labour government reliant on Liberal Democrat support.

• New politics of work? While ‘Labour supports worker’s rights’ is hardly a shocking headline, it has perhaps flown under the radar how much policy exists in this space. The popular support for recent strikes, and success that Joe Biden has had in branding himself a ‘union man’ indicate a recognition that in turbulent economic times, the economic security offered by rights and unions is a potential vote winner, especially as economic insecurity is the key commonality among swing voters. The popularity of this agenda is perhaps best demonstrated by a Conservative candidate for London Mayor launching their campaign talking about the four day week.‍
• Support. The Right to Disconnect pushes the usual politics of worker’s rights into new territory, appealing to many white collar, younger and remote workers - all demographics that are traditionally underrepresented in trade unions. Polling commissioned by Prospect has found that two thirds of remote workers support the idea of a right to disconnect with companies required to negotiate with their staff over rules on when people could be contacted out of normal working hours.

Good morning from New Economy Brief. 

For as long as we can remember, ‘growth’ has been seen as synonymous with economic success, and the Gross Domestic Product - GDP - the de facto measure for the economic health of nations. Growth is one of Rishi Sunak’s five priorities for 2023. Keir Starmer wants Britain to be a “growth superpower”. Being part of an ‘anti-growth coalition’ became the political insult of 2022. A policy platform that isn’t focused on growth, or indeed actively opposes it, would be politically unthinkable. Or would it?

This week, MEPs, policy wonks and campaigners have gathered in Brussels to imagine what a “post-growth” Europe could look like. The ‘Beyond Growth’ conference is evidence of a growing movement which argues that exponential growth cannot be sustained in the face of a climate emergency and growing inequality. But can post-growth (or degrowth) become mainstream? Are there alternatives? And is there genuine political appetite for it? 

The problem with growth. Current debates around the limits of growth date back as far as the 1960s and 1970s, with the Club of Rome’s 1972 paper Limits to Growth seen as a seminal publication that has since been successively revised and republished. The central tenet of the paper and subsequent arguments for degrowth is that exponential economic growth cannot be decoupled from resource and energy use. In other words, if the commitment to growth continues, finite resources will run out and irreparable damage will be done to the environment and nature. In 2016, the Limits to Growth APPG found that the predictions in the Limits to Growth paper are essentially still correct and that new understandings of planetary boundaries have added new dimensions to the challenge. A 2009 study by the Stockholm Resilience Centre identified “planetary boundaries that must not be transgressed” in order to “prevent human activities from causing unacceptable environmental change”. An update of the research in 2015 found that of the nine planetary boundaries identified (climate change, ocean acidification, biodiversity loss, interference with global nitrogen and phosphorous cycles, ozone depletion, global freshwater use, land system change, atmospheric aerosol loading and chemical pollution) four have already been crossed. These boundaries have been incorporated into the Doughnut concept by Professor Kate Raworth, setting an ecological ceiling above a social foundation and outlining a safe ‘space in which humanity can thrive’. 

• The problem with GDP. When we talk about growth, we generally mean the monetary value of goods and services produced in an economy - or GDP. However, this “ultimate yardstick of economic performance” not only fails to account for economic harms but makes us “lose sight of what actually contributes to a happier, more prosperous society and a healthier environment” such as by ignoring non-monetised yet essential activities such as unpaid domestic work and childcare, argues NEF’s Lukasz Krebel. What’s more, the often used GDP per capita statistic is an inadequate tool for measuring how prosperity is shared out in society, says Krebel: “higher GDP doesn’t necessarily mean a better life for all of a country’s residents, since how the economic pie is shared is often extremely unequal”. Even the ONS has highlighted the limitations of GDP and its failure to take account of “things like social, natural, or human capital – things which all improve our lives and contribute to our happiness and health”. 
• The Great Decoupling. One argument for the inadequacy of GDP is the decoupling of wage growth from GDP (sometimes referred to as the ‘Great Decoupling’). A 2018 OECD paper found that “on average across 24 OECD countries, real median wage growth has decoupled from productivity growth”. Advances in technology were cited as a “downward pressure on median wages” but also “‘winner-takes-most’ dynamics as labour shares at the technological frontier have decreased and between-firm wage dispersion has increased”. 

So what exactly are we talking about when we talk about degrowth? Faced with growth’s harmful effects on planetary boundaries, degrowth proponents advocate strategies which seek a deliberate and planned contraction in the economies of high-income countries with the ultimate ambition of a steady-state economy. It is argued that the reduction in the materials and energy produced by economies can be achieved without negatively affecting living standards. Central tenets of degrowth proposals are equitably sharing out resources, and reducing consumption and income by reducing working time. 

• Growth, but not as you know it. There are some who believe that growth can be decoupled from its harmful effects and can therefore still be pursued. Proponents of ‘green growth’, for example, argue that it is not economic growth per se that is impossible, but only its current patterns and forms. There is some evidence that economies such as the UK are experiencing a degree of relative decoupling of economic growth from carbon emissions, although this should be taken with a pinch of salt. Many countries like the UK have essentially ‘offshored’ emissions by importing carbon intensive products from economies where growth is still very much positively associated with carbon emissions. Advocates, such as the World Bank, say that growth is still necessary to eradicate poverty and improve living standards and, with renewable energy and resource-efficiency, can exist safely in a ‘circular economy’. An extension of this is ‘inclusive growth’, which the OECD defines as ‘economic growth that is distributed fairly across society and creates opportunities for all’.

Political implications. The line-up of the Beyond Growth conference alone shows that the post-growth debate is no longer happening at the fringes of politics and economics. The event is the initiative of 20 cross-party MEPs with speakers including President of the European Parliament Roberta Metsola and Deputy Secretary-General of the United Nations Conference on Trade and Development (UNCTAD) Pedro Manuel Moreno. Just last month, the Irish President, Michael D Higgins, condemned neoliberalism and the “obsession” with growth. However, while degrowth may be becoming less taboo, it is by no means mainstream. Polls show that growth is still popular with the UK public, leaving little motivation to the main parties to make the case against it. A poll conducted by Ipsos MORI last year found that while 49% of those surveyed said that economic growth does more good than harm, only 17% said the opposite. 

• But… the public aren’t quite as pro-growth when faced with its associated harms. In the same Ipsos MORI poll, 43% said that more focus should be placed on protecting the environment, even if that harms growth, with only 29% saying the opposite. The Covid pandemic may also have played a role in realigning many people’s attitudes to growth, too. A poll conducted by YouGov on behalf of Positive Money in May 2020 found that more than 8 in 10 thought that the UK should prioritise health and wellbeing of citizens over GDP during the coronavirus crisis. When asked whether the UK should prioritise improved social and environmental outcomes over GDP when pandemic is over, 60% agreed. Whether its pandemics or the climate, could the crises we face spell the end for the pro-growth consensus?
• Messaging matters. As with all political and economic ideas, how it is explained really matters. A study of framing around post-growth models for example has found that the phrase ‘green economy’ is as popular as ‘economic growth’ while the idea of ‘degrowth’ is much more mixed. 
• Everyone’s a winner. The political appeal of the idea of growth until now is that it allows for a story where everyone gets better off, without having to confront the tricky politics of redistribution, which are central to any post-growth model. This dynamic is difficult to break. However, the above polling evidence, alongside the effect of the great ‘decoupling’ and greater awareness of climate harms do suggest that models that decentre growth may gain traction in the coming years. This might at first look more like Keir Starmer’s pledge to introduce new measures of national wellbeing and value them equally alongside growth, but the idea of questioning growth is certainly no longer confined to the fringes of the debate.

Good morning from New Economy Brief

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Inheritance tax is in the news, for two rather different reasons. Firstly because of one person who isn’t paying it, and secondly because of the mounting rumours that it may be a leading candidate for the highly anticipated pre-election tax cut.

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The myths around inheritance tax are many and various, and the politics and economics of inheritance tax interact with each other in complicated ways. The tax has important distributional consequences, and proposals exist for reform from different sides of the political spectrum. This week’s briefing explores the political and economic debate around inheritance tax and examines the proposals for reform.

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Who pays inheritance tax? King Charles has been crowned, but the Monarch is exempt from paying any tax on the £15.2bn royal estate he inherited from his mother. Some have argued that this is unfair, as the rest of us have to pay a 40% levy applied on assets valued over £325,000. 

• A minority tax. It’s not just the King who doesn’t pay inheritance tax (IHT) though, in fact the relatively high threshold means that very few people actually pay the tax. HMRC data from 2019-20 reveals that only 3.25% of deaths resulted in an IHT charge, and Demos calculate that only 6,000 estates actually pay inheritance tax each year because of the high thresholds and exemptions. It’s not just those at the bottom that don’t pay inheritance tax though, analysis from the Office for Tax Simplification (p5) finds that the very wealthiest also don’t pay much IHT either, as there are many loopholes used to avoid paying. This results in a surprisingly low IHT revenue figure of around £7bn per year - although this is set to rise as asset values inflame while the threshold remains frozen.
• But inheritance tax is unpopular. Inheritance tax has an almost mythical political status. The prospect of any cut raises the spectre of George Osborne’s famous inheritance tax gambit which allegedly convinced Gordon Brown not to call an early general election in 2007. Despite most people not paying it, public attitudes research shows that IHT is unpopular, for instance only a third of Labour supporters think inheritance tax is fair, whilst two thirds think income tax and National Insurance are fair. Oxford Professor Ben Ansell suggests that “when it comes to property or savings, there’s very little public support because it gnaws away at many people’s fundamental views of desert, effort, and prudence”. Essentially, many people believe that parents should be able to pass on assets accrued over their lifetime to their children.

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However, inheritance tax has important distributional consequences. IHT remains one of the only taxes on wealth in the UK and is an important way of transferring wealth as inequality soars. A combination of rising house prices, declining home ownership and stagnating incomes has created stark inequality between generations, but this will accelerate as newer generations inherit wealth from their parents. An IPPR report explains that “wealth transfers, such as inheritances, confer opportunity on the recipient. Taxing and redistributing transfers, either to individuals or through investment in collective services, therefore promotes equality of opportunity… As such, failing to tax wealth transfers sufficiently perpetuates economic injustice, and negatively impacts social mobility, while also constraining economic growth.”

• Failing to tax inheritance will accelerate wealth inequality. The IFS have argued that wealth is the growing economic divide in the UK today, warning that the economic prospects of young generations are struggling to match those of their predecessors, and recent declines in social mobility may accelerate as inherited wealth becomes an increasingly important part of lifetime resources. The Spectator’s Ross Clark explains why “scrapping inheritance tax is a terrible idea… There’s nothing conservative about encouraging unearned wealth”. Demos’s Andrew O’Brien argues that “Any tax cut is not only unlikely to incentivise inheritance (given the growing levels of inheritance) it would also be a change that would benefit only a handful of already wealthy people”. They also found that a typical person in the South of England born in the 1970s is set to inherit three-and-a-half times as much as a typical person in the North East. A report from Demos on the UK’s ‘New Age of Inheritance’ found that the real value of inheritances transferred annually in the UK has doubled roughly every 20 years since 1979 to over £100bn a year. The Resolution Foundation expects ‘peak inheritance’ to be reached in 2046, where the value of inheritances is forecast to double again.

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But it’s not perfect, and can be reformed. IPPR propose abolishing IHT and replacing it with a lifetime donee-based gift tax levied on the gifts received by an individual above a lifetime allowance of £125,000. After this limit is reached, any income from gifts is taxed annually at the same rate as income from Labour. This would increase the tax level on higher earners who receive large gifts and also encourages gifting to less well-off beneficiaries. It also has fewer exemptions so no one can exploit the current loopholes which allow many wealthy people to game the system and avoid paying IHT, for example by putting their assets into trusts.

• The potential tax take. A similar gift tax has also been advocated for by the Resolution Foundation. They calculated that taxing gifts through the income tax system with allowance of £125,000 could have raised £15bn in 2020/21, £9.2bn more than the current IHT system, and would do so more progressively as most people would pay the basic rate, whilst a higher top rate helps to reduce wealth inequality by levying more from the highest earners.
• Getting around the politics. IHT currently taxes estates, not the inheritance of the individual receiving it, making it easier to be classed as a politically unpopular ‘death tax’, rather than a social mobility enhancing gift tax, which can be framed to appeal to values of equality of opportunity and fairness. Ben Ansell’s public attitudes research has shown that emphasising the benefits of lower income taxes and higher public spending “led to a decline in just under ten percentage points in people thinking inheritance taxes were too high”.
• Other options. The fact that IHT is one of the only taxes on wealth in the UK means it is doing a lot of heavy lifting in terms of redistribution. If there were better ways of taxing wealth more consistently, such as a land value tax, or a net wealth tax, the imperative for a tax on inheritances would reduce, although there would still be an argument from a fairness perspective.

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It’s all politics. Bloomberg’s Alex Wickham recently reported that PM Rishi Sunak is “considering cutting the UK’s unpopular inheritance tax ahead of the next general election, people familiar with the matter said, a move senior Conservatives think will give his ruling party a major boost”, particularly from ‘Blue Wall’ voters. This is worth exploring. The political logic of pursuing pre-election tax cuts has two driving motives. One is the desire to do something that will leave voters feeling better off before polling day, and given that improvements to public services or rising real wages are harder for the government to deliver in the remaining 18 months or so of the parliament, tax cuts begin to look attractive. The second is a belief held by many Conservatives that lowering taxes will lead to growth, and that championing low taxes can tell a story about a kind of small-state economy a Conservative government would create that is distinct from anything other parties are offering. It is hard to see how cutting IHT fulfils either of these objectives. By its very nature few people will feel any kind of material benefit from such a tax cut, compared to cutting income tax by 1p for example (which has a similar price tag), and even the most Thatcherite of Conservatives would struggle to argue that the rate of IHT is holding back the UK economy. 

• The language of priorities. Reading the above polling on IHT, it’s easy to see why a party in need of a polling boost and a dividing line with the opposition might be tempted by this idea, but it is also worth remembering that this is a party extremely vulnerable to the charge that they are determined to cut taxes for the 1%, as seen in the recent row over pension lifetime allowances. There is also the question of priority; while people might not like IHT, is it really a vote-moving issue for them? With the cost of living crisis devastating household finances and public services on their knees, there is a real risk of such a move backfiring and the government looking extremely out of touch with people’s priorities.
• Opposition choices. Finally, there is the question of how opposition parties and others would respond to such a move. There are important reasons, both principled and practical, for defending taxing inheritances. In principle the idea of restricting the ability for inequality to be passed through the generations is an important one, and practically while there are options for reform it is always easier to keep an existing tax than to create a new one. But if IHT were to be abolished before an election, the above examples demonstrate that there are options to replace the revenue and actually raise taxes on the wealthy in ways which are perhaps less politically difficult than pledging to reintroduce IHT.

Good morning from New Economy Brief. 

How sustainable are the public finances? This question shapes our political debate in so many ways, and yet there is precious little data that can help us understand the reality, leading to some quite blunt statistics (such as gross debt and deficit numbers) dominating our fiscal debate. 

In fiscal policy, as with many other areas of economics, what matters is what is measured, and, therefore, what is measured really matters. That’s why the decision to add a new public finance measurement, Public Sector Net Worth, is worthy of deeper exploration. 

In this week’s New Economy Brief we explain what this measure is, what it tells us about the UK’s public finances, and how it could be used in the future.

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‍Public Sector Net Worth. Last week the Office for National Statistics (ONS) began measuring Public Sector Net Worth (PSNW) for the first time. This is a broader measure of the state of the UK’s public finances, as it calculates the value of the total assets a government owns, minus its liabilities. Assets include physical assets owned by the state, such as schools, hospitals, roads and other infrastructure, and financial assets such as student loans. Grant Fitzner, the ONS’s Chief Economist, explained that the new PSNW measure “provides a fuller picture of long-term fiscal sustainability and captures the impact of a wider range of government activities”.

• It’s not that simple. Of course, as with many economic statistics, it’s a little bit more complicated than that. There are different ways of measuring the value of assets, and especially of which liabilities are included in the measure, these can skew the statistics and frustrate efforts to make comparisons between different economies.
• Why is this important? Economists have often complained that commentary about the public finances is overly focused on the total debt of the public sector rather than how much it is worth, which gives the government too little incentive to invest in the value of their public services and infrastructure. As the BBC’s review of its own impartiality on fiscal policy recently found, many journalists instinctively believe that all debt is bad, a lack of nuance which could be partially attributable to the paucity of the official statistics.
• The case for investment. The Institute for Public Policy Research’s (IPPR) Carys Roberts and Carsten Jung explain that the idea of PSNW helps to “enshrine in government thinking the notion that public investments should be encouraged if they generate value”. Richard Hughes, now head of the Office for Budget Responsibility (OBR), along with other co-authors from the Resolution Foundation, have previously called for the UK’s fiscal rules to include a PSNW objective “to deliver an improvement in public sector net worth as a share of GDP over five years. This would incentivise prudent investment decisions to address the long-term challenges facing the UK”. Interestingly, their suite of proposed changes to fiscal rules also includes an ‘escape clause’ which recognises the need for more active fiscal policy and the suspension of other rules “if the economic outlook deteriorates significantly”, which could enable fiscal policy to play the lead role in supporting the economy in the event of shocks. An IMF paper has also found that countries with higher PSNW are found to recover faster in the aftermath of recessions and experience shallower economic downturns. 

The value of the UK’s public sector: -£605.8bn. The ONS calculated the UK’s Public Sector Net Worth to be in a deficit of £605.8bn. The Resolution Foundation’s analysis notes that the value of the public sector has declined from -£530bn last year, continuing "a long-term trend of decline in net worth, which has fallen substantially from the surpluses recorded by the ONS pre-financial crisis” and shows that “the country is failing to invest in its future”. 

• Analysis: “Worst of any major economy”. A recent report from the Resolution Foundation’s Economy 2030 Inquiry shows how the UK’s public-sector net worth is “very low” by international standards - only Portugal performs worse (for countries where reliable data exists). They argue that “combining low investment with fairly normal borrowing levels and repeated economic shocks has meant steep declines in public sector net worth…which has fallen by more than 50 per cent of GDP over the past two decades…Had the UK’s levels [of public investment] been at the OECD average over the past two decades, public investment would have been a truly transformational £500 billion higher (in 2022 prices).” Economist Julian Jessop (Fellow of the right-wing think tank, the Institute of Economic Affairs) notes that the UK’s PSNW is “the worst of any major economy” and that including measuring PSNW as part of the government’s fiscal rules “could have broad appeal” as fiscal conservatives hope it would force the government to face up to the cost of longer-term liabilities, such as public sector pensions, and advocates of more expansionary fiscal policy hope “the inclusion of a wider range of assets in the fiscal rules might create more room for governments to borrow to invest… as long as the resulting increase in liabilities is matched by an increase in the value of the assets owned by the public sector.”

What could this enable politically? The primary practical application of PSNW is in its interaction with fiscal rules. Targets based on PSNW rather than debt or deficits could reduce the temptation for the Treasury to cut investment and engage in fire sales of public assets in times of economic downturn. Labour is planning to adopt a PSNW approach to fiscal policy, while stopping short of committing to a new fiscal rule. They argue that a focus on debt has led to “a short-termist mismanagement of the public finances under the Conservatives”, reports Bloomberg’s Philip Aldrick, where “privatizations and asset sales may reduce the debt but have left the government with one of the largest net worth deficits of all OECD members…Labour hopes a full balance sheet rule might also reframe the debate around its plans to borrow to invest in green infrastructure.”

• PSNW and public ownership. In 2019 Labour’s Shadow Chancellor John McDonnell proposed the adoption of a PSNW target to improve the ‘overall balance sheet by the end of the Parliament’. Crucially for Labour at that time, this rule would enable more government borrowing to return privatised utilities into public ownership, as they would then be listed as valuable assets when assessing the public finances.
• The rationale for change. Professor Simon Wren-Lewis has written on how a public sector net worth target would be a more appropriate fiscal rule given the acute need for major green investment, though he has also argued that there needs to be a broader de-emphasis of fiscal targets in favour of a more holistic economic outlook. (See his discussion with Bloomberg’s Stephanie Flanders on fiscal policy challenges during and after the pandemic.) 
• Rules vs principles. Wren-Lewis is not alone in questioning the concept of fiscal rules. The New Economics Foundation (NEF) recommended the government’s ‘fiscal rules’ be replaced with a new framework, including a Fiscal Policy Committee (FPC) housed at the OBR or other third-party institution, appointed by government and parliament and guided by a set of ‘fiscal principles’. The FPC’s mandate would be based on resource constraints, full capacity utilisation, the private sector balance sheet position, and public sector net worth.
• An unsustainable status quo? While the measurement of PSNW may not on its own herald a brave new dawn of fiscal understanding, it is part of a wider drumbeat of dissatisfaction with the current fiscal policy framework which is worth watching. In recent months the current framework of rolling targets based on debt figures has been criticised by a wide range of people and institutions including the NIESR, Resolution Foundation, the IfG’s Jill Rutter and the Times’ Simon Nixon. After many years where debt and deficit figures dominated all political debate in the UK to the exclusion of all else, it is possible that there may be a growing appetite for a new approach.

The public don’t generally like to think of their pension as risky, so it’s always a surprise when a politician argues that the issue with management of pension funds is that there isn’t enough risk-taking. But this is the view of UK Chancellor Jeremy Hunt, who argued recently that this is one of the ways to unlock investment in potential ‘high growth UK businesses’. 

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This week’s New Economy Brief looks at the debate over pension investments, including the growth of overseas ownership of UK businesses and infrastructure, and alternatives to the drive to leverage more private investment.

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Pension funds aren’t investing in the UK. UK pension schemes are some of the biggest sources of capital for British companies, but according to the FT funds have been moving away from investing in the UK stock market, and more UK firms are listing overseas. Prominent business figures such as Nicholas Lyons, Lord Mayor of the City of London, have urged Chancellor Jeremy Hunt to compel more capital from UK pension funds into growing domestic companies and infrastructure. 

• Who owns our companies? If UK pension funds don’t own UK shares, then who does? Pension fund demand for UK equities has fallen by £400bn since 1997. A report published in 2022 from the TUC, Common Wealth and the High Pay Centre finds that the proportion of UK shares held directly by UK pension funds decreased from almost 1 in 3 in 1990 to less than 1 in 25 in 2018. Most UK shares are now held by overseas investors, with the proportion rising from 12% to 55% during the same period. When accounting for direct and indirect ownership through pooled funds, UK pension funds own less than 6% of UK shares.

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Chancellor urges pensions to make ‘riskier’ investments. Pensions funds have been making less ‘risky’ investments since the shift from defined-benefit to defined-contribution schemes, meaning more money has shifted from company equities and into government bonds. The government is due to publish new measures in the Autumn Statement to “unlock productive investment” from defined-contribution pension funds to enable more financing for high-growth companies and make the London Stock Exchange a more attractive place to list businesses. This could include pooling of Britain's ~28,000 fragmented defined-contribution schemes so they are consolidated in larger funds and ‘mandating’ pension funds to make certain investments. 

• Looking to Canada and Australia? During a visit to Washington, Chancellor Hunt gave a speech noting that Australia and Canada have managed to increase their returns by consolidating their pension fund industry, which makes it simpler for them to invest in unlisted companies with higher growth potential. According to the OECD, the percentage of UK pension fund assets invested in equities dropped from 55.7% in 2001 to 26.4% in 2021. In comparison, Canadian funds had 40.6% and Australian schemes had 47% of their assets invested in equities.
• Crowding-in opportunities with carrots, not sticks. However, the FT’s Helen Thomas argues that “political edicts on investment strategy are not the right way to emulate the country’s success”, as pension funds in Australia were attracted by opportunities to invest in projects with high returns, rather than compelled. She suggests that the government is not offering enough opportunities in clean energy, housing, or transport infrastructure, quoting former regulator and professional pension trustee Andrew Warwick-Thompson: “It is not pension regime reform that is needed to increase investment in UK assets… but coherent, stable and sustainable economic and industrial policies to make the UK fundamentally more attractive to investors.” 
• Risky business? Encouraging risks with pensions isn’t necessarily something you would imagine a UK Chancellor doing, especially a few months out from the big LDI pensions scare (ironically, caused by pension funds being overexposed to falls in the value of ‘safe’ government bonds as rates rose). Arguably the current system already involves too much risk for savers. The IFS last week published a report setting out the case for a new review of the pension system, arguing that the move to defined-contribution pensions results in “individuals bearing risks that are difficult to manage well”.

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But is private investment necessarily the solution? British companies and infrastructure certainly need more investment, and both major parties have suggested mobilising private capital from pension funds as a way to revitalise the country’s infrastructure and grow the economy. However, Common Wealth’s Mat Lawrence argues that mobilising private capital can lock in extractive behaviours as investors seek ever higher returns, which could encourage profiteering from UK infrastructure and the green economy.

• De-risking private investment is not risk-free for the government. Private financing of infrastructure projects can be more expensive than government funding, exactly because private investors not only expect a steady flow of income in form of dividends but also want to minimise any risk to themselves. As economist Daniela Gabor has observed, attracting investment is increasingly accomplished through ‘de-risking’, where the state takes on the risks to ensure higher returns to private investors. In a piece for the Guardian, Professor Brett Christophers argues that the influence of asset management firms is inextricably linked to the ‘de-risking’ agenda (in which he includes the US Inflation Reduction Act). In a separate piece for the FT, Christophers explains the risks of relying on private pension funds to invest in public infrastructure. 
• Look at the experience of developing countries. The down-sides of de-risking private capital to fill infrastructure ‘financing gaps’ have been thoroughly demonstrated by the World Bank’s programme to leverage investment for developing countries. Packaging infrastructure projects in ways to interest risk-averse institutional investors, such as pensions funds, require transferring risks onto the public sector, which has shown to bring excessive costs to taxpayers and exacerbate financial instability. A report by Eurodad’s María José Romero Duarte found that the World Bank's strategy of encouraging private investment in infrastructure projects goes against the historical experience of successful developed and developing countries, as well as the current practice in emerging markets, where infrastructure is mostly financed by the public sector. 

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Neglecting the role of public finance. State-backed investment banks are one route to providing finance where private banks may be reluctant to do so – in disadvantaged regions, new technologies or in sectors where returns are either too low or too risky.

• Patient capital and innovation. National investment banks are particularly valuable for providing 'patient' capital: long-term finance that is beyond the time horizon of most commercial banking but which is essential for innovation and strategic economic development. Economist Mariana Mazzucato explains why patient capital delivered through state-funded investment or development banks allows investors to take more risk (necessary for green innovation) as they are not required to pay dividends to private stakeholders, can meet more ‘public good’ objectives, and “can set conditions for access to their capital in an effort to maximise economic or social value to their home country.” 
• National investment banks. The UK is unique among major advanced economies in not having a national investment bank. Advocates argue that such a bank would increase investment in innovation and support major mission-focused industrial transformations, such as building a green economy. UCL's Institute for Innovation and Public Purpose has examined the role which publicly-owned investment banks have played in a variety of countries to provide patient finance for innovation and business development, and proposed the creation of a UK National Investment Bank. The centre-right think tank Onward has also called for the establishment of a national investment bank, arguing that this could unlock £16 billion in capital for investment in small and medium sized businesses, municipal infrastructure and project finance to level up lagging regions. The Scottish Government established the Scottish National Investment Bank in 2020.  
• Improving the UK Infrastructure Bank (UKIB). The UKIB is an Arm’s Length Body of HM Treasury, but is on track to deliver “barely a fifth of the financial support the European Investment Bank provided before Brexit” and is set to miss its annual investment target according to a recent report by the OBR. The UCL Institute for Innovation and Public Policy’s Thomas Marois analysed how the UKIB compares with other national infrastructure banks in Germany and Canada. The author notes the “remarkably little” investment given to the bank by HMT (£1.5bn annually) and a “fraught public-private partnership strategy that often costs taxpayers more while delivering less.” He concludes that the new bank is “anchored to past ‘market-failure’ approaches rather than a future where public banks, public purpose, and citizen engagement provide credible and innovative solutions to green and just transitions for people and planet.”
• More resources. Read our resource bank page for more on public finance institutions that can support economic development and another on how to rethink finance for business investment.

Artificial intelligence (AI) has become an increasingly important technology that has impacted the economy and jobs in various ways. Or at least that’s what OpenAI’s artificial intelligence chatbot ChatGPT told us when we asked it to summarise the effect of AI on the economy and jobs.

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The chatbot isn’t wrong about its increasing importance. Over recent months, ChatGPT and similar services have made headlines as students and civil servants alike have attempted to outsource complex tasks to this type of artificial intelligence.

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So what are these “various ways” that rapidly developing AI technology are impacting the economy and jobs? And can regulation really solve the issues it presents? 

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White paper on regulation. Last month, the Government published a white paper detailing “plans for implementing a pro-innovation approach to AI regulation”. Central to the proposals is an ambition for the UK to be a science and technology “superpower” with AI identified as one of five key technologies in this effort. However, the proposed regulatory frameworks are “underpowered” and risk “leaving prominent AI harms unaddressed”, warns the Ada Lovelace Institute.

• Old regulations, new technologies. Artificial intelligence is by no means new, the term itself is well over half a century old, and yet the regulations around its development and use are still in their infancy. This is particularly alarming in the context of the drive to create AGI (Artificial General Intelligence), and the potential imminent arrival of  “God-like AI”, as argued by AI investor Ian Hogarth recently. This iteration of AI, of which some argue OpenAI’s ChatGPT and DeepMind’s GATO are precursors, “learns and develops autonomously, that understands its environment without the need for supervision and that can transform the world around it”. But the issue of regulation isn’t just about the future, it's about how the tools that exist now are being integrated into our lives. The Government’s White Paper, which includes a consultation that is open until the 21st June of this year, does seek views on the topic of general-purpose AI “for future action”. However, as it stands, the white paper relies heavily on existing regulatory frameworks and expects not to implement the new AI framework or assess its effectiveness for at least a year. As noted by the Ada Lovelace institute, this rapidly developing area of technology is already being “deployed in high-stakes contexts such as recruitment and healthcare”. 

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AI and work. The adoption of AI in workplace settings is one of the frontiers of this debate on adequate oversight and regulation. A reliance on AI for “hiring, firing, pay and promotion” could make workers in several sectors increasingly vulnerable, according to the TUC, with the TUC’s Kate Bell describing the Government’s white paper as “flimsy” at its AI@work conference yesterday. Recruitment in particular has been identified as a key area in which harms may already be present and must be addressed much more quickly than the expected timeline would allow. According to the TUC, AI systems are already being used “to draw conclusions from candidates’ facial expressions and their tone of voice in video interviews”. The Ada Lovelace institute argues that key risks in recruitment are either not covered by regulation or are covered by “a patchwork of regulators”. For example, it is unclear that any regulator is responsible for ensuring that AI videos used in recruitment processes are used transparently. A lack of “statutory backing” and “adequate resourcing for regulators” are also identified as key risks for monitoring the use of AI in these areas.

• Power and control. Ultimately, unions are exercised about AI because it has the potential to blur lines of accountability and power relationships in the workplace. Decisions will be being made about workers based on algorithms that often have very little transparency, and are barely understood by the managers and HR departments adopting them. In response, unions are arguing for new laws and regulations, such as the expansion of collective bargaining rights to include employee data, and for clear accountability for decisions made by AI so they can be challenged. 
• Job losses. Of course, the impact of AI on work is about the availability of jobs as well. A new study has found that around 80% of the workforce could have at least 10% of their work tasks affected by the introduction of LLMs (Large Language Models which includes Generative Pre-Trained Transformers like ChatGPT), and approximately 19% of workers may see at least 50% of their tasks impacted. Research by Goldman Sachs found that AI could replace up to 300 million jobs across the UK and Europe. The report also found that 46% of tasks in administrative and 44% in legal professions could be automated. 

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So what happens next? The response to the Government’s white paper has focused on regulation, with hopes that promptly updated regulatory frameworks with proper statutory oversight and resources could mitigate existing and emerging harms. While this is needed and can be helpful in protecting existing workers and job seekers, wider structural concerns about the impact on the job market must be addressed. Speaking in a US context, the founder of Stealth Startup JB Rubinovitz argues that governments “need to start building safety nets now”.

• Rights at work. In addition to specific new rights and regulations referenced above, there is a more old-fashioned point about power dynamics which needs to be considered every time there is a new technology or development promising to ‘disrupt’ work. With union membership and collective bargaining coverage still at relatively low levels, large amounts of the UK workforce have limited ability to shape or control the way that AI will interact with their working life, leaving them vulnerable to redundancy or even practices like ‘fire and rehire’ which might be deployed by employers in response to AI changing job roles. Extending both union membership and collective bargaining coverage is key if workers are going to have more of a voice in shaping the future of AI at work.
• Social Security. Another aspect is the ability of the social security system to cope with the impact that AI might have on the labour market. One issue is whether the social security system is robust enough to ensure people's incomes in and out of work can’t drop below a certain threshold, meaning calls for reform could gain traction. Another issue is churn, where ideas such as a new system of employment insurance to help give workers more resilience to bounce back quicker from periods of unemployment could gain momentum.‍
• Working time. Finally, it is worth asking the question of whether the productivity gains from the introduction of AI into the workplace should not be realised in the form of more leisure time for workers. That’s what Oxford economist Carl Benedikt Frey thinks - arguing that "Any technology that increases productivity, ChatGPT included, makes a shorter workweek more feasible.”

Good morning from New Economy Brief.‍

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The Inflation Reduction Act in the US has put pressure on governments across the world to ramp up their efforts to develop their own green economy. 

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The ‘Washington Consensus’ of free trade is dying. State-aid rules, a cornerstone of the EU’s single market, are being relaxed as Western governments move towards state-directed reindustrialisation and decarbonisation.

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But where does this leave the UK government and how could they catch up in the 'green arms race'?

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The green arms race. The Inflation Reduction Act (IRA) in the US has catalysed a ‘green arms race’ across the Western world, with many governments pledging billions in public investment to compete for private capital and grow their domestic low-carbon economies. Governments are moving away from the ‘Washington Consensus’ of free trade in favour of state-directed reindustrialisation, with the IRA offering tax breaks for businesses that invest in low-carbon manufacturing and for consumers who buy electric vehicles which have materials sourced in the supply chain from North America. The EU has responded with its own Green Deal Industrial Plan (GDIP) and loosened state-aid restrictions to allow for more state intervention by member states to develop low-carbon economies and diversify critical supply chains within the EU.

• ‘Made in America’: Reshoring US manufacturing jobs. The Biden Administration has pledged $369bn in tax breaks for companies investing in low carbon manufacturing if they have ‘local content requirements’, where goods are assembled or sourced domestically. The aim is that many businesses utilise the subsidies and reshore to the US so that around 90% of domestic demand could come from domestic manufacturing supply chains by 2030 and bring millions of good quality jobs with them. Households can also receive up to $28,500 in up-front incentives to switch to lower carbon appliances, electric vehicles and install energy efficient upgrades. More than 100 climate, energy and environmental investments in the IRA have been estimated to create more than 9 million jobs in the US over the next decade. In the seven months since the IRA passed, clean energy companies have announced over 100,000 new jobs across 31 US states with investments totalling $89.5 billion - nearly 10 times more jobs have been created there in the last 7 months than have been created in the UK’s low carbon and renewable economy over the last 7 years.
• Job quality was important for political support. The scale of investment is novel in US climate policy, but the legislation also unites climate and trade union agendas through requirements for green jobs to pay ‘prevailing wages’, apprenticeships, access to affordable childcare and other benefits to receive certain tax credits. International Climate Policy Expert Mary Hellmich explains the political context for this: “American support for climate action depends on these policies leading to well-paying, union jobs, in addition to the achievement of climate targets. Thus, the inclusion of domestic content and labor provisions in the IRA were critical to the legislation’s passage; without them, there would be no climate bill in the US.”

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Green protectionism and the end of the ‘Washington Consensus’. This new ‘interventionist moment’ should be seen as part of an international competition to develop low-carbon technologies by the world’s major economies. China currently holds at least 60% of the world's manufacturing capacity for technologies such as solar, wind and batteries and holds “a near-monopoly on the production of many minerals critical for low-carbon technologies”. The Western world now wants these jobs and industries back, and governments are prepared to go against the norms established in the era of globalisation and use state-directed green industrial development on a huge scale to shelter their own nascent sectors and secure domestic supply chains. (Angela Nagle provides a great overview of the economic history of protectionism and situates the green industrial strategy race in a geopolitical context.)

• The EU’s response. The EU has noted ‘at least nine points’ in the IRA which could be regarded as a breach of international trade rules; in particular, the stipulation for local content requirements are incompatible with World Trade Organisation rules which are supposed to be agnostic about where products are made. Because the IRA is likely to attract private investment and industry away from the European economies and towards the US, the European Commission has responded with its Green Deal Industrial Plan (GDIP) to get at least 40% of the EU’s low-carbon technologies - such as solar panels and heat pumps - produced within its borders by 2030. The EU 's goal is to avoid dependency on any single nation outside of the EU for more than 65% of any one critical raw material by 2030 - which has already reportedly “sent renewables shares plummeting” in the Chinese low-carbon industry.
• Developing the European green economy. The GDIP will be accompanied by Net-Zero Industry Act to “identify goals for net-zero industrial capacity and provide a regulatory framework suited for its quick deployment”, a Critical Raw Materials Act to reduce dependency on imported materials and diversify domestic and sustainable supply of materials such as lithium and rare earth metals needed for electric vehicles and wind turbines, and a loosening of state-aid rules to allow EU member nations to channel more public funds into critical minerals extraction. This latter change has been described by experts as “nothing short of a paradigm shift in EU State Aid law…The EU now leaves the achievement of its climate targets to the willingness and ability of the Member States to subsidise companies in support of accelerating the rollout of renewable energy, the decarbonisation of industrial production processes and accelerated investments in sectors strategic for the transition towards a net-zero economy.”  

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“The British way.” Whilst the UK’s formal response to the IRA is scheduled to be announced in the Autumn, Chancellor Jeremy Hunt has written in the Times warning against a protectionist “distortive” global subsidy race and says “Britain will not go “toe-to-toe” with the United States and the European Union by offering billions in green subsidies and tax breaks.” Hunt said the UK response will instead focus on private investment and a “pro-growth regulatory regime…this is ‘the British way’”. 

• Green day. The government released 44 climate and energy related documents on ‘Green Day’ last week, including a new net-zero strategy after a High Court ruling that its climate strategy was unlawful under the Climate Change Act and a carbon budget delivery plan, which showed the UK is not on track to deliver its legally-binding carbon budgets. Former President for COP26 Sir Alok Sharma MP has warned that a key test of “Green Day” last week would be whether the government’s announcements “materially accelerate significant private sector money into green technologies and green jobs in the UK”, and called for faster action to respond to US and EU incentives that are ”attracting billions and billions of private sector investment in their green energy sectors right now”. (It’s not just the US and EU though… the Canadian government also pledged an $80bn investment package in clean technology in response to the IRA.) Responding to the Government’s energy announcements on ‘Green Day’ the Executive Director of Policy for Renewable UK (the UK trade body for renewables) said: “These announcements do not go far enough to attract the investment we need in the renewable energy sector…Global competition for investment in renewable energy projects is fiercer than ever, and the UK risks falling behind and surrendering our global lead…we need much more than a “business as usual” approach to kickstart investment…Without that, we won’t land the UK-wide economic benefits of building up new clean energy supply chains, as they will go elsewhere where the investment environment is more conducive and attractive”.
• Missed opportunities. Whilst the UK government has criticised the ‘dangerous’ measures in the IRA, they have simultaneously argued that we are unable to compete with the scale of subsidies needed to attract private investment on offer in the US and EU, whilst also being “ahead of the game” on renewable energy, pointing out that the UK has the four largest offshore wind farms in the world. Critics note that much of this infrastructure is owned by foreign state-owned entities and that the wind farms are an “illustration of political failure because they should have been built by a home-based manufacturing sector”, in the words of GMB Scotland’s Peter Welsh: “The result is a situation where we have haemorrhaged the vast majority of the jobs in the manufacture of offshore wind projects to the rest of the world because we have not invested in our infrastructure and supply chains – and the public are footing this industrial failure through their bills.” (Readers might also remember the collapse of ‘flagship’ electric battery manufacturer, BritishVolt, which went into administration in January after the government refused to bring forward public funding and it failed to find a private investor to save it.)

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Catching up in the 'green arms race'. The UK’s drive for Net Zero is now taking place in a new context, where other nations are offering generous subsidies to develop their own green industries. What does this mean for UK policy? And can the UK really compete with the IRA? Luckily there are various lessons that the government can learn from this paradigm shift in global trade and green industrial strategy. 

• “This is not protectionism, is it patriotism”. Labour are now positioning their Green Prosperity Plan as a direct response to the IRA. Shadow Chancellor Rachel Reeves often justifies their £28bn a year green investment pledge as a way to compete with other nations which are “taking a punt on these jobs and industries of the future”. Labour’s plans for an initial £8bn National Wealth Fund to invest in the green economy also echoes the US’s ambition to redevelop domestic industries (“made in Britain”), and similarly aim to generate returns for taxpayers. Shadow Secretary for Climate Change and Net Zero Ed Miliband outlined Labour’s approach in a speech to Green Alliance last week: “those who say we can’t be winners in that global race are wrong. We should match the ambition of President Biden’s Inflation Reduction Act and stop moaning about it…this is the British version of the Inflation Reduction Act: 2030 zero carbon power. Action to break down the barriers in planning, grid, skills and supply chains. A new national wealth fund to invest in partnership with the private sector. And GB Energy, our new publicly-owned energy company.”‍
• Reindustrialisation and decarbonisation: lessons for the UK. IPPR’s Luke Murphy explains how the UK can use a wider policy toolkit than the US due to unique constraints within their political system, such as regulatory measures and public procurement, “but to reap the economic benefits of such measures the UK must learn from the US approach combining regulation with greater public investment and green industrial policy.” Some of the eight lessons include learning from the unprecedented certainty and policy stability that the IRA provides through its 10 year framework for tax credits (resembling the ‘critical decade’ for climate action), focusing climate action on creating good quality jobs, using conditionality to shape and bend corporate behaviour to socialise risks and rewards (e.g. through encouragements to sign collective bargaining deals with unions, offering affordable childcare for workers and ruling out share buybacks and sharing excess profits with the government), and that the UK should play a role in greening the global trade regime. (We will cover more on the international trade angle in a future Digest.)

Good Morning from New Economy Brief

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From Hayek to Marx, economic thinkers from across the political spectrum have long criticised the power of monopolies. But despite this consensus, are we at risk of sleep-walking into a new age of monopoly capitalism?

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This week’s Digest looks at the evidence about market concentration, its impacts, the emerging literature about the interaction between monopolies and inflation, and possible policy options to counter these effects.

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Monopoly money. “We’re now 40 years into the experiment of letting giant corporations accumulate more and more power...I believe that experiment failed.” These were the words of President Biden in 2021 announcing a new executive order on anti-trust (competition policy). It isn’t hard to see why he felt the need to sound the alarm. Researchers in the US have found that the top 0.1% of companies in America are responsible for a staggering 88% of corporate assets and 66% of sales. Campaigners Global Justice Now (GJN) argue in a new paper that this is part of a wider trend, where giant corporations have “captured the economy” through a series of mergers and acquisitions and are now exerting their power to warp global markets.

• Why does this matter? The concentration of corporate power has many warping effects. For example, concentration in the agrifood industry has led to a loss of biodiversity as giant businesses standardise crops across different regions. GJN also argue that lack of competition also creates other negative climate outcomes, for example by encouraging practices like built-in obsolescence. More profoundly, as the Balanced Economy Project put it: “Monopoly power corrupts politics, increases inequality, worsens political polarisation, stifles innovation, reduces economic growth, undermines truth and the media, benefits authoritarian rulers, and generally blocks the possibility of change.”
• Food for thought? Which markets are we talking about? Well, quite a lot of them. GJN point to Google’s 85% share of the global search engine market (93% in the UK) as an example, but draws the net more broadly, with Big Tech and Big Pharma in the spotlight. Perhaps most relevant given current economic concerns though is the global food market which has seen dramatic consolidation in recent years. The latest report from the ETC group on ‘food barons’ finds that many crucial agrifood sectors are controlled by just four to six dominant firms which “wield enormous power” over global food markets.
• Isn’t this regulated?  Not very well according to campaigners. New anti-monopoly outfit the Balanced Economy Project argue that neoliberal thought has evolved to prize ‘competitiveness’ over ‘competition’ and this has muddied the regulatory waters. For example, the government’s controversial Edinburgh Reforms embed the principle of ‘competitiveness’ in the mandate of financial regulators, which finance campaigners like the Finance Innovation Lab claim confuses the role of the regulator. In their paper, GJN also argue that regulators like the UK’s Competition and Markets Authority (CMA) have been too reluctant to block mergers and acquisitions - for example Google has acquired over 200 companies since 2001. Just last week, the CMA performed a surprise u-turn to remove barriers to the acquisition of video games company Activision Blizzard by Microsoft, further consolidating the rapidly growing video games sector.

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Competition and inflation. That’s a pretty long charge-sheet against monopolies, but of particular interest in the current economic climate in the interaction between monopoly capitalism and inflation. A common argument in the ‘wage-price spiral’ debate is that this bout of global inflation is unlike previous price surges because the power of organised labour has been much diminished since the 1970s, meaning that collective bargaining is unlikely to drive inflation in the same way. Another aspect that has changed in recent decades is the concentration of various vital global markets, which has consolidated price-setting power into the hands of a small number of mega-corporations. Shouldn’t we also expect this to have some interaction with inflation? 

• Systemically Significant Prices. That’s what the University of Massachusetts' Isabella Weber thinks. Weber and her colleagues have argued that the current inflation phenomenon cannot be explained simply as a macroeconomic phenomenon (too much money chasing too few goods) and instead is about how changes to ‘systemically significant prices’ (like energy) can ripple through an economy. In this model, changes to these prices (often resulting from external shocks) spark responses from other businesses who have to raise prices to account for the increasing input costs, and eventually trigger a response from workers who demand higher wages. By focusing mainly on the wage-bargaining aspect, policy-makers are neglecting to tackle the root cause of the inflation.
• What has this got to do with monopolies? The interaction with market concentration is critical to understanding this kind of inflation. When small groups of firms have incredibly high price-setting power, it allows them to exploit external shocks either to raise prices further than they need to, or to keep them high long after an economic shock has abated. When these are in systemically significant sectors, like oil or food, this then has a material impact on inflation throughout the economy. The evidence of massive recent profits for commodity traders, alongside research from IPPR/Commonwealth and Unite the Union on recent profiteering suggest that some firms have been able to leverage their power in this way to make vast sums and fuel the cost of living crisis.

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What can we do about it? As the old joke goes, I wouldn’t start from here. Unwinding market concentration is significantly more difficult than preventing it from emerging in the first place through effective competition policy (anti-trust for American readers). As previewed in the opening to this newsletter, the Biden administration has toughened its stance towards the enforcement of anti-trust laws, appointing serious regulators and signalling a change of approach from recent decades. But effective enforcement of existing laws is unlikely to make a dent in the current situation. GJN highlight a suite of bolder policy options, such as the enforced break-up of monopolistic companies, and constraining the role of the financial giants and investment funds which lie behind so much of this concentration.

• Natural monopolies? In some cases it is almost impossible to generate real competition, which begs the question over whether these natural monopolies should be run in the private sector at all. The recent fiascos with the UK’s railway franchising model are an example of just such a problem, and famously the most profitable sector of the UK economy are the privatised power networks which have a complete monopoly over their areas and are largely owned by overseas investment funds.‍
• A new stabilisation paradigm? In respect of inflation, Weber argues that a new policy suite is needed to respond to this kind of price rise, rather than reliance on the blunt macroeconomic tools of interest rates. Central to this is the use of strategic price controls, which she argues “have tended to work in highly concentrated markets”. Citing UK and European energy price controls as examples, Weber argues that this kind of tool - once regarded as economic heresy - should be more widely deployed, especially as climate change is likely to spark waves of inflation that are similar to the one we are currently experiencing.

Good morning from New Economy Brief. 

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On Thursday the Bank of England’s Monetary Policy Committee (MPC) will decide whether to continue raising interest rates or hit the pause button. Central banks have been increasing interest rates around the world in reaction to record inflation, but this blunt tool has consequences for other parts of the economy, perhaps most notable in contributing to the instability of financial institutions.

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In todays’ Digest we look at the debate around the MPC decision, the interaction between interest rates and other economic issues, and examine other tools which could be used to combat inflation that avoid such harmful effects.

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Have interest rates peaked? This Thursday the Bank of England’s Monetary Policy Committee (MPC) will vote on whether to increase, maintain or reduce interest rates. Many economists have debated about whether the MPC should keep interest rates at their current level of 4% after a particularly turbulent week in financial markets. The last few weeks have also seen a remarkable public debate between MPC members about the course they should take. 

• The hawks. The February meeting of the MPC concluded with a majority vote of 7-2 to increase the Bank Rate by 0.5% to 4%, with two members voting to maintain rates at 3.5%. The ‘hawkish’ members of the MPC expressed concern that a historically tight labour market and potentially ‘sticky’ private sector wage growth above 6% “risks of greater persistence in underlying inflation” which a 0.5% hike would help address a ‘second round’ of inflation. Catherine Mann has been clear in public that she feels that more rises are necessary.
• The doves. The ‘dovish’ members of the MPC (Silvia Tenreyro and Swati Dhingra) argued that the real economy remained weak as a result of falling real incomes, that the economic downturn was affecting the labour market, and that the impacts of previous hikes are yet to have their impact, so inflation is likely to reduce “well below” 2% in the medium term, even with interest rates remaining at 3.5%. 

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Are rate rises harming the economy? The debate has shone a light on the effect of contractionary monetary policy on the wider economy. Economists have long argued that using interest rates to combat inflation is an imprecise tool, particularly when price rises are mostly driven by external supply shocks rather than domestic demand. Increasing the cost of borrowing and voluntarily slowing down demand in the economy on the brink of recession has a variety of adverse impacts on public debt, mortgages and the housing market, international debt repayments, business lending, unemployment and financial instability.

• They increase costs of government debt servicing... Interest rates have massive political effects as they change the cost of servicing government debt which has implications for how much ‘fiscal space’ the Treasury has to meet the Chancellor’s (self-determined) fiscal rules. These may be more political constraints than real economic constraints, but if the government is determined to meet these rules then there are real consequences for raising rates on fiscal policy. The Office for Budget Responsibility’s (OBR) latest report noted (page 14, 1.24) that if interest rates were 1% higher (or lower) than assumed in their forecast, borrowing would cost the government £20bn (0.7% of GDP) more (or less) to service their debt in 2027-28, which “would wipe out headroom against debt falling in the higher rates scenario but would more than treble headroom in the lower rates scenario.” Thus the decision of the MPC will have a dramatic effect on the pre-election fiscal context and could scupper any government plans to ‘spend’ additional headroom on pre-election tax cuts. 
• …slow down economic growth... The OBR’s latest economic and fiscal outlook noted (page 6, paragraph 1.4) that the lower interest rate pathway was partly responsible for avoiding recession - another key factor determining the government’s narrative around the Budget. 
• …spark international debt crises... The 1980s was marked by a series of international debt crises in South America and Africa as developing economies struggled to service the higher cost of debt as creditor countries increased interest rates in response to rising inflation during the oil shocks of the 1970s. As central banks across the developed world hiked interest rates in response to recent inflation, a recent report from the International Panel of Experts on Sustainable Food Systems warns that 60% of low-income countries and 30% of middle-income countries are at high risk of (or already in) debt distress as government’s struggle to service higher debt. 

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…and have triggered a banking crisis. A new factor has been added to the mix in recent weeks as turbulence in global financial institutions has been traced back to rising rates, prompting calls for a pause. As debt gets increasingly expensive, companies and industries that flourished in the era of super-low interest rates are more likely to default, which can lead to bank collapses. Last week Silicon Valley Bank (SVB) collapsed as higher interest rates in the US left the bank increasingly exposed and eroded the value of its long-term bond portfolio, triggering a sell-off of stocks and an international banking crisis.  Commenting on the failure of SVB, a timely peer reviewed article explains how rising interest rates erode the value of bank assets and have put “almost 190 banks at potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk” in the US. Tulip Siddiq, Labour’s Shadow City Minister, wrote to the Chancellor earlier this week to call for a “systemic review of the impact of interest rate rises and the wider uncertainty in the global banking system on our financial sector and economy.”

• This is also a warning against financial deregulation. The situation is unfolding rapidly, but the Finance Innovation Lab’s Jesse Griffiths explains that the reaction of central banks “shows we have a real financial crisis on our hands…only powerful state intervention can prevent the crisis spreading across the whole system” and warns against further financial deregulation. The US’ Federal Reserve also provided more lending to banks through its emergency funding programme last week than at the 2008 crisis peak. Chatham House expert Creon Butler concurs that the episode teaches us a key lesson: “Governments and financial regulators should be very cautious about relaxing regulations put in place to protect the financial system after the global financial crisis. This is as true of the UK’s desire to take advantage of post-Brexit freedoms, as it is of those in the US who see ‘excessive’ financial regulation as a constraint on growth.” (See our previous Digest on the UK government’s plan to deregulate financial services.) 

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Are other central banks still increasing interest rates? The Guardian’s Richard Partington reports that the SVB collapse ‘could force central banks to stop interest rate rises’. Market expectations for where the US’ Federal Reserve will peak interest rates have also dramatically reduced since SVB’s collapse (Look out for their decision at 6pm tonight). Expectations for the European Central Bank (ECB) peak interest rate have also reduced, although their Governing Council still increased rates by 0.5% last week as “macroeconomic projections were finalised in early March before the recent emergence of financial market tensions”. The FT’s Delphine Strauss reviews the views of former central bankers in light of recent financial turmoil.

• Latest market projections for the UK interest rate. Even at the last MPC decision in February and before the emerging banking crisis, many brokers argued that the Bank of England shouldn’t increase UK interest rates further. Capital Economics’ Paul Dales notes that “The fact that problems in the banking system...can be traced back to the rises in global interest rates means it is natural for the MPC to become more wary about further tightening the screws.” The latest market expectations for UK interest rates have reduced since the collapse of SVB but now expect a further 0.25% rise tomorrow due to an increase in CPI to 10.4% in February (up from 10.1%) in ONS data published this morning.

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Reviewing the UK’s macroeconomic institutions. This is the first major inflation crisis since the Bank of England became independent in 1997, and it is reasonable to ask what lessons we can learn about the policy response to the inflation shock. Arguably, the whole episode has exposed the danger of relying almost exclusively on interest rate rises to combat inflation which is driven by external supply shocks. As economist James Meadway notes, “The primary function of a central bank… is to preserve financial stability. If this primary task conflicts with the demand that they must also try and keep inflation low, central banks should be focused on their primary function. This means, in practical terms, that the fairly useless programme of interest rate rises must be halted and support given to banks as needed.” But if we accept that aggressive rate rises have limited ability to control certain kinds of inflation, and have damaging consequences elsewhere, then what other options exist?

• Time for fiscal and monetary coordination? A working paper for CUSP explains that the current monetary and fiscal policy regime “is no longer fit for purpose and may end up hampering both the recovery from the pandemic and the transition to net zero”. They call for a greater degree of flexibility in the UK’s macroeconomic institutions (Page 22-25) so that fiscal policy can “take a more active role in managing economic activity, and for monetary policy to take consideration of public (and indeed private) debt sustainability issues when setting interest rates.”  Economists Jo Michell and Jan Toporowski argue that the Bank of England should be given an enhanced financial stability mandate requiring more explicit coordination with the Treasury, “but need not eliminate the independence of the Bank”. They argue that the pre-2008 crisis orthodoxy of inflation-targeting was “incorrectly credited for a period of macroeconomic stability that was subsequently shown to be illusory”, and review a variety of proposals for reforming monetary policy (Page 23-29) including replacing the Bank of England’s inflation targeting with a growth target, and more. The authors ultimately conclude that “the proper regulation of employment and investment in the economy is a matter of policy for Government, not the central bank.”

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Alternative ways of reducing inflation. The government can also reduce inflation through use of targeted fiscal policy and more active competition policy.

• Fiscal price caps. IPPR have outlined how “a less often discussed, but potentially hugely important, macro-economic policy lever is to use fiscal policy to reduce prices immediately”, such as freezing the energy price cap, which they calculated could drastically reduce inflation in the UK (written before the Truss administration implemented the Energy Price Guarantee). 
• Competition policy. Isabella Weber in the US and IPPR and Common Wealth in the UK have been problematising corporate concentration as an explanation of rising prices after the pandemic. In Prices and Profits after the Pandemic, Carsten Jung and Chris Hayes find that “While inflation is primarily being driven by global factors… surging profits by some companies could be a contributing factor to rising prices…[where] the market power of some firms could be exacerbating inflation.”IPPR’s Carys Roberts proposed the government should levy excess profit taxes to other sectors of the economy which have made windfall profits (beyond oil and gas) and use the receipts to support households and build more resilient supply chains to tackle external causes of inflation (e.g. for critical commodities). This could reduce inflationary pressure by discouraging profiteering, as research by IPPR and Commonwealth has observed.

Good morning from New Economy Brief. 

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Tomorrow the Chancellor will lay out his decisions on tax and spending for the coming year. 

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Commentators and think tanks have debated how much fiscal ‘headroom’ he has available against the fiscal rules he set himself in November, whilst pressure is mounting for additional spending across the board to help counter the effect inflation is having on household finances, wages, and departmental budgets.

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Can the Chancellor afford not to invest in structural solutions to the cost of living crisis? Read on for our analysis. 

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The ‘war chest’ replaces the ‘black hole’. The fiscal mood music around this budget is significantly more positive than it was in November for a number of reasons, with GDP more resilient than feared and positive signs that inflation is receding. This adds up to a £30bn ‘improvement’ in the public finances compared to November according to the ONS. Whereas the last fiscal event was preceded by frantic briefing about the size of the ‘fiscal black hole’, this one has been dominated by a very different kind of fiscal context. 

• How much ‘fiscal space’ does the Chancellor have? The £30bn improvement so far in 2022-23 is partly due to tax revenues being higher than expected, less borrowing by local authorities and nationalised industries, and the remainder from lower-than-anticipated government subsidies for household and company energy bills, net investment and debt interest payments. (For context, £30bn is more than enough to prevent inflation eroding the wages of every public sector worker). However an expected downward revision later in the forecast period means that, as the Institute for Fiscal Studies’s Paul Johnson argues, “Unless the [Office for Budget Responsibility (OBR)] springs a pretty big forecasting surprise”, there won’t be any “money kicking around to be spent on permanent tax cuts or spending increases”. A very different perspective on the debate on the size of fiscal space comes from the National Institute of Economic and Social Research (NIESR) who forecast the Chancellor’s fiscal space to be far higher at £166 billion to meet Hunt’s deficit target, and £97.5bn to meet his debt target.

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Important economic decisions should not be based on such uncertain forecasts. As right-wing economist Julian Jessop argued: “it’s bonkers that the Treasury places such weight on projections that are known to be unreliable. This leaves very little room for Chancellors to make their own judgements.”

• “Black holes” in the public finances appear and reappear with rounding errors. This was precisely the point made by economists in the run up to the Autumn Statement, where the Institute for Public Policy Research (IPPR) flagged that the government could actually afford to run a primary deficit of £49bn and still meet its self imposed fiscal rules (as public investment can avert a low-growth scenario and therefore reduce the government’s debt:GDP ratio), and the Progressive Economy Forum (PEF) argued that loosening the fiscal rules (as the Chancellor ended up doing) would eliminate any need to plug a “black hole” in the public finances. The idea of the ‘black hole’ set the context for the last budget in which the government announced a large programme of cuts, and yet mere months later the projections on which it was based are looking distinctly shaky.

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Spending pressures. Pressure is growing from Conservative voices to use the Treasury’s extra headroom to cut taxes, particularly to prevent the planned rise in corporation tax from 19% to 25% in April. The Institute for Fiscal Studies (IFS) notes that the long term economic outlook is “too ‘murky’ to wave through a bunch of tax cuts.” (Reminder: there is a lack of evidence that tax cuts generate economic growth.) However, many economists are arguing that there is a strong case for increasing government spending now in a variety of ways that could boost GDP growth and make the public finances even more resilient to future shocks. 

• The cost of living crisis is still eating away disposable incomes. The Bank of England expects inflation to fall to 4% by the end of the year, but even in this scenario, people will still be permanently poorer than last year as the cost of essentials like food (see last week’s Digest on food price inflation) and energy continues to rise faster than wages; the Energy Climate Intelligence Unit (ECIU) calculated that even if the government extends the Energy Price Guarantee, households will still be paying £285 more than last year. Real pay is falling steeply and in cash terms average real pay is still £110 a month below where it was in 2008. Trades Union Congress (TUC) General Secretary Paul Nowak argued the government “must put pay rises at the heart of next month’s budget” as this will increase disposable incomes and prop up demand for goods and services in the economy. They recommend giving all public service workers a real-terms pay rise, moving towards a £15 minimum wage “as soon as possible” and more. 
• Public services need investment. According to analysis by the New Economics Foundation (NEF), the government is hiding £28 billion of “stealth cuts” to public services, despite promising in the Autumn Statement to increase spending by 1% a year. This is because previous assumptions were based on low and even negative inflation in the years ahead, which seems to suggest that the Bank of England would not intervene to try and hit their 2% target. Alfie Stirling explains: “If inflation rests closer to 2% from 2024/25 onwards, the government will need to commit a further *£28bn/yr* (2022/23 prices) to preserve the real terms value of spending plans by 2027/28.” PEF recently calculated that more than half a trillion pounds have been taken out of public spending over 2010-19. A lack of investment in public services and public sector workforce that deliver them is driving workforce shortages, particularly in the NHS.
• Growing support for boosting investment. A recent editorial by the Financial Times argued that “It is time for a UK-wide growth strategy”, where “the government must boost public investment, which has proportionally been among the lowest in the OECD over the past two decades…Next week’s Budget is an opportunity to begin addressing these issues.” Various funding sources exist for ambitious plans to boost growth. Even former US Treasury Secretary Larry Summers now believes “There is capacity to raise revenue from the wealthy on a quite substantial scale – far more than is politically imaginable – without doing any appreciable damage to economic growth”. A new report and video from the Social Guarantee’s Isaac Stanley explains how £92.6bn can be raised from increasing tax on wealth and passive income, taxing big businesses (especially energy companies) and through progressive consumption taxes. They propose this can fund “a limited suite of universal basic services”.
• What is expected? The pre-briefed announcements from the Budget suggest that that it will be a relatively low-key affair, with some temporary help for households in the form of an extension of the Energy Price Guarantee, some action on childcare, a refreezing of the fuel duty permafrost, and some additional spending on defence to attempt to compensate for inflationary pressures.

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Choices and gambles. The government story around this budget is very much ‘steady as she goes’ with the improved public finances a vindication of prudence and a mark of restored ‘stability’. The assumption of many in Westminster is that the Chancellor will attempt to ‘bank’ his additional headroom and use it to store up a “war chest” for pre-election tax cuts. This would enable a narrative going into the election that ‘the plan had worked’. Taking this approach is a choice, and it is also a big political and economic gamble. The idea that the economy has returned to ‘stability’ might be true from the perspective of the bond markets, but seems tone deaf when millions of people are finding their personal finances more unstable than ever. When people’s incomes are so insecure, can the government really afford (politically, and economically) to avoid using the fiscal space to solve the cost of living crisis?

• Stagnation nation. There is a fine line between being stable and being rudderless. There is a real risk that an empty Budget red box this week will lead the public, and investors, to conclude that Britain is closer to the latter than the former. With the USA and EU embarking on new economic strategies based on encouraging public and private investment in the green transition, and the Labour Party echoing this rhetoric, the lack of a similar vision or strategy from the UK government is all the more striking. 
• No alternative? The government’s pre-budget briefing has been that they are unable to act because any additional spending would break fiscal rules or risk fuelling greater inflation. The Stop the Squeeze campaign have released a pre-budget briefing addressing these arguments head on, and conclude that they do not stand up to scrutiny.‍
• Broken Britain. More profoundly, there is a deep sense across the country that things are going in the wrong direction. Public services are at breaking point, strikes are continuing, energy bills are still sky high, and growth is nowhere to be seen. The public, unsurprisingly, continue to put the cost of living crisis at the top of their list of concerns. From an economic point of view, deciding not to act now risks prolonging economic stagnation, deepening the crisis in public services, and leaving the UK lagging behind on green investment. From a political point of view, it risks deepening the impression that the government lacks a plan to deal with the cost of living crisis or the economy - an impression that no amount of pre-election tax cuts will be able to shake.

Why is the UK running out of certain foods? Food insecurity has climbed up the political agenda in recent weeks as five of the six largest supermarkets have started rationing vegetables. Sustain’s Vicki Hird explains that the current shortages are exposing system issues in the UK’s unsustainable and unresilient food sector, as supply chains are threatened by a combination of poor weather conditions, trade frictions and higher costs of production for growers. Tim Benton, research director of emerging risks at Chatham House, has warned about the need to “de-risk” food supply chains in an increasingly insecure world.  

• Extreme weather is reducing harvests. Economist James Meadway explains how extreme weather events are reducing harvests across the world and continue to drive up food prices. Extreme heat in Europe last year reduced potato and sugar beet harvests by up to 50% in Britain. The supply of other home-grown vegetables are also being threatened as extreme weather reduced harvests of leeks by “between 15 and 30 per cent”. The President of the National Farmers’ Union warned the domestic farming sector will struggle to adapt to more extreme weather and higher input costs, leaving the UK more reliant on food imports and more vulnerable to supply chain disruption.

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Food supply shocks will exacerbate global hunger... The UN’s Intergovernmental Panel on Climate Change’s report on climate impacts explains how the climate crisis poses an acute threat to global food supplies, which has severe consequences for global hunger and security. The World Food Programme estimates that the number of people facing acute food insecurity more than doubled from 135 million people before the pandemic to 345 million, mostly in poorer countries.

• …worsen food poverty in the UK… In richer countries, populations will face rising prices with more instances of shortages. Increasing numbers of people are already struggling to put food on the table due to the rising cost of living. The Independent Food Aid Network is already reporting record increases in demand for UK food banks, with 80% of food aid providers reporting a “significant number of people needing help for the first time” and half of the organisations surveyed saying that “if demand increased, they would have to reduce the level of support they could provide or turn people away”.
• …and profiteers will generate windfalls. In this context, the spotlight is falling on those people and organisations within the food system who are benefitting from food inflation and shortages. Last year, Oxfam’s Profiting from Pain report found that “62 new food billionaires have been created” as the largest food corporations receive windfalls from a 30% increase in global food prices over the previous 2 years. Greenpeace’s new report on food profiteering since the pandemic has found that 20 of the world’s biggest food corporations (in the grain, fertiliser, meat and dairy sectors) gave $53.5bn to their shareholders in the last two financial years. The report shows how the 20 companies control supply chains for food itself, and information about those supplies, which fuels commodity speculation.

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Creating a sustainable, nutritious and resilient food supply. Just as energy inflation led to greater scrutiny of UK energy resilience, recent food shortages have prompted a wider debate about creating more nationally self-sufficient food supplies. The idea is that by restructuring the food system, it is possible to both keep food affordable whilst also ensuring better outcomes for farmers, the natural environment and public health. This will require moving away from the dominant globalised model that promotes vertically integrated monopolies which control most of the supply chain. In the current business model, UK farmers receive less than 1% of the profit made on key items like sliced bread, beef burgers, carrots and cheese, according to analysis from Sustain. Alongside strong regulation to stop abuse in supply chains, greater support is needed for domestic growers to be able to invest in agroecological production and new technologies to improve resilience and reduce exposure to import price shocks.

• Food sovereignty. Food sovereignty is an alternative to the export-led model of food production and consumption dominated by multinational corporations. Food sovereignty goes beyond food security and is underpinned by six principles: providing food for people; valuing food providers; localising food systems; centring local control; building knowledge and skills; and working with nature. The Landworkers’ Alliance (LWA) argue that a food sovereignty movement in the UK would allow for diversity of production rather than relying on ‘cash mono-crops’ and “offers an opportunity for us to restructure our food system from one which is profit-oriented to one which is designed to help both people and the natural environment.”
• Democratising ownership and taking back control of the food system. Rob Booth outlines an alternative future for agriculture in the UK and worldwide for Common Wealth. This redistributes power and “puts producers and citizens, rather than agri-business, in control of food systems”, by encouraging democratic ownership models such as cooperatives and community land trusts. The Welsh Government’s proposed changes to agricultural support after Brexit have the potential to encourage agroecological farming and increase food sovereignty by moving towards a more resilient system based on small and medium scale farms producing a wide diversity of food for domestic markets. (LWA and Shared Assets have outlined a series of case studies showcasing good practice in Wales.)
• Supporting growers through international, national and local policy change. Greenpeace, La Via Campesina and others call for “a legally binding global treaty coherent with the Articles of the UN Declaration on the Rights of Peasants and Other People Working in Rural Areas” to reduce the influence of agri-business models in the international trade order which exploit cheap labour and encourage profiteering. Common Wealth’s Rob Booth outlines the national level policies, local actions and legislative changes (a Right to Food) needed to transform food supply chains in the UK.

The five missions of a Labour government. Leader of the Opposition Sir Keir Starmer explained Labour’s “statement of intent to how we intend to govern” through five missions, which will likely form the backbone of their election manifesto. Their priorities are: securing the highest sustained growth in the G7, a zero-carbon electricity system in Britain by 2030, an NHS “fit for the future”, making Britain’s streets safe and breaking down barriers to opportunity (through childcare and education reform).

• Ending ‘sticking plaster politics’. Starmer argues that a “mission-driven government” is required to end what he called ‘sticking-plaster politics’ in his New Years speech; a term to describe the government’s consistent failure to solve complex challenges plaguing the UK economy due to being overly focused on short term solutions to neutralise immediate political challenges. For instance, Starmer quoted the energy price freeze as “an expensive, last-minute fix” for the cost of living crisis, “papering over cracks in our energy security that have been on display for years”.
• Light on detail? The speech has had a mixed reception, with some criticism that it is ‘light on detail’ or that it doesn’t constitute a ‘retail offer’ for voters at the next election. In fairness to Labour, they have said that they will be fleshing out these missions between now and the election, and as former Labour advisor Tom Hamilton argues, the missions will not necessarily form the basis of the ‘pledge card’. 
• The benefits of a ‘mission-led’ approach. IPPR’s George Dibb explains why we need ‘missions’ to drive the UK’s economic renewal: “A mission should provide a clear and measurable goal that shapes the action of a government. It should be an ambition that different parts of government can align around and provide a clear steer for collaboration and partnership between business and government.” 

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Clarifying Labour’s new role for the state. The mission-led approach has received some criticism for being ambiguous about the role of state intervention in markets, which some argue risks an overreliance on private sector delivery. Starmer said he is “not concerned about whether investment or expertise comes from the public or private sector - I just want to get the job done…Mission-driven government is a different way altogether. Not state control or pure free markets, but a genuine partnership”. Interestingly, the refrain of “get the job done” seems to echo the New Labour slogan“what matters is what works”, but with an important difference: in the late 1990s this apparent ambivalence between public and private sectors was used to justify more market involvement in public services, whereas Starmer is using the phrase to justify more state involvement in markets.

• Concerns about a ‘partnership approach’. Private Eye’s Solomon Hughes questioned whether Starmer’s approach goes far enough to ensure the state has a “firm element of control, so public investment doesn’t just flow into private profit” IPPR’s George Dibb argued that “putting in place structures to guarantee public return on public investment is essential” through policies such as a citizen’s wealth fund, state purchasing of equity stakes in businesses through a British Business Bank or UK Investment Bank type structure, or public ownership of public intellectual property. 
• Ensuring government shapes (and doesn’t just serve) markets. To be fair to Starmer, his speech argued that “there is a massive role for the private sector in mission-driven government but if the aspiration is merely to replace the public sector while extracting a rent to privatise the profits, while socialising the risk, that takes us nowhere”. Labour has also already announced policies like a citizens’ wealth fund and a publicly-owned energy generator, but Global Justice Now’s Nick Dearden argues “Starmer will need to go much further…state support must require business to behave very differently” through stronger use of conditionality, pointing to the Inflation Reduction Act in the US as an example of good practice in market shaping. IPPR’s George Dibb also argued that government support should also depend on firms' tax affairs, union recognition, dividends and share buybacks policy and more, as, ultimately “missions are an important part of the puzzle but can't do it alone. Missions have little to say to questions of ownership and power. That's why they have to be combined with other structural & institutional reform”, such as strong competition policy to avoid rent extraction.

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The transformative potential of a mission-oriented government. Missing from much of the commentary around the speech has been a sense of what it means for Labour to be thinking and talking in the language of ‘missions’- with little distinction being drawn between Labour’s ‘missions’ and the government’s five targets. But missions are much more than just targets. A mission-oriented approach to solve ‘grand challenges’ such as climate change is a seminal part of new economic thinking. The idea of using government to explicitly steer the direction of economic activity to achieve ‘missions’ was popularised by Mariana Mazzucato, founder and Director of the UCL Institute for Innovation and Public Purpose. By making strategic investments in particular sectors, such as green industries, an active industrial strategy from an ‘entrepreneurial state’ can kick-start the development and take-up of new technologies, develop new markets for UK companies, trigger greater private sector investment, and tackle major environmental challenges. 

• Labour is tapping into the new global consensus. The ‘Asian Tiger’ experience is often referred to as an example of how governments can steer the direction of growth and technological development to support domestic competitive sectors in the direction of desired goals, e.g. the Tiawanese government directly steered universities and firms R&D processes to become a global hub for computer chip exporting. Moving away from a laissez faire approach to economic development has been an emerging global consensus for years: 84 countries (accounting for 90% of global GDP) adopted formal industrial policies between 2013-2018. It is also important to note that the recent Conservative government has had a stop-start relationship with industrial policy, including policies such as the National Security and Investment Act, the British Business Bank’s Future Fund and the Advanced Research and Invention Agency. 
• Giving business what they want? While some might suggest that this emphasis on the role of the state to design economic objectives might be unwelcome to businesses- in fact this is exactly what many business leaders have been calling for. The CBI’s Tony Danker has been vocal in criticising the lack of economic direction from recent governments and the absence of a sense of partnership between state and private sector on joint challenges. Danker’s call for a long-term ‘economic vision’ isn’t a million miles away from the ‘missions’ approach Labour has set out.‍
• “Seize the interventionist moment”. The FT’s Martin Wolf recently warned that “the new interventionism could pose a threat to global trade”, referencing how Joe Biden’s plan for creating a domestic green industrial base centred around electric vehicle manufacturing has put the US at the centre of a major trade dispute with the EU and UK. However, Global Justice Now’s Nick Dearden argues “we should defend policies that allow all countries to develop their own industrial strategies to build fairer, more sustainable economies…it is the trade rules that need to give”. Economist James Meadway also notes that the EU’s “decades of dogged commitment to free-market rules are being shredded with surprising speed” and state-aid rules are “on the verge of being weakened” to allow more government subsidies and public ownership in the single market. It is in this context that “Labour has an important political opportunity to seize the interventionist moment and define its terms for Britain”.

‍More workers are leaving the workforce since the pandemic. The Chancellor is reportedly focussing the March 15th Budget on reducing the amount of people on sickness related benefits and boosting employment, amid growing concern about record numbers of people on long-term sickness and the effect of declining labour force participation on economic growth.

• Why are workers leaving the workforce? Labour market participation has fallen markedly since the pandemic and has not returned to its pre-pandemic level. One important reason for this is the rise of individuals with long-term ill health, with a rise in economic inactivity particularly concentrated in older age groups, women with children and those affected by rising ill-health and disability. The Resolution Foundation’s new research on the drivers of economic inactivity finds that 460,000 more working-age people have become economically inactive due to long-term sickness since the start of the pandemic (now 2.5 million in late 2022).

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‘Sick-note Britain’: the sticking plaster response? The government’s mooted response is a classic mix of carrots and sticks, most of which are targeted firmly at the symptoms rather than the causes of this issue. The Telegraph reports that the government is considering “a new approach to how GPs decide whether people are too sick to work” and telling doctors to “sign fewer people off work with sick notes and instead help them to remain in employment under plans being considered for next month’s Budget.” Other ideas under consideration to encourage older people back to work are: putting work coaches in GP surgeries so doctors can refer older patients who express interest in getting a job to them for advice, giving early retirees financial advice “with many set to be told that they do not have enough cash to see them through life” and encouraging pension companies to offer more ‘mid-life MoTs’. But is this the best way to stop people leaving the workforce? (The Resolution Foundation's Torsten Bell explains why the government's ideas won't work.)

• NHS crisis. One solution which seems to be firmly in the ‘too difficult box’ is actually fixing the crisis in the NHS, and particularly with waiting lists for elective surgery, which lie behind some of these numbers. For economic arguments about how increasing investment in the NHS can reduce long term sickness and increase participation and productivity in the economy, read our previous Digest on reducing the NHS backlog. 
• Elephant in the room. Another issue which is off the table for now is any serious attempt to reform the UK’s migration system in order to encourage more economic migration. Again, this is an issue we have covered previously in our Digest on the economics of migration post-Brexit.
• All about tax. The Resolution Foundation has proposed a solution firmly in the ‘stick’ category this week, urging the government to scrap lucrative tax breaks which they argue are causing workers to seek early retirement. They make the point that these tax breaks are highly regressive, and make it much less attractive for wealthy older workers to stay in work.

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What about work itself? Often missing from this debate on workforce participation is any consideration whether work itself might be part of the problem. With workers often being asked to work longer hours, for less real terms pay, and fewer employment protections than previously, it is surely worth considering whether the focus should be trying to improve the experience of work, rather than attempting to nudge reluctant workers back into jobs that make them ill or unhappy. Perhaps the most transformative proposal in this space is the campaign for a four day working week, which has released some new data this week. Surveys have shown “consistently” growing public support for a four-day week since the beginning of the pandemic. So could reducing the length of the working week be an innovative solution to falling workforce participation?

• World’s largest 4 day week trial a “huge success”. Over a 6 month period, more than 3,300 workers from 70 UK companies from a wide range of sectors took part in the world’s largest four-day week trial. Participants worked 80% of the time for 100% of their pay, in exchange for a commitment to maintain at least 100% productivity. The results? Business revenue increased, whilst mental and physical health both experienced improvements. Job retention “dramatically improved” as employees were 57% less likely to quit and there was a 65% reduction in the number of sick days. 92% of businesses decided to continue with the 4 day week after the experiment. (See our previous Digest for more background on the 4 day working week proposal, our Resource bank page on reducing working time, and follow the European Network for the Fair Sharing of Working Time’s newsletter for developments in working time reduction across Europe.)
• Improving working conditions helps job retention. Firms have been increasingly using the four day week to attract and retain more staff whilst the labour market remains tight. Autonomy and PIRC’s research from 2021 found that 3 in 4 FTSE 100 companies cite labour shortages or staff retention issues as a principal risk to their business. Over 40% of workers surveyed reported that they considered leaving their job, with low pay, long working hours and poor mental health cited as reasons for dissatisfaction. When surveyed, workers reported that higher pay, better in-work benefits and shorter hours for the same pay would prevent resignation. The Women’s Budget Group found that shorter working time leads to a more equal distribution of unpaid housework and caring responsibilities (overwhelmingly undertaken by women) and can help women increase their earnings and reduce the gender pay gap. 
• The importance of flexible working. Joseph Rowntree Foundation’s Helen Barnard argues that the government’s chosen method to draw workers back into the labour market should “look beyond the familiar tools of work coach meetings and benefit conditions”, and instead, focus on facilitating more flexible working conditions across the economy. A recent ONS survey of over 50s has found that 59% of early retirees would not consider returning to work, but of those who would, flexible working arrangements would be required. (See another previous Digest for an explanation of why using benefit sanctions to fill labour shortages doesn’t work.) The Resolution Foundation’s Louise Murphy argues that, “Instead of persuading older workers to ‘unretire’, Government efforts to boost Britain’s workforce should focus on supporting more mothers into work and helping older workers and those with a disability stay in work.”

Profiteering from volatile energy prices. Record profits from the UK’s two largest oil majors led media headlines in recent weeks, as fossil fuel giants continue to benefit from the global energy crisis. We know where these profits are coming from, but where are they going? And with a form of windfall tax already in place, what more can be done to ensure more of this windfall is diverted into alleviating the cost of living crisis facing ordinary households?

• Follow the money. First, the facts. Common Wealth calculated that Shell made £32bn profit in 2022 - 107% more than the previous year and the largest in the companies 115 year history - as fossil fuel companies continue to reap windfall benefits from higher wholesale gas prices. £20bn (62%) of Shell’s profit was extracted by private shareholders, 7.5 times more than their investment in ‘low carbon’. Similarly, BP made £23bn across 2022 and have announced a new round of share buybacks - where a company buys more of its own stock to artificially inflate its value on the stock exchange - taking the total buybacks to £9.35bn. (And no, this isn’t paying our pensions. UK pension funds only own 0.2% of Shell and BP’s shares, so these payouts arguably aren’t benefiting ‘average pensioners’.) 
• Why is this a problem? The reason these profits have sparked such outrage is partly because of the scale, but mainly because they are not the result of anything these companies have done. They truly are a ‘windfall’- a boon for companies due to factors outside their control- and are being paid for directly by high energy prices facing consumers. 
• It’s a Net Zero issue. Common Wealth’s Mat Lawrence explains that “the ability to control the economic surplus and decide on the direction of investment” is critical for creating a net zero carbon energy system needed for the UK’s 2035 target. For instance, BP has since reduced its pledge to cut emissions and planned “a greater production of oil and gas over the next seven years compared with previous targets.” 

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What can the government do about profiteering? Labour has been calling for a stricter windfall tax in response to capture some of the unearned rents and use it to fund household support for the rising cost of living. Last year, Tax Justice UK modelled how a 95% tax on excess profits could raise £12.9bn instead of the £5bn planned in the government's original estimates. But other policies also exist which can disincentivise profiteering and other extractive behaviours from taking hold in the economy.

• Taxing share buybacks of energy companies. If we want the oil giants to genuinely invest in the green transition then it would make sense to disincentivise other possible uses of their windfall profits like share buybacks. Taxing these buybacks would also raise revenue that could be used to fund additional cost of living support. IPPR and Common Wealth have calculated that a tax on BP and Shell’s buybacks could raise nearly £5bn a year. IPPR’s George Dibb argues that share buybacks are “a symptom of a firm that can identify no productive investments beyond boosting their own value.” Shreya Nanda explained why share buybacks are part of a wider cycle of business failure in this thread.

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Publicly-owned energy companies? Nationalisation has been a topic of discussion in relation to the energy system ever since privatisation, and it is no surprise that the scale of these profits should spark the conversation again. However, unlike public ownership of energy retail companies or the energy networks, nationalisation of the oil majors is complicated by the risk of passing over billions in stranded assets onto the taxpayer. (Progressive Britain’s Tom Collinge argues that nationalisation may be too expensive for the current energy crisis, but energy security “cannot be left to the market”, and nationalisation must be recognised as “a long term, structural, solution to long term, structural problems.”)

• Setting up new energy generators. Labour’s plan for creating Great British Energy (GB Energy) does not involve nationalising any existing companies. Instead, GB Energy would enter the market as an energy producer that would compete with private firms. Though operationally independent, GB Energy would have a mandate to invest in clean energy, which it could do individually or in partnership with the private sector. Labour hopes that GB Energy would be able to make riskier investments, such as new tidal technology or modular reactors, that the private sector may often “shy away from”. Common Wealth’s Mat Lawrence said that public ownership of energy was “superior and more affordable” due to the state’s ability to invest in clean energy technology at lower rates and the fact that it would not have to consider shareholder interests. TUC research has found that “If the UK today had a public energy champion like EDF (France), EnBW (Germany), or Vattenfall (Sweden), the UK government could use the excess profits made – equivalent to between £2,250 and £4,400 per UK household – to reduce bills and accelerate home insulation roll-out.”

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Profiteering throughout the UK energy system. Profiteering is not just limited to energy generation. Common Wealth’s latest explainer details how profit is extracted at every stage of the UK’s privatised supply chain through extraction, generation, transmission, distribution and supply. Nationalisation could be more fruitful in natural monopolies of energy transmission and distribution.

• Energy transmission and distribution. The National Grid owns and operates long-distance transmission infrastructure and charges a “network cost” on household bills. Other research by Common Wealth found that the business paid investors nearly £9bn in dividends and share buybacks schemes in the last five years. The government has already planned to partly nationalise the National Grid (a division called the Electricity System Operator) to give the government more control over “the challenges posed by decarbonisation.” However, the rest of the National Grid will continue to be owned shareholders (which counts the fund managers BlackRock, Vanguard and the Abu Dhabi Investment Authority among its top five shareholders).
• Energy distribution. Electricity is regionally distributed along network infrastructure owned and operated by Distribution Network Operators who also charge for “network costs”. Common Wealth briefing finds that the Gas Distribution Networks and Distribution Network Operators “enjoy the highest profit margins of any sector in the UK” and “in the case of both gas and electricity distribution, just a small collection of companies have more than 90 percent market shares”. 

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Tackling profiteering in the rest of the economy. Profiteering is not limited to the energy system either. Unite’s Profiteering Commission accused many FTSE 350 companies of price gouging and argued that profiteering pushed a ‘second round’ of inflation last year: “This isn’t just about oil companies or a few “bad apples”. Even excluding energy firms, FTSE 350 company profits increased by 42% between 2019 and 2021.”

• E.g. housebuilding. The FT’s Jonathan Eley notes that “UK housebuilders’ profitability [are] no less remarkable than BP’s returns” as the UK’s largest housebuilder, Barratt Developments, reported similar returns as BP but paid a far lower tax rate. Dividends paid by the largest nine housebuilders rose from an aggregate of £400 million around the time of the financial crisis to £1.8 billion in 2017. (See this peer reviewed article for evidence of value extraction amongst the UK’s major housebuilders.) ‍
• Taxing share buybacks. IPPR calculated FTSE 100 companies announced £55bn share buybacks in 2022, and that a 25% tax on them could raise £13.5bn a year. They also note that President Biden recently introduced a share buyback tax to discourage price gouging and help alleviate the cost of living crisis in the US.

Context. What does it mean cover fiscal policy ‘impartially’? And is the BBC currently doing so? That was the question the BBC sought to answer last week when it published a long-awaited report examining its coverage of taxation, public spending, government borrowing and debt which found that the broadcaster’s coverage of fiscal policy had at times “put impartiality at risk”. The report was published as part of a 10-point impartiality plan which includes “thematic reviews” of BBC coverage of key areas of public debate. This first thematic review, led by former Institute for Fiscal Studies Director Andrew Dilnot and journalist Michael Blastland, spoke to over 100 people from both within and outside of the BBC and reviewed 11,000 piece of relevant BBC online, TV and radio content (focusing closely on 1,000 pieces of content). Back in 2020, 24 leading economists wrote a letter to the BBC, criticising its “inappropriate” use of language in covering the 2020 Spending Review, particularly highlighting then political editor Laura Kuenssberg’s analogy of a “maxed out” “credit card” to describe public finances. It was allegedly this letter that prompted the BBC to reflect on its economic reporting, and in February 2022, the review was commissioned. In addition, there has been a long-running critique of fiscal policy coverage by Oxford Professor Simon Wren-Lewis (an economist who coined the term 'media-macro'). He has published his response here.

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Findings and recommendations. 

• Economic literacy. The review found that “too many journalists lack understanding of basic economics or lack confidence reporting it”. It highlighted that debt was a particular area of concern, finding that journalists often “feel instinctively that debt is simply bad, full stop, and don’t appear to realise this can be contested and contestable”.
• Policy is political. The report warned of “the language of necessity”, arguing that the BBC sometimes fails to make it clear that policy decisions are political choices, not inevitable outcomes. It found that by presenting fiscal policy decisions as necessary measures, the BBC can at times stray “perilously close to policy endorsement”. Repeating a phrase such as “fiscal rules” without the caveat of its political roots, for instance, blurs the line between economics and political choice. A “rule” might sound necessary or even scientific, but ultimately, the report acknowledges, “fiscal rules are only rules because the government of the day chooses to call them that... they’re not rules because some natural law dictates it” and should be reported as such.
• Beware the household metaphor. Picking up on themes from the 2020 economists’ letter, the review warned of the implications of certain metaphors and comparisons. In particular, it highlighted the danger of comparing the state and its budget to a household and how such analogies can be misleading: “states don’t tend to retire or die, or pay off their debts entirely”. Likewise, it warned of “tempting” and “pithy” phrases such as ‘pay off’ or ‘pay down’ when discussing debt which, in the case of a state’s finances, are contested concepts. ‘Headroom’, ‘wiggle room’ and asking if numbers “add up” were also examples given of potentially contested terms.
• A little more economics, a little less politics, please. The review found that politics can “distort economic reporting” and that a heavy focus on political angles can lead journalists to “miss or misunderstand or underweight economic perspectives”. It urged the BBC to look beyond the “Westminster frame” and the “politically salient”. It also warned journalists to resist “hype”, and urged them not to “buy” that something is a “big deal” just because a politician says it is. 
• Regional representation. Impartiality isn’t just about left vs. right. It’s also about what - and who - gets left out of the picture. The report found that by omitting coverage of particular economic topics, certain communities were underrepresented in the issues covered. The issue of VAT was given as an example: “In Wales, more VAT is paid than income tax, ditto North East England" meaning that failure to account for this means "the tax interest of the better-off gets more attention".
• Widen the pool. The report urged the BBC to widen its pool of contributors, suggesting that at times it can “subcontract judgement about what’s reasonable or impartial to a few established names like the Bank of England, the OBR, the IFS or the Resolution Foundation, however respected”. It suggests that “recent concern” about amplifying “fringe views” is indeed a concern but that there is also a “risk the other way, of accepting too narrow a consensus and excluding reasonable opinion”. 
• Accessibility. The review highlighted the need for the BBC to balance impartiality with accessibility, stressing the importance of making economic content engaging. Audience research used as part of the review found that most people did not know what stories meant. It found Scottish audiences to be “a little more informed” with “lower socio-economic groups” worst affected.

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Implications. At the weekend, former Prime Minister Liz Truss was ridiculed from across the political spectrum for blaming “the left-wing economic establishment” for the failure of her economic programme. However, the point that there can be a reflexive economic orthodoxy which often goes unchallenged in mainstream public debate should be taken seriously, even if it stretches credulity to imagine that Truss’ brand of neoliberalism hasn’t been given a fair hearing in recent years.  

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Contested language. Some of the key economic debates of recent months have hinged on potentially contested economic terms making the BBC’s reflection on its own coverage and role in setting the terms of national debate particularly timely. If the BBC takes on board the review’s recommendations, what topics may be covered differently in the future? One issue that we may see reframed is that of the so-called ‘fiscal black hole’. This phrase, used relatively uncritically by the BBC and other outlets, has been widely criticised and questioned by leading economists and journalists. Could this review see the end of ‘black hole’ metaphors, and the associated reporting of often arbitrary fiscal rules as if they are ‘natural laws’? Similarly, the review has warned journalists about using politically-charged phrases such as the ‘tax burden’ which the New Statesman’s Anoosh Chakelian has described as ‘Tuftonspeak’. 

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Don’t swallow the line. Furthermore, ongoing strike action and high inflation has led outlets (including the BBC) to consider the possibility of a wage-price spiral, with the existence of one repeatedly asserted by the government when justifying wage restraint. However, the argument about whether this is in fact occurring has been deeply contested. With the review warning that there is an issue of journalists sometimes uncritically repeating government talking points, perhaps this is another area that will become increasingly challenged by BBC journalists in light of this review. 

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Better debate. Liz Truss and the libertarian right aside, a range of experts and journalists are beginning to reconsider how we think and talk about fiscal policy. If the BBC takes on board the review’s recommendations, we may just end up with a better informed debate about fiscal policy that goes beyond just black holes, tax burdens, and the infamous government credit card. 

The government’s “empty” plan for growth. Last week Chancellor Jeremy Hunt gave a speech on the government’s plans to boost economic growth, focusing on “four E’s” of enterprise, education, employment and everywhere”. However, the speech was received poorly by business lobby groups who complained it offered no new policies. Kitty Ussher, chief economist at the Institute of Directors, said the speech should have included another E: “empty”.

• Solvency II reforms. At the centre of the speech was a previously-announced policy. Hunt said the reform of EU-era insurance regulations known as Solvency II “could unlock over one hundred billion pounds of additional investment into the UK’s most productive growth industries”. Rishi Sunak previously described the Solvency II reforms as an action to get rid of an “EU diktat which has been unnecessarily preventing…giant investments in UK firms and in industries”. 
• Politics. The BBC’s Dearbail Jordan reports that “Many have interpreted Mr Hunt's speech as an attempt to respond to criticism that the government has no long-term plan for growth.” The Chancellor also signalled that the March Budget would not contain big tax cuts, despite calls from some Conservative MPs. The FT’s Stephen Bush therefore suggests that this push for post-Brexit deregulation is to appease parts of the Conservative right: “He asked his party to swallow a lot of heresies in his autumn statement and will be asking them to swallow more in March…So a little bit of light Brexit boosting is, Hunt hopes, the spoonful of sugar that will make his internal critics take their medicine again in March.”

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Reducing buffers against financial shocks. The Solvency II reforms are part of the Chancellor’s 30 ‘Edinburgh Reforms’ that seek to deregulate the UK financial sector and “unlock investment and turbocharge growth in towns and cities across the UK.” The Solvency II regime regulates how much capital insurers have to keep as an extra buffer against shocks, to protect policyholders and the overall system in case of insolvency. It also restricts the capacity of insurers to invest in certain types of assets. The government is proposing to reduce the buffer capital by 65% for life insurers and 30% for general insurers, which British insurers estimate could release over £100bn over the next ten years. 

• Who benefits from the reforms? Former member of the Financial Conduct Authority Mick McAteer accused the government and regulators of “doing deals behind closed doors” which could “provide a windfall for shareholders at the expense of policyholders and pension savers”. Sam Woods, head of the Bank of England’s Prudential Regulation Authority, recently suggested that 8 million insurance policyholders could be affected by the reforms and warned that the proposal “‘increases risk’ and could result in a corporate failure that ultimately hits the public purse.” (Read our previous Digest for an explanation of how financial deregulation risks repeating the same mistakes that led to the 2008 financial crisis.)
• No guarantee capital goes to green investments. ShareAction’s Isabella Salkeld and Caroline Metz have written a briefing explaining the proposed Solvency II reforms and how they ignore “the greatest risk humanity faces today: climate change and its irreversible consequences”. They argue that changing regulations to allow UK insurers to hold less capital is “extremely risky” because, without mandatory requirements for where that capital ends up, “there is no guarantee that the tens of billions of capital previously set aside to protect policyholders will not be used to invest in and/or underwrite fossil fuel projects (or other socially and environmentally harmful assets) that expose both policyholders and insurers to greater risks.” (ShareAction’s policy briefing highlights the extent to which insurance companies – even those in the Net Zero Insurance Alliance – continue to underwrite and invest in new fossil fuel projects.)
• Insurers are both implicated in, and exposed to, climate risk. Finance Innovation Lab’s (FIL) Jesse Griffiths points out that the impacts of climate change also pose a risk to insurers and policyholders. For instance, increased risk of flood damage is estimated to lead to a 200% increase in insured losses in the UK. ClientEarth’s response suggests 5 proposals to ensure “that the insurance sector both supports climate goals and is resilient to the long-term risks that climate change poses” and lead to actual investment in green infrastructure, including capital requirements and double materiality - where insurers manage their impact on environmental and social matters and not just manage the risks to their own business - and more. FIL’s ‘Transforming Finance’ project produces a range of resources on how to repurpose the financial system to meet social and environmental as well as economic goals.
• Further regulatory divergence risks deterring investment. ShareAction’s consultation response to HM Treasury outlines their disappointment that the reforms don’t include “mandatory sustainability requirements to streamline the insurance industry with the UK Government’s climate ambition.” They highlight that the Solvency II Directive currently being reviewed in the EU is considering such requirements, and that the UK is lagging behind the EU in terms of the proportion of market activity accounted for by green finance: “It is vital that the UK keeps pace with the EU on sustainable finance. Not only is it impractical for companies to face divergent regulation in different jurisdictions, but it also puts the UK’s aim to be the world’s first Net Zero-Aligned Financial Centre in jeopardy.” 

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Growing the green economy without risking financial and climate crises. The UK government’s deregulatory approach deviates from the growing international consensus around the use of active industrial policy to crowd-in private capital and channel investment in growth areas. For instance, the “biggest climate spending package in US history”, the Inflation Reduction Act, includes £369bn in tax breaks to direct private investment in low-carbon energy and electric vehicles. Earlier this month the European Commission pledged to make “unprecedented” investments in clean technologies and relax state-aid rules to compete with the US package. 

• UK being left behind on green industrial strategy. The Telegraph’s Ambrose Evans-Pritchard explains how the UK is “failing to keep up” with the US and EU and left “strangely adrift as it pursues a retrenchment policy of fiscal austerity”. In January CBI Director-General Tony Danker warned that “the overwhelming view of CBI members is that Rishi Sunak has dropped the ball on the green energy transition,” and the UK is losing out investment as companies look elsewhere to capitalise on opportunities in the US and EU. He also warned against mass deregulation as the UK pursues regulatory divergence from the EU.
• Case in point: the failure of BritishVolt. BritishVolt was conceived as a flagship part of the government’s levelling up agenda and crucial to securing resilient supply chains of the UK’s electric car manufacturing industry. The electric battery manufacturer went into administration in January after it failed to find a private investor and the government refused to bring forward public funding. Last week, the Society of Motor Manufacturers and Traders warned that the number of new cars made in the UK was at its lowest level for 66 years and that the UK was lagging behind other countries, particularly in offering state aid to manufacturers. Make UK said there had been "some hugely damaging big picture issues caused by the absence of an industrial strategy which are impacting on some of our strategic sectors". ‍
• Free-market ideology is preventing green growth. The BBC’s Simon Jack suggests that ideological resistance to “overt government involvement in the private sector” - a policy seen as “picking winners” in the more libertarian wing of the Conservative Party - was to blame. (The Observer also blamed the government’s ‘free market thinking’.) Commenting on the failure and Chris Skidmore’s Net Zero Review, Chief Leader Writer of the Times, Simon Nixon, writes: “There is no path to delivering net zero by 2050 that does not require sizeable government support, whether in the form of guarantees or grants to de-risk investments.“

Survival of the Richest. Last week, on the opening day of the World Economic Forum in Davos, Oxfam published its report “Survival of the Richest: How we must tax the super-rich now to fight inequality”. The report (backed by Bill Gates) highlighted how the wealthiest 1%  “grabbed nearly two-thirds of all new wealth… created since 2020, almost twice as much as the bottom 99 percent of the world’s population”. It calls for a “wide-ranging increase in taxation of the super-rich”, specifically an annual wealth tax of up to 5 percent on the world’s billionaires and multi-millionaires, which Oxfam says could raise enough money to lift 2 billion people out of poverty, deliver a plan to end hunger, and deliver healthcare to low- and lower middle-income countries. However, Oxfam is not alone in its calls for higher taxes on the wealthy. As the cost of living crisis continues, the gap between the richest and poorest grows, and climate catastrophe becomes reality, more and more seem to be turning to wealth taxes as a possible solution to the world’s, and the UK’s, economic problems. While momentum for the idea grows among inequality campaigners, they are certainly not alone. Economists, journalists, and policy experts across the political spectrum are starting to consider wealth taxes as a viable solution.

• The campaigners. It wasn’t just Oxfam who used the World Economic Forum in Davos as an opportunity to call for wealth taxes. Last week, a group of millionaires from across the globe wrote to political leaders at Davos, arguing that taxing rich people like them was “common-sense economics”. Signatories of the letter (coordinated by Patriotic Millionaires, Patriotic Millionaires UK, taxmenow and Millionaires for Humanity) included Disney heiress Abigail Disney and actor Mark Ruffalo. Last week also marked ‘Black Band Friday’, a global campaign for taxing the rich which deliberately coincided with the conclusion of the meeting of world “elites” at Davos. Outside of Davos, many ongoing campaigns are calling for wealth taxes. Stop the Squeeze, for example, is a UK-based coalition campaign which calls for higher taxes on wealth to fund solutions to the cost of living crisis. The campaign is spearheaded by the Economic Change Unit, Tax Justice UK and the New Economics Foundation and is supported by a range of civil society organisations, trade unions and grassroots groups.
• The “experts”. Nobel prize winning economist Joseph Stiglitz has joined recent calls for wealth taxes over the past week, arguing that a worldwide income tax rate of 70% on the highest earners would “make sense” and that annual wealth tax proposals such as Elizabeth Warren’s call for a 3% tax on those with more than $1 billion, were “reasonable”. 
• The press. In an editorial last week, the Guardian came out in favour of higher wealth taxes, arguing that “Britain has wealth taxes. But they don’t work very well” due to the fact that levies such as inheritance tax are easy to evade. Instead, an annual wealth tax of 1% on wealth above £10 million, or a “solidarity tax”, it argues, could tackle “the causes of low growth and high inequality”. Meanwhile, at the Financial Times, Chief Economics Commentator Martin Wolf called for policy-makers to consider “wealth taxes or taxes on bequests, to help fund the state people will need” in an essay defending “democratic capitalism” and criticising the rise of “rentier capitalism”. 
• The unlikely suspects. Conservative-aligned think tank Bright Blue has called for higher wealth taxes which it argues should be coupled with lower taxes on income from work which it says would help the Government achieve its “levelling up” objectives. The current Work and Pensions Secretary Mel Stride has previously alluded to his support for a one-off tax on stocks of wealth. In 2021, the IMF called for wealth taxes to reduce inequality in the aftermath of the Covid-19 pandemic. 

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The proposals. Those who call for higher taxes on wealth agree that taxation is currently too heavily concentrated on income from work and not on assets or income acquired outside of work (for example, through inheritance). However, taxation of wealth comes in a variety of forms. In the UK, current forms of wealth taxes generally tax transfers of wealth such as inheritance tax and capital gains tax. Some, such as centre-right think tank Bright Blue, focus on the need to reform such taxes or to make it easier for those taxes to be avoided or evaded. Others call for the introduction of taxes on stocks of wealth, as opposed to transfers. These come in the form of annual or “one-off” wealth taxes. 

• Capital gains reform. The University of Warwick’s Arun Advani has highlighted the dramatic difference in capital gains increases compared to incomes. While incomes have remained largely stagnant, capital gains have “skyrocketed in recent years”, almost trebling “from £22 billion to £63 billion, between 2012-13 and 2019-20”. He explains how most of the value of capital gains comes from the sale of small businesses, with 92% of these gains going to those with more than £100,000 in gains. Equalising rates of capital gains tax with income tax could raise £16 billion per year.  
• Extending national insurance. While workers pay an additional tax on their income in the form of national insurance, landlords, investors and those who benefit from owning assets do not pay such a levy. Advani argues that a “simple extension of national insurance to cover all income equally would raise £31.4 billion”. 
• Inheritance tax reform. Though concerns about inheritance tax are common, research shows that the very wealthiest actually pay less than those with large, but comparatively modest, estates. According to the Government’s 2018 Inheritance Tax Review, estates of £2-3 million pay 20% in inheritance tax on average while estates worth over £10 million pay only 10%. The IFS has argued that “inherited wealth stands in the way of social mobility”, finding that for those “in the top fifth of the wealth distribution, their inheritance could increase their lifetime income by nearly 30 per cent.” Meanwhile, “those born at the same time but with parents in the bottom fifth of the wealth distribution are likely to receive inheritances that add only 5 per cent to their lifetime income”. According to the Stop the Squeeze campaign, removing inheritance tax loopholes could raise £2.7 billion per year. 
• Annual wealth tax. Taxing stocks of wealth, as opposed to transfers, is an idea that is growing in popularity. While some call for one-off or windfall taxes, annual wealth taxes on the very richest could consistently raise significant sums for the public purse. A 1% tax on those with more than £10 million in stocks of wealth could raise £10 billion per year, according to the Wealth Tax Commission. Cristina Enache of the Tax Foundation outlines how different European countries implement annual wealth taxes. Countries such as Norway and Spain implement a net wealth tax, covering all the wealth an individual owns. Others have taxes on selected assets such as France which taxes all worldwide real estate of French tax residents worth over €1.3 million and non-French tax residents whose net real estate assets located in France are valued at or above €1.3 million. 
• Further reading. The House of Commons library has produced a helpful briefing and list of resources on the potential merits of wealth taxes. The Wealth Tax Commission’s tax tool allows individuals to model different wealth tax thresholds and simulate their own tax liabilities in the event of various levels of wealth tax. 

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The politics of wealth taxes. Prime Minister Rishi Sunak has been under continuous pressure to cut taxes throughout (and leading up to) his premiership and, together with his Chancellor, Jeremy Hunt, has been accused of being responsible for “the highest tax burden since World War Two”. However, Sunak has repeatedly demonstrated that he is unwilling to share that “burden” with those whose income stems from wealth rather than work. Other than lowering the threshold at which people pay capital gains tax (doing little to increase taxes on the very wealthy), Sunak has not introduced or increased any wealth taxes and in his role as Chancellor in 2021, rejected calls for an emergency wealth tax to fund pandemic spending. 

• Labour and wealth taxes. While Labour has vowed to abolish the “non-dom” tax loophole in which individuals who are resident in the UK can claim on their tax return that their permanent home (‘domicile’) is abroad, the party has been reluctant to make any commitments on higher taxes on wealth, though some comments suggest that the policy has not been ruled out. Shadow Chief Secretary to the Treasury Pat McFadden, while not specifically addressing the question of wealth taxes, said that “wealth creation” should be matched by “fair taxation” in a Westminster Hall debate on wealth taxes last year. Shadow Chancellor Rachel Reeves has said that she currently doesn’t have any plans to introduce wealth taxes, but has previously hinted at higher taxation on income from wealth. However, Labour have been keen to stress that all of their policy commitments won’t be “unfunded, un-costed", while at the same time pledging not to increase taxes on the “squeezed middle” and last year pledging not to reverse Liz Truss’ cut in the basic rate of tax from 20% to 19%. Reeves also made it clear that Labour opposed Truss’ “tax cut for the wealthiest one percent”. So, if Labour are “against austerity”, want to fully cost their pledges, prevent tax rises on everyday earners, and ensure the wealthy pay their fair share - do all roads lead to wealth taxes? ‍
• Polling. New YouGov polling shows that Britons generally support a variety of wealth taxes, especially when the threshold for paying the tax is high: “around three quarters would support a wealth tax of 2% on wealth over £5 million (73%), and of 1% on wealth over £10 million (78%). Both proposals draw cross party support, with seven in ten Conservative (69%) voters supporting the former, and 77% supporting the latter, along with 83% and 86% of Labour voters respectively”. The polling found that there was less support for a one-off wealth tax on wealth over £500,000.

Winter crisis in the NHS. 2023 began with renewed media attention on the crisis in the NHS. The Royal College of Emergency Medicine’s Dr Adrian Boyle warned that delays in A&E are causing between 300 and 500 deaths each week. Matthew Taylor, chief executive of the NHS Confederation warned that staff pressures are becoming “unbearable” and “the next three months will be defined by further critical incidents needing to be declared and the quality of care being compromised.” Excess deaths are at a 50 year high (9% more than 2019). 

• The backlog is at an all time high. In addition to the crisis in A&E and ambulance waiting times, the latest data from the British Medical Association shows a record high of ~7.21m people are waiting for treatment in elective care. This is not a recent problem. In August 2022 National Audit Office found that there were ~2.75m patients waiting more than the legal standard of 18 weeks. Before the pandemic NHS England had not met elective waiting time performance standards for 4 years. (The King’s Fund’s Saoirse Mallorie explains what being on waiting lists actually means.)
• Causes of the bottleneck. The King’s Fund’s written evidence to an inquiry into NHS backlogs and waiting times argued that the root causes for longer waiting times were workforce shortages, funding shortfalls between 2010 and 2019, reduced numbers of beds relative to comparable countries’ health systems and a rising demand for care services due to an ageing population. 

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History of underinvestment in capital. The FT’s John Burn-Murdoch explains how the Government has decreased spending on the NHS as a share of GDP relative to comparable economies since 2010, and how this has led to a squeeze on staff pay and a “dearth of [capital] investment” so that “the NHS finds itself hamstrung by acute shortages of beds and the equipment that gets people out of beds faster.” (The NHS required an extra £33bn capital investment between 2010-2019 to catch up to the EU14 average.) The government’s answer to this was the 2019 election pledge to build 40 new hospitals by 2030, however the latest information is that work has only begun on 7 of the hospitals with other projects well behind schedule.

• Day-to-day spending. Further, average day-to-day UK government spending on healthcare between 2010 and 2019 was 18% below the EU14 average. Matching spending per head with France and Germany would have led to an additional £40bn and £73bn (respectively) in total health spending each year in the UK. (See the Nuffield Trust’s explainer on The past, present and future of government spending on the NHS.)
• Staff shortages. Total NHS vacancies now stand at 133,446, an increase from 7.9% in 2021 to 9.7% in 2022. The King’s Fund found that shortages are increasing due to a lack of long-term planning by the government and NHS over training and migration policy not being set with the “NHS’s interests in mind” (see a study from the Nuffield Trust on how Brexit affected the UK’s medical workforce).
• Retention and pay. Junior Doctor Jatinder Haryre notes that 89.7% of doctors who have already left the NHS to work abroad blame dissatisfaction with pay in the UK. The Institute for Public Policy Research’s Parth Patel explains that pay increases are crucial for maintaining NHS performance in an interview with Sky News. (See the TUC’s analysis of how much NHS staff have lost from a “brutal decade of lost pay” and our previous Digest for more on the impacts persistent pay constraint has had on public sector recruitment and retention.)
• Political implications. The FT’s Stephen Bush argues that “what would worry me were I a Conservative strategist is that the post-2019 increases in funding will start to actually have an effect on NHS performance, ooh, about a year after the next election, exactly in time for Labour to take the credit and to deepen voter anxieties about my party and the health service.“ Further, an Opinium poll commissioned by Compassion in Politics has shown that Conservative voters “overwhelmingly believe their party has failed in its management of the NHS during their time in Government”.

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The emergence of a two-tier healthcare system. More of the population are resorting to using private healthcare as an alternative to long waiting lists and declining quality of care. Persistent strain in the NHS has led some (e.g. from David Davis and Sajid Javid) to position insurance-based healthcare systems that utilise the private sector as solutions.  (See the Nuffield Trust CEO Nigel Edwards’s critique of social health insurance based systems.)

• “Exploiting the managed decline of the NHS?” A report from the IPPR explains how underfunding and persistent structural pressure has led to more increased direct utilisation of private healthcare services as more individuals are resorting to self-funding their own care. Keep Our NHS Public “condemns the underfunding of NHS services, particularly when done to cynically promote the unnecessary need for privatisation of services.” The Centre for Health and the Public Interest’s David Rowland argues that the growth of the for-profit healthcare sector in the UK is largely driven by government support. One example he gives is by exploiting access to a highly trained, expert workforce, as private providers contract NHS staff to deliver services without contributing to training.
• Outsourcing staff. Keep Our NHS Public notes outsourcing of staff as a key mechanism being used to drive privatisation. Professor Neena Modi, ex-president of the British Medical Association explains that sending NHS patients to private hospitals will worsen staff shortages within the NHS and erode health budgets as the public sector foots the bill for higher prices in the private sector.

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Labour’s solution sparks row. Sir Keir Starmer has said Labour would use the private sector in the health service more “effectively” if elected prime minister, which has attracted criticism from some on the left who  have accused Starmer of “ditching [his] pledge to end NHS outsourcing”. In the longer term, Labour has pledged a massive expansion in the NHS workforce, paid for by ending the non-dom tax status, but this would take years to bear fruit and would not help to deal with the immediate backlog.

• Clarifying Labour’s position. Labour wants to use spare capacity within the private sector (e.g. rooms and beds) to help clear the NHS backlog. Shadow Health Secretary Wes Streeting clarified that this treatment would still be “provided free at the point of need” and that this principle “will be erased over my dead body”. He proposed that “the next Labour government will agree a 10-year plan of change and modernisation”, which includes reform of how the NHS uses the private sector.
• Will it work? CHPI’s Director David Rowland argues that Labour’s proposals won’t work because “private hospitals do not have any additional doctors to assist in reducing the NHS backlog – in all the private hospitals operating in the UK, the doctors are NHS doctors, working in their spare time”. Further, workforce shortages are particularly acute amongst consultant level doctors that are critical for the delivery of the types of healthcare provided by the for-profit sector. Private hospitals can’t do anything to ease the staffing pressures currently driving the backlog, may deepen funding issues and expose patients to a greater risk of harm.

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Ultimately, clearing the backlog requires more funding. As Stephen Bush noted, “A good gauge for deciding how seriously you should take [either political party] is if their reforms are related to either of these two things: investment in healthcare capital and increasing bed capacity.” 

• Poor health is costing the government... The Times’ Health Commission found that rising levels of ill health are costing the economy £150bn a year in lost income tax, benefit payments and larger NHS budgets. Health inequalities were estimated to cost the UK £31bn to £33bn in productivity losses before COVID-19. However, the number of working age people suffering from chronic illness has significantly increased since the pandemic. The FT’s John Burn-Murdoch argues that “Britain’s healthcare crisis, with tens of thousands waiting over a year for hospital treatment, is directly contributing to the UK’s exceptional rise in economic inactivity."‍ The OBR recently predicted that up to 14% of the working age population will be in receipt of disability benefits by 2027-28 due to declining public health, which will increase government spending on welfare. 
• …holding back growth…Andy Haldane, Chief executive of the RSA and former governor of the Bank of England, has said that “more than a century of progress on health and wellbeing was going into reverse, with a direct impact on the economy and the cost of living emergency.” He said that the UK “sits towards the bottom of the pack” in the G7 on spending on healthcare, which is holding back the economy as the workforce has been shrinking since the pandemic. The Commission on the Future of Employment Support’s first report found that the “UK is one of only five countries in the industrialised world with a weaker labour market than before the Covid-19 pandemic and is on course to have the worst record by next year.”‍
• …and investment is politically popular. Those who want to increase taxes and spend more on health, education and social benefits has been climbing since 2017. More of the public want the government to “increase taxes and spend more” than those who want it to “keep taxes and spending at the same level as now”. Half of the public say they would support increasing the basic rate of income tax from 20% to 21% and using the money raised to increase spending on the NHS. Less than a third are opposed.

“The ‘sick man’ of the G7”? The Bank of England and various leading economists have said the UK has entered recession, with a 0.3% month-on-month decline in GDP for November expected to be reported on Friday. This is part of a wider global phenomenon, with at least one third of the world (and half of the EU) predicted to be in recession this year, according to the head of the IMF. However, the UK looks set to fare particularly badly. Experts are predicting we will have the longest and worst recession in the G7, causing a former governor of the Cypriot central bank to label the UK “the ‘sick man’ of the G7”. More than 80% of top economists polled by the Financial Times predict that UK growth will not be stronger than its counterparts, while Goldman Sachs’ macroeconomic outlook has forecast a 1.2% contraction in the UK’s real GDP, with a recession almost as deep as Russia’s. Meanwhile, the eurozone will see a contraction of just 0.1% while the US economy is expected to grow by 0.25%, according to Consensus Economics. Living standards are also declining more rapidly in the UK than elsewhere, with real income expected to fall by 3% in the UK in the first half of 2023, compared to a 1.5% decline in the eurozone across the same period. 

• But why? The combination of the energy crisis caused by Russia’s invasion of Ukraine and a “US-style overheating jobs market” is the “official rationale” for the UK’s particularly poor growth forecast, says the BBC’s Faisal Islam. However, specific UK policy decisions are at least in part to blame according to Islam. While other European countries may be more reliant on Russia for their gas supplies, the UK is more reliant on gas in its energy system. This, he argues, is making “the country unavoidably poorer” as the rise in international gas prices means we have to pay more for this essential import. An unusually tight labour market (meaning a shortage of trained workers relative to demand) has caused problems in supply chains of critical goods and services. Brexit and the pandemic have played a role here. 
• “Structural hole” and a lack of investment. While recent shocks such as the energy crisis, Brexit and the pandemic explain some of the UK’s economic misfortunes, many argue that the problem is more deep-rooted. “The UK is in a structural hole, not a cyclical downturn”, argues Cambridge university professor Diane Coyle, one of the economists polled as part of the Financial Times’ annual survey. She calls for better trade relations with the EU and an “adequately long-term economic strategy” in order to improve UK living standards. The Guardian’s Larry Elliot suggests that the predicted recession both in the UK and globally points to a “crisis of capitalism” and that a reluctance, rather than an inability, to invest from both the government and the private sector is to blame. “Governments could have taken advantage of historically low borrowing costs to rebuild clapped-out infrastructure, but failed to do so”, he argues. Similarly, the Chief Executive of the Resolution Foundation, Torsten Bell, blames a lack of business investment in skills and automation for the UK’s growth problem, arguing that “Britain doesn’t invest in its own future”. 
• Wage stagnation. While Brexit and the pandemic have both had a significant impact on the UK’s labour shortage, these issues may simply have exposed longer-term, structural problems at the heart of the UK’s labour market. Poor wages and working conditions in key supply chain sectors such as road haulage mean that workers are leaving or simply not entering these roles, according to the Institute for Government, although wages in some key sectors have begun to increase in response to shortages. Falling average real wages are holding back growth, with the OBR predicting that real household disposable income will fall by 4.3% in 2022-23. Lower household incomes means less household spending, which pulls back GDP. A wage boost in the form of a “real living wage” could grow the economy by £1.7 billion, argues the Living Wage Foundation.

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Sunak’s answer. The Prime Minister set out his New Year vision to “address” Britain’s “issues” on 4th January - a speech labeled “defensive and defeatist” and a “somber assessment of Britain’s woes”. He delivered five pledges: to halve inflation, to grow the economy, to reduce the national debt, to cut NHS waiting lists and to introduce laws to detain those crossing the Channel in small boats.

• No plan for growth. Many have criticised Sunak for failing to provide an adequate growth plan, with his most detailed proposal revolving around children having to study “some form of maths to 18”. Conservative Home’s Paul Goodman argues that Sunak “won’t want voters to peer too closely at the small print”, arguing that on his pledges of growth and lowered inflation, “the substance requires some filling-out”. Similarly, former chief economist at the Bank of England, Andy Haldane, criticised the Prime Minister for having no plan for growth.

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Starmer’s answer. Sir Keir Starmer delivered a speech in the exact same venue as the Prime Minister on 5th January, setting out how “Britain needs change”. Starmer’s solutions revolved around tackling Westminster-led policy making and “sticking plaster politics”, with a focus on a mission-led approach and devolution of policy. Echoing economist Mariana Mazzucato, the Labour leader outlined how he would be announcing “national missions” over the coming weeks, with the first aimed at decarbonising the UK’s energy system by 2030. 

• Industrial partnership between public and private sectors. Labour’s recent report ‘Prosperity through Partnership’ outlines their approach to cross-sectoral, collaborative and consistent approach to industrial strategy. (See the Treasury Committee’s report criticising the government’s ‘chop and change’ economic strategy since 2020.) CBI Director General Tony Danker noted in his 2021 conference speech that “we’ve had five decades where the free market has palpably failed” and called for a “partnership with government”.‍
• A new “Take Back Control” Bill. Echoing the proposals made by Gordon Brown in a recent report for Labour on constitutional reform and decentralisation of power (See the IfG’s summary here), Starmer argued that “a huge power shift out of Westminster can transform our economy, our politics and our democracy”. The bill would devolve new powers over employment support, transport, energy, climate change, housing, culture, childcare provision and how councils run their finances. CLES’s Sarah Longlands argues that Brown's report does not go far enough in challenging “where power rests in the UK'' and fails to critique “the economic model that aids and abets [over-centralised decision-making]”.

The ‘New Winter of Discontent’. The government is facing a wave of public sector strikes this Winter with nurses, border force staff, DWP officials, ambulances workers and more joining rail workers, postal workers and others who have walked out over pay disputes. (For a useful explainer on recent strikes, read Anoosh Chakelian’s myth-busting piece for the New Statesman.)

• Political row over nurse pay. One key flashpoint is the strike from the Royal College of Nursing (RCN), where nurses taking part in unprecedented industrial action and are demanding pay rises 5% above RPI inflation to compensate for below inflation pay increases in the 2010s. (See the TUC’s analysis of how much NHS staff have lost from a “brutal decade of lost pay”.) The RCN say NHS pay announcements have left nurses 20% worse off in real terms compared to a decade ago. The government is offering pay increases of 4.75% to nurses despite RPI inflation forecast to hit 14% - a huge real pay cut. Conservative backbenchers such as Caroline Nokes and Jake Berry have urged the government to reevaluate their stance and improve their offer on nurses pay. (See Ipsos polling on public support for striking nurses.) The government’s case against the strike action has three main components, with ministers arguing that the pay claims are unaffordable, that they cannot override independent pay review bodies, and that pay rises will fuel further inflation. 
• Misleading costings. On the first point, the government has been accused of misleading the public, arguing that an inflation-matching pay rise for all public sector workers would cost £28bn - £1,000 per household. The IFS says the cost is actually more like £10-14bn once increased revenue from tax receipts is factored in and because some of the increase has already been promised by the government. Economist James Meadway explains how the actual costs (of around £12bn) are affordable within existing government budgets due to falling borrowing costs, or could be funded through tax increases in his latest Macrodose podcast.
• Independent PRB? On the second point, the role and ‘independence’ of Pay Review Bodies in the public sector is coming under greater scrutiny, with unions making the point that these bodies operate under a mandate set by central government. PRB’s operate make their recommendation based on two criteria, recruitment and retention needs (more on this later) and affordability, with the second having primacy. The affordability constraint is determined with reference to central government budgets, in this case the 2021 Spending Review which had allowed for pay rises of 2-3% based on inflation running at 2-4%, and PRBs are highly reluctant to recommend unfunded pay rises above these levels. While not directly comparable, central government’s insistence that it has no role on pay, while holding the purse strings, is analogous to their role in the rail dispute and is one of the central barriers to meaningful pay negotiations. (As an aside, the government are now arguing that they will instruct the NHS PRB to take a greater account of staffing pressures and recommend higher rises next year, which rather undermines their point about independence).
• No risk of wage-price spiral. The final plank of the government’s argument is that pay rises would drive inflation, but this line is also crumbling. David Smith, Economics Editor at the Sunday Times notes: “There is little danger that higher public sector pay settlements would trigger a wage-price spiral. Rather, it would be public sector pay catching up”. According to the IfG, the NHS Pay Review Body essentially concluded that its recommendations were not meaningfully constrained by the government’s inflation target, saying: “As earnings growth remains substantially below inflation, we judge that increases in earnings present a much lower risk to increasing the rate of inflation compared to some of the other fundamental drivers.” (Read the IMF’s recent paper suggesting fears of wage-price spirals are not supported by empirical evidence.)

Public services, recruitment and retention. The primary context for these public sector strikes is clearly high inflation and the cost of living crisis, but it is also impossible to ignore the role that persistent pay constraint has had on public sector recruitment, retention, and morale over recent years. Public services, and the NHS in particular, are suffering from growing vacancies and skills shortages. IPPR’s Parth Patel explains that pay increases are crucial for maintaining NHS performance in an interview with Sky News. For instance, there are currently 47,000 nursing vacancies and around 1 in 3 public sector workers have taken steps to quit their profession or are actively taking steps to do so, with the majority citing low pay as the decisive factor. Without pay increases, public services will deteriorate. (The TUC analysis also found that nearly 1 million children in key worker households are growing up in poverty.)

• What is the government planning instead? The government is currently working on a workforce plan for the NHS, but it is an open question how they plan to fill growing vacancies without fair pay increases relative to the private sector. TUC analysis shows pay in the public sector has fallen much faster than in the wider economy (£180 in real terms compared to the same month last year, and with pay falling by £76 in the wider economy). Martin Wolf explains why “Letting inflation reduce real wages while expecting services to be maintained is dishonest…The government should keep pay in line with the private sector’s, especially where it has significant recruitment and retention problems. If this means it has to reopen spending plans that no longer make sense in today’s debased pounds, so be it.”
• Nurses not non-doms. Meanwhile Labour has launched its own NHS campaign, pledging “one of the biggest expansions of the NHS workforce in history”, with thousands of new training places for doctors and nurses, funded by the abolition of the non-dom tax status. (For more on non-doms read this by CAGE’s Arun Advani).
• Theory of the strike. It is partly for this reason that the FT’s Stephen Bush questions whether the Sunak government has thought through its theory of how to win this industrial dispute. Even if the government manages to grind public sector workers down over this pay offer, it will still be left with huge recruitment and retention issues, a further demoralised and under-funded workforce, and the consequences of this for public service delivery. Without a serious plan for dealing with these issues, and with the public largely taking the side of the workers, it is hard to avoid the impression that the government is locked in a losing battle with no exit strategy.

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Strikes expected to become the norm. What does the future hold for industrial action in the public sector? We can answer this partly by looking at the overall spending envelope going forwards. In the Autumn Statement last month, Chancellor Jeremy Hunt committed to the departmental budgets outlined in the 2021 Spending Review (with some exceptions). This was based on outdated inflation predictions, and locks departmental budgets until 2024/25. After this there will be even greater pressure, as departmental budgets are set to be squeezed again. In summary, the Institute for Government concludes that: “the reality is that from this year services are unlikely to see further large budget increases to deal with poor performance and an increasing share of their budgets will need to be spent on higher pay awards to keep services functioning”. 

• “Get used to them”. Resolution Foundation’s Torsten Bell highlights that, while we are still a long way away from the scale of strikes seen in the 1970s, we should “get used to them”, as “Workers and firms are contesting who pays what part of the cost of Britain becoming poorer, and strikes are what that looks like.”
• If you can't beat them. The government plans to bring in new laws to restrict Trade Unions’ right to strike following proposals for allowing agency workers and soldiers to replace striking workers in key sectors (see our previous Digest). Last week 11 trade unions were granted permission for a legal challenge against strike breaking in the High Court.
• Funding pay increases to rebuild public services. Ahead of the mini-budget, the TUC called on the government to invest an additional £43bn in public services to deliver a cost-of-living proof pay rise for public sector workers and protect budgets from the impact of inflation. NEF’s analysis calculates the funding shortfall against the 2021 Spending Review commitment for the Departments for Health and Social care, Education, Justice and the Environment, Food and Rural Affairs. Separately, NEF has advocated using taxes to capture growing wealth of the UK’s billionaires to fund vital infrastructure and public services. 

The income crisis. The cost of living crisis has dominated the economic agenda for the past year, with the focus primarily on inflation and the extent to which prices of food, energy and other essentials are rising. However, inflation is just one side of the cost of living crisis. The other half of the story is income stagnation for those both in and out of work. Years of minimal pay rises mean that wages are not expected to return (in real terms) to their pre-financial crisis levels until 2027. According to the Resolution Foundation, had wages continued to grow at their pre-2008 rate, they would be £292 a week – or £15,000 a year – higher. As a result, over a quarter of households have less than a month’s worth of income to fall back on as a buffer. This means relying on social security which too has failed to keep up with the rapidly rising cost of living and is at its lowest level on record. A new report, published yesterday by the New Economics Foundation (NEF), predicts that budgets are about to be squeezed even more. It finds that 43% of households, and 90% of single parents, will be unable to afford a decent standard of living by the next election. 

• Raising pay. Demands for wage increases are growing, with industrial action either planned or soon to be voted on across most of the public sector throughout December 2022 and in the new year (see our weekly updates for more detail). There are also calls for the government to take action across the board, with the TUC, for example, calling for a £15 minimum wage. 

Bridging the gap: a national living income. Successful industrial action and an increase in the minimum wage will go a long way to improve living standards. However, those who cannot work, cannot work full time or for whatever reason cannot rely on income from a decent wage, must rely on the social security system. While there has been strong resistance over the past decade to welfare cuts and specific aspects of the social security system such as the two-child limit and the benefit cap, attention is rarely focused on designing a new system altogether. NEF’s new report ‘The National Living Income: Guaranteeing a minimum income for all’ attempts to bridge the gap (see NEF’s Alfie Stirling’s summary here). It calls for Universal Credit to be replaced with a national living income: a plan which would create a minimum income floor below which nobody (employed or not) could fall and could see the disposable income of the poorest families rise by 50%. The research uses the Minimum Income Standard (MIS), a way of measuring living standards developed by the Joseph Rowntree Foundation (JRF) and the Centre for Research in Social Policy (CRSP) at Loughborough University. It is used to calculate the ​‘real’ Living Wage. The proposal is involves a number of key reforms:

• A guaranteed minimum income. NEF proposes that a minimum income should be guaranteed which amounts to at least 50% of the Minimum Income Standard (MIS) after housing and childcare costs (AHCC). This compares to 35% and 33% of MIS (AHCC) for single adults and couples over the age of 25 (respectively) on UC.
• Alignment of tax and income protection. It also proposes that nobody would pay tax or have benefits withdrawn until their income reaches 100% of the MIS (AHCC) for a single adult, which would include reform to personal tax allowances and work allowances.
• A universal national allowance. A universal national allowance of £187 a month would be paid to almost everyone in the “as a new pillar of income protection for all, and making up part of the 50% of MIS guarantee”.
• Additional payments. NEF proposes that additional payments be made to ensure that disabled people and those unable to look for work in the near future receive up to 100% of the MIS (AHCC) in income support.
• Enabling auto-enrolment onto the NLI. The National Living Income would be calculated and paid automatically when incomes fall in the same way that tax contributions rise when incomes go up. NEF says that this would eliminate the five-week wait for Universal Credit.
• Scrapping existing caps, limits and sanctions. NEF proposes scrapping the existing caps on social security, including the benefit cap and the two-child limit. 

‍How to pay for it? NEF estimates that implementing the full national living income reforms would cost £70.6bn per year in 2021/22 prices, with an initial package of reform costing £25.3bn. The authors of the report, Sam Tims and Alfie Stirling, argue that this could be funded by “closing the gap in effective tax on income from employment compared with income from wealth and ensuring higher earnings pay the same marginal rate of national insurance as everyone else”. They say that this would include “extending national insurance to investment income, equalising the rates of tax on capital gains and dividends with income tax, and abolishing the upper earnings limit to national insurance contributions”.

• Coalition support. Along with Tax Justice UK and the Economic Change Unit, NEF helped to form the Stop the Squeeze campaign: a coalition of organisations which is calling for the Government to reform the tax system in order to introduce a living income (as well as clean, affordable energy for all). 

‍Benefits of a national living income. As the report outlines, recent events such as the Covid-19 pandemic have brought the inadequacies of the current social security system into sharp focus. The pandemic also opened the door to “radical economic reform” and the possibility of universal income support, explains the FT’s Martin Sandbu. The furlough scheme created a shift in opinion about universalism, away from the principle that support should be “the least you can get away with”. A national living income would introduce such a universality,  reducing the need for ad hoc crises schemes such as furlough, while at the same time targeting support to those most in need. Former Prime Minister Gordon Brown has echoed the language of a living income, calling for “a decent minimum standard below which no one should ever fall”, with the Government needing to “take the shame out of need”. 

• Who would benefit? NEF argues that under the national living income scheme, two-thirds of the population would see their disposable incomes rise, with the poorest families seeing a rise of as much as £500 a month on average. Severely disabled people would see a rise in incomes of 32% on average, while single parents would see a rise of 18%. 

Migration and growth. There are of course many non-economic arguments about migration and many arguments for increased migration other than for promoting economic growth. However, as fiscal debates about blackholes and doom loops rumble on, migration has found itself at the heart of the growth conversation. Last week, the Confederation of British Industry (CBI) held its annual conference, with both the Prime Minister and Leader of the Opposition using keynote speeches to present their vision for business and growth. A week on from the Chancellor’s Autumn Statement, anxiety still appeared to run high among business leaders, with the CBI’s chief UK Policy Director, Matthew Fell, warning of the impact of labour shortages on growth. Fell suggested that as the country was “running out of firepower on both fiscal and monetary policy”, the easing of migration rules may be the key to plugging the labour gap, meeting demand and spurring on growth. The number of job vacancies now stands at 1,225,000 according to the ONS which is 54 percent higher than before the pandemic. The CBI has called for the Shortage Occupations List (SOL) to be extended which would mean that visa restrictions would be eased for a wider range of positions. 

• GDP per capita. In many ways, it makes logical sense that more immigration to the UK during a labour shortage should lead to growth, therefore a much-needed boost to living standards. However, while there is little doubt that plugging these labour gaps with migration would increase the size of the economy, it is not guaranteed to provide a better standard of living, argues the LSE’s Alan Manning.  Too often, Manning argues, the calculation of whether immigration boosts growth relies too heavily on GDP rather than GDP per capita. 
• Migration and productivity. Several studies have actually found immigration to have a positive effect on GDP per capita as well as GDP. Many of these studies attribute the benefits of immigration to its effect on productivity, with some studies finding that the marginal migrant is around 2.5 times as productive as a UK-born worker. Another suggests that one percentage point increase in the migrant share results in a 1.6 per cent increase in total factor productivity (the total outputs relative to the total inputs used in production of the output).
• Low-skilled vs. high-skilled migration. It is not necessarily just “high-skilled” migration that has a positive effect on migration, suggests former Cabinet Office chief economist Jonathan Portes who argues that “a more liberal immigration system overall, even one that is not solely focused on high-skilled workers, may boost productivity”. The TUC has argued against a points based system which preferences high-skilled workers, suggesting that “restricting the number of visas available for low skill jobs will increase shortages in key public sector roles”.
• Training. When it comes to tackling labour and skills shortages, migration is often framed as the antithesis of training, in which migrants fill the gap left by a skills shortage among UK-born workers. In his speech to the CBI last week, Keir Starmer advocated for “a clear plan for higher skills and more training”, in place of the UK’s current “immigration dependency”. (it is worth noting that Starmer stopped short of saying that he thought overall migration should fall, saying that Labour would be “pragmatic on the basic lack of people”). However, a study by Francesco Campo (King’s College London), Giuseppe Forte (University of Oxford) and Jonathan Portes (King’s College London) found no evidence of migration having a negative impact on the training of the UK-born workforce. It found that, at local authority level, a one percentage point increase in the migrant share is associated with a 10.1 percentage point increase in native workers’ training. 
• But, there must be investment. The CBI frames looser immigration policy as an antidote to a dearth of fiscal and monetary policy options. However, migration can only be successful if coupled with stimulus and investment, according to the TUC. “The way to tackle concerns about immigration isn’t by further restrictions and exploitative new schemes, but by addressing the root cause of low pay, insecure contracts, undercutting and discrimination workers are suffering, along with cuts to public services and lack of skills training”, it argues. 

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Net migration. Net migration has hit a record of 504,000 in the year up until June 2022, an increase of 331,000 on the previous year. The net migration of non-EU nationals was 509,000, which is three times as high as the previous year while the net migration of EU nationals was -51,000. In large part this increase is due to an increase in arrivals from countries where the UK had established specific schemes in order to provide refuge for those fleeing conflict zones or political repression, specifically Ukraine, Afghanistan and Hong Kong.  From June 2021 to June 2022, 89,000 Ukrainians, 76,000 Hong Kongers and 21,000 Afghans arrived in the UK. And while asylum applications are at their highest for 32 years, nearly 100,000 people are waiting more than six months to have their initial claims processed. 

• Student migration. The number of migrants arriving on student visas nearly doubled to 277,000 in the year up to June 2022. A new graduate visa scheme means that students can apply to work in the UK for up to three years after graduation. However, research suggests that the majority of non-EU students leave immediately at the end of their studies. However, rumoured plans to clamp down on student migration could bankrupt universities, according to King’s College London’s Professor Brian Bell. Bell argued that universities could struggle to survive without international students, warning that such a measure could lead to higher fees for UK students. He also pointed out that only allowing international students on courses designated as “elite” (such as those at Oxford, Cambridge and in London) could pose significant issues for the Government’s “levelling up” agenda. 

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The political landscape. Despite the CBI’s calls for looser immigration policy, both Labour and the Conservatives have taken a much tougher stance with the Prime Minister arguing that immigration should fall and Keir Starmer warning of the UK’s “dependency” on migrant workers. 

• Public opinion. Starmer and Sunak may be at odds with the public on this issue, however, with polls suggesting that the public’s concerns over immigration have waned since the 2016 Brexit referendum. A new paper published by the IPPR which analyses a range of attitudes data (such as the British Election Study and the Ipsos immigration tracker) suggests that “the public has become strikingly more positive about immigration across a range of indicators”. “While around 44 per cent of the public saw immigration as a top priority in 2015, the average for 2022 so far stands at only around 9 per cent”, the paper suggests.
• Support for economic migration. This positive shift in favour of immigration appears, at least in part, to be linked to labour shortages, with public support varying for different types of immigration. The IPPR analysis found that the strongest support was for the migration of nurses and doctors but also that there had a been a strong increase in support for “relatively low skilled professions where substantial labour market pressures exist, such as restaurant and catering staff, construction workers, and fruit pickers”. 

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The alternatives. Is the CBI’s suggestion of expanding the Shortage Occupations List the answer? This suggestion is backed by the IPPR, which has advocated for “opening up the list to allow for the potential inclusion of occupations of all skill levels” while also “redefining the shortage occupation list as a ‘priority occupation list’”. The IPPR also suggests that the immigration system could be used to boost workers’ rights more generally. For example, it could require employers to pay the real living wage to all their employees in order to gain a sponsorship licence and require sponsors to inform migrant workers of their employment rights.

• No return to free movement. One idea which is not coming back is a return to free movement of labour. Despite arguing that the Brexit deal has to be ‘fixed’ and that forging a closer, less antagonistic, relationship with the EU would be Labour’s policy, the party have also made clear that free movement would be a ‘red line’.  
• Safeguard against low pay. As well as ensuring that employers pay the living wage, immigration policy could also boost training and safeguard against low pay of migrants. Currently, employers can pay migrants less for roles on the Shortage Occupation List. However, businesses who use this scheme could be forced not only to demonstrate that they pay staff a living wage, but that they will invest in staff training and commit to increasing migrant wages over time, argues the IPPR’s Marley Morris. Morris has also set out how regional mayors can use their skills remit to promote regional growth and integration of migrants. ‍
• Allowing asylum seekers to work. Another proposal that could help plug the skills shortage is to lift the ban on employment for asylum seekers who are waiting for their claims to be processed. Chief Executive of the Legatum Institute, Baroness Stroud, has argued that this would be a “common sense” change, with the ban currently costing the taxpayer an estimated £210m a year and leaving “businesses up and down the country without extra hands at a time of record job vacancies”. The idea has support across the political spectrum, including from prominent Conservatives such as Dominic Raab and Steve Baker.

No alarms and no surprises: There were few surprises when the Chancellor delivered his Autumn Statement last week, and in many ways this was the whole point. This was a fiscal event with the primary aim of reassuring the markets and the country that the government that the ‘grown-ups’ were back in charge and as a result the entire contents were extensively briefed beforehand. Rhetorically Jeremy Hunt attempted to do two things in the statement. The first was to deflect blame for the dire economic situation away from the government. The message was that a combination of Russia, Covid and (unspoken) his predecessor were responsible for the country's economic woes. The second was to reassure both voters and his own MPs that the choices he was making to manage those woes could have been worse, hence the talk of a “balanced approach” between spending cuts and tax rises.

• Context is king: The OBR was famously excluded from the last fiscal event, but the agency took centre stage here, predicting a long recession and the biggest fall in living standards on record. This combination, described as “horrific” by economist Duncan Weldon, was the main story from the day and presented a bleak picture of the next few years, with real disposable incomes set to be lower in 2028 than they were pre-pandemic and the value of workers’ pay packets not expected to return to their 2008 level until 2027 according to Torsten Bell of the Resolution Foundation.
• Moving the goalposts: In response, the main decision the Chancellor took was to loosen the fiscal rules set by his predecessor in order to avoid even greater spending cuts or tax rises. He extended the period until the debt-to-GDP ratio needs to be falling until the fifth year of the forecast period (up from three years), and introduced a new rule that total public borrowing in the same period should not exceed 3% of GDP. This loosening was in some ways a tacit admission that the government’s pre-statement rhetoric on the ‘fiscal black hole’ was always overblown, and the government always had the option of changing its fiscal rules. Interestingly, Hunt did not use the phrase ‘black hole’ once in the statement. (See our recent Digest on the fiscal debate). It is also a reminder that these rules define the terms of our political and economic debates, and they still receive relatively little scrutiny considering the enormous impact they have.
• Tough choices: These new rules may have been looser, but they still committed the government to a substantial fiscal tightening in the next five years. The Chancellor delivered this in two ways. The first was through a series of tax rises in the near term, billed as “asking more from those who had more”. In fact, the majority of the extra revenue came from freezing income tax thresholds for those on low and middle incomes - an effective reversal of the major tax policy of successive Conservative governments from 2010 onwards. CAGE’s Arun Advani unpicks the tax changes here, arguing that the government should have gone much further on taxing wealth. The second plank of the plan was a £28bn squeeze on public spending in the years after 2025, with some areas such as health and education protected. Tackling inflation was one of the justifications for these cuts, and inflation will make this squeeze feel even worse, with the TUC and NEF warning that public services needed an extra £43bn just to stand still.

That’s how you get a doom loop: The phrase ‘doom loop’ was heard from both sides of the chamber in the debate, referring to the idea that spending cuts and low investment would trap the UK in a cycle of economic stagnation, leading to more spending cuts. With the short-lived ‘plan for growth’ of the Truss era consigned to the scrapheap, the Chancellor reassured the Commons that the government was still committed to growing the economy. The problem, as IPPR’s George Dibb points out, is that the OBR thinks the measures announced will do almost nothing to lift the UK’s anaemic growth rate.

• Capital pains: In fact, the government announced cuts to the UK’s capital budgets from 2025 onwards, the very spending that is most likely to lead to growth in the future. With business investment also predicted to remain weak, and the government trapped by internal Conservative politics on issues like immigration and housing, it becomes increasingly difficult to see where growth is coming from in the next few years.

‍The big squeeze: The government saw stabilising the public finances as their task in this statement, but for the public the main issue is that their personal finances remain in crisis. Despite the squeeze on households, the government announced precious little help on the cost of living in the statement. The Chancellor attempted to present automatic upratings to pensions, universal credit, and the minimum wage as acts of generosity from the government, whilst announcing a small package of extra grants for the most vulnerable in 2023.

• High prices, guaranteed: Hunt also confirmed that his decision to abandon the pledge to freeze energy prices for two years would result in the level of the Energy Price Guarantee rising from £2500 to over £3000 from April 2023. As IPPR’s Carsten Jung points out, this is a far lower level of support than that being provided by comparable countries like Germany.
• Make me energy efficient, but not yet: Campaigners have long been calling on the government to invest in energy efficiency and home insulation programmes which would reduce bills, save government money, and cut down on carbon emissions. The Chancellor did at last commit to action on this front, establishing a new Energy Efficiency taskforce and a target to reduce energy consumption by 15% by 2030. But with funding not available until 2025, campaign group Warm this Winter warn that millions will still face fuel poverty this winter. 
• Pay under pressure: The other effect of the government’s squeeze on public spending will be to intensify the battle over public sector pay rises. Unison General Secretary Christine McAnea responded by warning that: “Health worker wages must be boosted now to prevent a damaging dispute this winter. Otherwise, the NHS can’t hang on to experienced staff, halt the damaging exodus of key workers or improve wait times for patients.”

A trap for Labour?: The decision to delay spending cuts until after the election in 2025 was justified by the Chancellor as a decision not to further weaken the economy going into a downturn, but has been widely interpreted as a trap for Labour. The message the government wanted voters to hear around the statement was that they are willing to take the tough decisions to deal with an economic crisis not of their making, while Labour refuse to face up to reality.

• Blame game: The first problem with this approach is that the public aren’t buying the argument that the cost of living crisis is not the government’s fault, according to polling for Channel 4 news. This largely explains why Labour continues to enjoy extremely healthy leads in general election polling, and this is before the energy price rises, tax rises, and biggest fall in living standards on record really hit home.
• Sound finances: For their part, Labour are not taking the bait. They have responded to the Autumn Statement by insisting that they are the party of ‘sound finances’, rhetorically accepting the need for fiscal discipline while stopping short of committing to specifics. Leader Keir Starmer explained that the economic context meant that Labour would be unable to do everything they want to do as fast as they had hoped. 

Cycle of stagnation: Labour’s main economic argument is that 12 years of stagnation and 12 years of chaos left the UK economy in a historically weak position, and that major investment (particularly in the green transition) is needed to force the UK onto a higher growth trajectory. Squaring this analysis, and the need to rebuild public services, with the commitment to fiscal discipline and the need to avoid the government’s spending trap will be the terrain for the coming years of political battle.

COP27 and climate finance. COP27 continues this week as 196 countries and the EU gather to the UN Framework Convention on Climate Change. A key issue at this year’s negotiations is ‘climate finance’ - money provided in different forms from advanced economies to countries in the global South. 

• Negotiations at COP26. Developed countries pledged in Copenhagen in 2009 and again in the Paris Agreement that they would mobilise public and private funding of $100bn a year by 2020. They failed to hit this target (providing $80bn in 2019) but said they expect to hit it in 2023. (Oxfam calculate the “true value” of climate finance provided to developing countries to be much lower than reported, once “dishonest and misleading accounting” is taken into account.) At COP26 last year, developed countries resisted the demand that they make up the shortfall since 2020 by providing more in 2024 and 2025. The level remains at $100bn a year, and a process is currently under way to define a New Collective Quantified Goal for how much they should pay after 2025.

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Finance for adaptation. Achim Steiner, the UN’s Global development chief, warned that more than 54 poor countries are in danger of bankruptcy and suggested that many were at risk of giving up on the climate talks if developed countries fail to provide the pledged climate finance required to implement their mitigation and adaptation goals. 

• Ensuring finance goes where it is needed. For many years poorer countries have expressed anger that around 75% of climate finance has gone to mitigation efforts, such as renewable energy, rather than on adaptation to help them cope with the climate change they are already experiencing. Last year’s UN Environment Programme report on financing for adaptation estimates that the costs for vulnerable countries to adapt to global warming are up to ten times higher than available funding. Last year’s Glasgow Climate Pact (see our analysis) saw the vulnerable countries achieve their demand that developed countries should “at least double” funds for adaptation. The Stockholm Environment Institute outline 6 principles to underpin climate finance so that it meets the needs and priorities of vulnerable communities

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Loss and damage. A key issue at COP27 has been the issue of ‘loss and damage.’ In UN climate negotiations 'loss and damage' is the term used to describe the principle that rich countries should compensate poor ones for the climate costs their historical emissions have caused. For many countries in the global South this is central to climate justice. 

• The Pakistan Megafloods. Devastation wreaked by the recent ‘megafloods’ in Pakistan increased the salience of loss and damage at COP27 this year as they highlighted mounting fiscal and climate challenges that vulnerable nations continue to face. Official reports estimate 33 million people have been affected by floods in Pakistan this year - significantly more than the 2010 ‘megafloods’. For context, one third of the country was underwater - an area equivalent to the size of the UK - with economic damages exceeding $30bn. Climate resilience experts Dr Amiera Sawas and Sobia Kapadia argue that “This is a clear cut example of loss and damage that can be used to amplify the calls of the most vulnerable states for a financial mechanism to support countries experiencing such devastation despite being low emitters.” 

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Who is responsible for climate change? Developed countries have always resisted recognising the concept of loss and damage; they fear it is the slippery slope to being held liable in international courts for trillions of dollars in damages although developing countries agree any mechanism would not legally establish liability. The largest 20 economies in the world (the G20) are responsible for 80% of greenhouse gas emissions, whilst the whole of Africa is responsible for 4%, but suffers disproportionate impacts. (See Carbon Brief’s video showing which countries are responsible for cumulative emissions.) A new study published by Christian Aid warns that, under current climate policies, African countries will lose 20% of their average expected GDP by 2050, and 64% by 2100.

• “Polluters must pay”. Research by Global Justice Now (GJN) found the ‘Big 5’ oil companies (including BP and Shell) are responsible for four times more carbon emissions than the 150 lowest-emitting countries, and have reported $170bn in profits this year - more than the annual amount being called for to compensate the global south for loss and damage. Campaigners have suggested extending the windfall tax on oil and gas companies into a ‘climate damages tax’ to raise-revenue for loss and damage payments. (25% more fossil fuel lobbyists registered to attend COP27 this year.)
• “Drowning not only in flood but in debt”. Debt Justice has highlighted that over 70% of climate finance has been in the form of loans, not grants, which add to the debt burdens of lower income countries. Bilawal Bhutto Zardari, Pakistan’s foreign minister said that this historic flooding means they “end up not only drowning in the floodwater, we also end up drowning in the debt as a result of having to rebuild" Pressure is building to reform international finance institutions to allow ‘debt-for climate swaps’, where creditors cancel some debt from a poorer country in exchange for a commitment to an equivalent or lesser amount of climate adaptation or mitigation investment. Debt Justice has previously explained why debt-for-climate swaps are “not a silver bullet”, particularly since new conditionalities must not be imposed on poor countries for a crisis they did not create.

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Progress so far. Egypt pushed ‘loss and damage’ to the top of the agenda at COP27, but the EU and US have “coordinated a gentle but firm pushback” against the idea of the creation of a dedicated fund for ‘loss and damage’ compensation so far, opting instead for a “mosaic of solutions”. 

• The “mosaic of solutions”. The Loss and Damage Collaboration explains that this term originated in a speech by Mia Amor Mottley, the President of Barbados, but has since been adopted by developed countries to focus on solutions outside the remit of the UN, such as Germany’s Global Shield Against Climate Risk. Her original vision included a dedicated loss and damage fund, reforming the IMF and World Bank to provide debt relief and mobilise finance through Special Drawing Rights, and taxing fossil fuel companies and other big emitters. Carbon Brief is tracking the ongoing negotiations and finds that only 10% funding pledges made from rich nations at the time of writing is for on the ground projects relating to loss and damage.
• The way forward. E3G argues that an ambitious outcome at COP27 would require parties to agree to the establishment of a loss and damage facility with “accessible, transparent and additional” funding, and more. The negotiations aim to be concluded later this week. Formation of a loss and damage fund at COP27 has become the clear litmus test for developing countries' trust in the UNFCCC process and the willingness of rich countries to step up and meet their responsibilities, thirty years since first signing the climate convention at the UN’s 1992 Rio Earth Summit.

The long march to economic ‘credibility’. Fiscal policy debates are heating up in the run up to the Autumn Statement on the 17th November. Treasury sources have been briefing journalists the gory details of the rumoured ‘black hole’ in the public finances and dropping hints about measures being considered to fill it. The latest estimates report that Chancellor Jeremy Hunt is planning cuts and tax rises totalling £60bn (at least half is expected to come from spending cuts) as he attempts to restore the Conservative party’s reputation for economic credibility. (Be warned: there is a large amount of expectation management going on from the Treasury, so take all reports of figures or policy options with a pinch of salt).

• A comprehensive explainer of fiscal responsibility. But what is fiscal space, how much does the government have, and what determines the options available to the Chancellor? Spending and Stability, a timely briefing by IPPR’s Carys Roberts and Carsten Jung, outlines the macroeconomic situation after the mini-budget and clarifies what the real constraints on tax and spending decisions are going forward.
• Inflation and sustainability are the only constraints. The authors explain there is little justification for the government narrative of a multi-billion pound ‘black hole’ which must be filled immediately to avoid economic calamity. In fact, the primary short-term constraint is the risk that any tax and spending decisions further stoke inflation (which they argue was the main driver behind the mini-budget “market turmoil” - read our analysis of the mini-budget’s contents and reaction) and the only medium-term constraint is the Chancellor’s choice of fiscal rules (a self-defined measure of sustainability).
• Room for additional spending. In the short term, IPPR argues that there is room for the government to raise spending to combat the cost of living crisis and invest in policies that will lead to economic growth, as long as inflation pressures are controlled. In the medium term, even the governments’ own fiscal rules do not prescribe spending cuts. Instead, a mix of policies (such as public investment) that increase growth (and thus lead to higher tax receipts and lower public spending) combined with some tax increases, would provide a credible fiscal strategy. This kind of countercyclical fiscal policy would be a more normal response to an impending recession, as the BBC’s Andy Verity explains. 

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Debt sustainability and fiscal rules. At the heart of this debate is the UK’s framework of fiscal rules. Fiscal rules are chosen by the Chancellor: they are a commitment to certain debt management policies to assure investors in UK public debt that there is a plan to ensure debt levels remain manageable - violating this can lead to higher risk premiums, leading investors to charge more interest on the debt. There are multiple fiscal rules, but the important one for this debate is the commitment to ensure the UK’s debt-to-GDP ratio is falling by the third year of the OBR forecast (i.e. by the end of 2025). This is a rolling target, so in some ways it can never be reached, but it does oblige the government to attempt to set out policies to meet it, which the Office for Budget Responsibility assesses. The ‘black hole’ is the anticipation of how far the government is away from meeting this self-imposed rule. 

• Debt-to-GDP ratios. Media commentary is estimating different sizes of the ‘fiscal black hole’ (from £10bn to £70bn) because it is based on different forecasts of GDP growth in three years time - or over five years if they assume the Chancellor will relax his fiscal rules and give himself more time to have debt falling as a % of GDP. The anticipated growth rate makes a huge difference to the estimated size of the ‘hole’, which is why policies that can raise the growth rate are also effective fiscal management policies. 
• The ‘moron premium’ and market reaction to the mini-budget. IPPR clarify that the market turmoil caused by the tax-cuts in the Truss government’s mini-budget was not due to a lack of faith from investors about the ability to repay the debt. They suggest that actually, it was caused by the lack of evidence about the effect of tax cuts to generate economic growth, citing recent analysis by the IMF (NB there is now a long-standing breadth of evidence that trickle-down economics - particularly via tax cuts - fails to generate growth), and that they might be inflationary which “combined with the fact that policies announced did not credibly address key upcoming challenges caused by the cost of living crisis.” 
• The market reaction to the Energy Price Guarantee. The tax cuts in the mini-budget were originally calculated to cost £45bn, however, the much larger Energy Price Guarantee was predicted to cost £150bn, but the latter didn’t provoke the same response from investors in UK government debt. IPPR explain that if public borrowing is used in ways that are much more likely to increase GDP growth, such as public investment to protect incomes, spending and demand, then this is more sustainable for the public finances in the long term. Further, there was good evidence that the energy support package would reduce inflationary pressure.

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Reducing the debt-to-GDP ratio through contractionary policy is self-defeating. IPPR’s point is that the size of the hole in public finances changes depending upon the policies chosen to fill it. George Osborne (in)famously tried to reduce the government’s debt-to-GDP ratio in the 2010s by heavily focusing on cuts to public spending. This approach has been roundly criticised by major economic institutions as a failure; across 32 of 32 advanced economies, reduced government spending led to slower economic growth. Contractionary fiscal policy, such as certain tax rises and spending cuts reduce spending in the economy and therefore negatively impact growth, making the hole in the public finances larger. In other words, if you want to meet a debt-to-GDP target, then the GDP is as important as the debt.

• This recession could be worse than the 2010s. The Guardian’s Larry Elliot explains that attempting austerity again now will be worse than in the 2010s because, unlike in the 2010s, the Bank of England is now also tightening its monetary policy; the Bank predicted last week that “higher interest rates would push the economy into the longest recession since the 1930s…Hunt’s fiscal squeeze is likely to worsen the forecasts, and the Bank said the economy was already contracting and would continue to shrink for eight consecutive quarters to the summer of 2024.” 
• Failure to learn the mistakes of austerity. The Institute for Government warned that £40bn of departmental spending cuts would require budgets to fall by 7.8% in real terms - the same severity of austerity as in 2010-2015 - but public services are already more fragile than they were in 2010 and “the methods used in 2010 are no longer politically or practically viable.” The UN’s envoy on extreme poverty also warned Rishi Sunak that a new wave of austerity could violate the UK’s international human rights obligations by increasing hunger and malnutrition: “This is the worst time to impose such cuts. You do not impose austerity measures when the whole population is facing a cost of living crisis. What you do is you raise taxes on the rich, you raise taxes on corporations.”

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Avoiding the “doom-loop”. The CBI’s Tony Danker, head of the UK’s largest business lobby group, warned PM Rishi Sunak against repeating the mistakes of the Cameron-Osborne years and creating a contractionary ‘doom-loop’; where tax increases and spending cuts harm growth so “the country could end up in a similar doom loop where all you have to do is keep coming back every year to find more tax rises and more spending cuts because you’ve got no growth.” The rumoured Treasury calculations admit the risk of this ‘doom-loop’ taking hold where estimates of the initial fiscal hole rose from ~£30-40bn to £50bn because more tax rises or spending cuts “will worsen the economic outlook, which will in turn hit future tax revenues”.

• Counter-cyclical approaches for economic growth. The PM has recently appointed Onward’s Director, Will Tanner, as his deputy chief of staff. Onward have a published a new paper by Tim Pitt (previously special adviser to Conservative chancellor’s Philip Hammond and Sajid Javid) calling on Chancellor Hunt to “loosen the interpretation of fiscal rules” to enable more investment in human capital, infrastructure and R&D. Pitt recently argued that Conservative economics must adopt a more pragmatic approach to fiscal policy, where they are “prepared to use it aggressively in downturns, esp when monetary policy is at ZLB, while accepting need for debt to fall materially in good times to build space for that”.
• Alternative fiscal rules. IPPR explain that debt-to-GDP fiscal rules have significant drawbacks as they limit borrowing to invest, even when this could be growth-enhancing and ultimately reduce debt in the long term. They propose instead a debt-interest-to-GDP rule or a net worth rule. NEF propose replacing fiscal rules with a Fiscal Policy Committee housed at the OBR and given a mandate based on resource constraints, full capacity utilisation, the private sector balance sheet position, and public sector net worth. 

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Achieving debt sustainability through growth. IPPR criticise the IFS’s estimate that £25bn of spending cuts are needed to meet the government’s current debt-to-GDP rule because this is based on near 0% growth in the medium term and 1% rise in interest on public debt. They argue that if the UK returns to pre-pandemic growth and interest rates closer to 2%, then the UK can afford to run a deficit of £49bn until 2025 and still be stabilising its debt - with £74bn more fiscal space than the IFS’s estimate.

• So how do we achieve growth? Fresh forecasts from the Bank of England last week predicted no or negative GDP growth until mid-2024. This can be broken with careful targeted measures to protect incomes and demand, in areas that don’t stoke inflation. IPPR’s paper outlines a strategy to tackle the cost of living crisis while ensuring sustainable growth and sound finances in the future; they give options for raising taxes that dampen inflation risk while also improving efficiency, equity and behaviour change. Carys Roberts outlines this approach in the New Statesman: “The fiscally responsible approach is to build a strong economy through public investment and tax increases on the wealthy.”  (Reminder: the UK is still a low-tax nation compared to Western standards.)
• Fiscally responsible policy options for 2023. The Telegraph reports that the Chancellor is looking at changes to the headline rate, reliefs and allowances on Capital Gains Tax and considering raising taxes on dividends. There is also speculation about whether the government will abolish non-dom status and the shape of a redesigned windfall tax. (The IMF ranks the UK’s oil and gas tax rate as the lowest amongst major producers.) The Guardian also reports that Labour are working on a “big policy intervention that will be a major overhaul of the tax system”, looking at taxing wealth in particular. Tax Justice UK have outlined 5 changes to wealth taxes that can raise £37bn a year. (Check out Economist Arun Advani’s Wealth Tax Reform Calculator for different revenue-raising options.)  

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No public appetite for austerity. Another consideration in this debate is how politically deliverable a programme of fiscal restraint would be in practice. Public attitudes on the economy have shifted since the 2010s. Deficit management is much less salient in the public's judgments about economic performance than it was in 2013; voters are now “most likely to be influenced by information concerning inflation/increases in prices”. NatCen’s latest British Social Attitudes survey shows “Appetite for government intervention in the economy is rising, as is concern about inequality, and enthusiasm for redistribution of income from the better-off to the poorer”. Those who want to increase taxes and spend more on health, education and social benefits was at its nadir at 31% in 2010, but has been climbing since - since 2017 more of the public want the government to “increase taxes and spend more” than those who want it to “keep taxes and spending at the same level as now”. 62% of 2019 Conservative voters think wealthy people should pay more tax.

• The pandemic changed people's views on welfare. Pollster Sir John Curtis argues that the public is much more sympathetic to working age people in need and more tolerant of welfare spending than in the Cameron-Osborne years. More than two-thirds now believe that ordinary working people do not get their fair share of the nation’s wealth - the most since 1991 and 10% more than in 2019. There is also growing support for redistributing income from the better-off to those with less (+10% since 2019). 71% of 2019 Conservative voters think the minimum wage and social security system don’t provide enough to live on. 

Splitting the bill for the cost of living crisis. The two week pause ahead of the Chancellor’s Autumn statement on 17th November has left plenty of room for speculation and debate about the likely contents. We will explore the wider macroeconomic context in next week’s Digest, but, for now, one question dominates: who should ultimately pay the bill for the cost of living crisis? 

• Filling the fiscal ‘black hole’. Jeremy Hunt reportedly “confronted” the Cabinet with a “demand to find new spending cuts” when he became Chancellor and reversed Kwarteng’s tax cutting mini-budget in a bid to repair the Conservatives reputation of fiscal responsibility, earlier in October. Bloomberg reported the Treasury has prepared a list of 104 spending cuts for the government to choose from in order to fill the £35bn fiscal ‘black hole’ which still remains to meet the fiscal rules Sunak had previously chosen as Chancellor. 
• Fiscal rules. However, as PEF’s James Meadway notes: “Change the forecasts, change the target, and the black hole shrinks.” The FT reports that the Chancellor might change fiscal rules to have debt to gdp ratios falling after five years, rather than three, so that “much of the fiscal pain will not be felt until after the next general election”. In a separate blog post, James explains how this leaves a “trap” for Labour who may be tempted to partly accept the premise of spending cuts in an attempt to appeal to perceived notions of fiscal responsibility. (Reminder: Across 32 of 32 advanced economies, reduced government spending led to slower economic growth and Osbourne-era austerity failed to reduce the UK’s debt to GDP ratio.) 
• Defining fiscal responsibility. The Telegraph’s Ambrose Evans-Pritchard argues that the OBR “must stop pushing the economy into a contractionary vortex” as “Jeremy Hunt is more or less forced to tighten hard into the teeth of recession, even if such a course is macroeconomic lunacy”. He continues: “The clear danger is that the OBR mechanism will push us into ill-timed austerity, inflicting far more lasting damage than the storm of over the mini-Budget…until they reframe their definition of what constitutes budget responsibility, they are objectively complicit in economic vandalism.” (Check out NEF’s proposals for scrapping fiscal rules entirely and replacing them with ‘fiscal referees’ - a new Fiscal Policy Committee at the OBR.)

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Wealth tax reform is preferable to austerity. More recently, the Telegraph reported that “Hunt is considering up to £20 billion of tax rises in the [now delayed] Halloween budget, with high earners to bear the brunt of his quest to balance the books.” 

• Raising money without harming growth. The FT’s Martin Sandbu argues that the government should levy a 1% annual tax on net wealth “above the level needed to get into the top 10% richest in the UK” could raise £35bn and encourage more productive uses of capital.
• Other revenue-raisers that don’t harm the majority. Tax Justice UK has set out 5 ways the Chancellor could raise up to £37bn through wealth taxes. Taxing income from wealth at the same level as income from work could raise up to £14bn, applying national insurance to investment income could raise up to £8.6bn, a 1% wealth tax on assets over £10 million could bring in up to £10bn, ending inheritance tax loopholes could raise another £1.4bn and scrapping non-dom rules raises a final £3.2bn. (Guardian coverage from Rupert Neate.) 
• Wealth taxes are politically popular. Polling by Opinium on behalf of the Stop The Squeeze campaign has shown that a majority of voters who backed the Conservatives in 2019 would support wealthy individuals paying more in tax than they do now. Centre-right think tank Bright Blue’s sets out the Conservative case for reforming taxes on work and wealth: “A centre-right Government that is committed to ‘levelling up’ the UK should rebalance the tax system from income associated with work and effort and onto income associated with privilege and luck.”

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What about the energy sector? Chancellor Hunt had previously also avoided ruling out the introduction of a new windfall tax. Current loopholes in the current windfall tax on oil and gas producers mean that drilling in new oil fields (such as Equinor’s new site at Rosebank) amount to a net loss for the taxpayer. 

• Reforming the windfall tax. NEF calculated that reforming the windfall tax on oil and gas producers could raise an extra £9bn. The Counterbalance newsletter explains how to turn temporary windfall taxes into longer-term excess profit taxes on monopolies. The Balanced Economy Project argue that “a deeper and more long-lasting source of unproductive unearned income is, of course, monopoly power.” 
• Taxing dividends and share buybacks. Last week, Shell announced their 2nd highest quarterly profits ever as their profits increased by $5.4bn. IPPR and Common Wealth calculated that $4bn of increase went directly into share “buybacks” to artificially inflate the share price of the company. (BP made $8.2bn in Q3 and gave $2.5bn to shareholders via share buybacks.) Share buybacks hit record levels in 2022, where FTSE 100 companies have announced $46.9bn so far in 2022. IPPR’s George Dibb argues that share buybacks are “a symptom of a firm that can identify no productive investments beyond boosting their own value.”  (IPPR’s Shreya Nanda explained why share buybacks are part of a wider cycle of business failure in this thread.) The report finds that new taxes on share buybacks and dividends could raise up to £17bn per year, help encourage more productive uses of capital investment and avoid cutting public services even further.
• Lost revenue from private ownership. The TUC calculated that the cost of privatisation of the UK’s power sector means the public misses out on £63-122bn over the next two years (£4,400 per household). The TUC’s Mika Minio-Paluello stated: “If the UK had publicly owned energy like our European peers, the profits would instead flow to the public…£122 billion would have gone a long way to lower bills and retrofit our homes.”

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Stop The Squeeze. Nick Gutteridge reports that the Chancellor is “not considering measures that would hit the poorest Britons who are already struggling with rising prices.” A new coalition campaign, Stop The Squeeze, has launched calling on the government to deliver “a real plan for an affordable Britain” and tackle the cost of living crisis by guaranteeing affordable energy, boosting incomes, and raising taxes on wealth. The campaign has a wide range of supporting organisations from anti-poverty charities like Oxfam and Save the Children, climate campaigners like Uplift and Possible, progressive think tanks, trade unions and more. You can read more about their aims and get involved here.

• Public support? The new campaign group launched by releasing polling which demonstrates that only 1 in 5 of the voters that backed the Conservatives in 2019 believe cuts are inevitable in response to the current economic situation. The campaign also finds that 71% of the same voters believe that the minimum wage and social security system do not provide incomes people can live on.
• Uprating benefits. JRF has co-signed a letter with over 100 anti-poverty organisations calling on Rishi Sunak to “honour the promise he made this spring to increase benefits in line with inflation, and to do so now rather than waiting until April.”

New Chancellor, new fiscal plan. This week began with the new Chancellor Jeremy Hunt announcing further U-turns on the government’s ‘mini-budget’, after Kwasi Kwarteng was sacked late last week. All of the tax cuts announced in the government’s Plan for Growth have been reversed, however the government still plans to abolish the Health and Social Care Levy and keep the cut to Stamp Duty. (HMT has listed the U-turns here.) 

• Financial markets dominated fiscal policy. In the words of Martin Lewis “Trussenomics totally hunted down and gone.” But, as IIPP’s Josh Ryan-Collins explains, “The defeat of free market ideology will be worthless if it results in a fear of public spending and an unquestioning faith in the markets.” Hunt justified the U-turns on tax cuts in an attempt to “reduce unhelpful speculation” ahead of the medium-term fiscal plan. The IFS has calculated the ‘credibility cost’ of the mini-budget was ~£10bn in extra debt payments each year as investors charged higher rates on government debt. 
• But what did bond markets actually fear? IIPP’s Josh Ryan-Collins makes the important point that “investors lost confidence in the government’s ability to bring down prices”, not expansionary fiscal policy in general: “High inflation reduces the real value of government debt and will lead to higher interest rates that will push down their price. This is bad news for the investors who hold such debt, hence the sell-off of bonds…it was the £45bn of tax cuts on top of already rising inflation that the market didn’t like. Even bond traders understand that making rich people richer is likely to stoke inflation and won’t on its own increase growth.”
• New advisory council to calm markets? The Chancellor also announced a new board of economic advisors at the Treasury. Four have been announced at the time of writing; economist and former MPC member Andrew Sentance notes that the “problem is all members are from the financial sector” One advisor, Rupert Harrison, was George Osbourne’s Chief of Staff at the height of the austerity years, who is now working for the US investment management firm, Blackrock. (IIPP’s Josh Ryan-Collins also notes that Blackrock “are designers of the LDI schemes that created financial chaos over the last two weeks and required BoE bailouts.” Economist Carolyn Sissoko has a timely paper out on Financial Dominance: Why the ‘Market Maker of Last Resort’ Is a Bad Idea and What to Do About It.)

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Risk of reverting to austerity. The episode of ‘financial dominance’ over the government's fiscal policy has sparked renewed fears of spending cuts. The BBC reported that yesterday the Chancellor warned the Cabinet of “the extent of the black hole in government finances means he needs to find tens of billions to balance the books”, which may force some ministers to resign. Polling from Ipsos Mori has found ‘The level of the deficit’ is now 8th in the list of important economic indicators for the public. (A recent study published in the Journal of Epidemiology and Community Health found there were 334,327 excess deaths in England linked to austerity from 2010-2018.)

• “Black holes'' and fiscal rules. BBC Newsnight’s Ben Chu calculates that a £38bn shortfall remains in the public finances to meet the government's fiscal rules - to have the government’s debt-to-GDP ratio falling at the end of three years. Hunt suggested that the measures will ‘raise’ £32bn every year but warned of more “difficult decisions” to come as the government tries to reduce its debt to GDP ratio through cutting spending. It is now widely acknowledged that Osborne-era experiment to  reduce UK’s debt-to-GDP ratio through austerity failed.
• You can’t cut your way to growth. Finance Watch’s report Fiscal Mythology Unmasked explains why debt-to-GDP ratios are poor arbitrary indicators for debt sustainability. For a modern explanation of fiscal responsibility, read Lord Nicholas Stern and Dimitri Zenghelis paper explaining why public investment in economic growth is key to debt sustainability: “G7 countries should increase post-pandemic public investment...recognise the potential economic and social returns to increasing public debt for the purpose of investment…[and wait] to pay off the public debt until the economy is undergoing robust growth.”

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Renewed call for wealth taxes to raise revenue. The Telegraph’s Tony Diver reports that “Labour is looking seriously at reform to capital gains tax – better balancing it with income tax – but rule out more radical measures that would tax assets directly.” Church Action for Tax Justice and several prominent UK Christian leaders have written to the Chancellor urging him to “introduce wealth taxes to reduce inequality, instead of cutting public services and benefits.” Tax Justice UK’s response to his announcement argued that “to avoid further austerity we need to tax wealth more. Capital gains taxes should be aligned with income tax rates. We should end inheritance tax loopholes open to the wealthy. And we need to tax the wealth of anyone with £10 million of assets.” 

• They can reduce inflation. The International Monetary Fund has urged the UK government to consider ‘raising windfall or wealth taxes’ to reduce inflationary pressure. This would be preferable, it argued, to the sole use of higher interest rates to tackle inflation. 
• And don’t have to compromise economic growth. Economists Linus Mattauch, David Klenert, Joseph Stiglitz and Ottmar Edenhofer have published a paper showing how governments can tax wealth to fund public investment and reduce wealth inequality, without compromising economic growth.

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Political flashpoint for energy bills in April 2023. Hunt announced the Energy Price Guarantee will now only remain in place until April, in order to avoid long-term exposure of the public finances to volatility in international gas prices. The Treasury is launching a review into how to support energy bills beyond April in ways that will lower cost to taxpayers whilst remaining supporting household needs. Sky’s Rob Powell’s analysis of leaked photos also suggest the Treasury is looking at a targeted grant scheme for vulnerable businesses, such as the hospitality and the most energy intensive sectors.

• Macroeconomic impacts of unfreezing the Energy Price Cap. Economist Samuel Tombs calculates that “current wholesale prices point to a 73% jump in energy bills, to £4334…That's a big change in the outlook for CPI inflation (↑) and GDP (↓).” (For an explanation of how freezing (or lowering) the Energy Price Cap has deflationary effects, read our previous digest covering research from IPPR.)
• A package to fix the UK's energy price crisis. NEF proposes to replace the Energy Price Cap with a new system for ‘free basic energy’ as part of a rising block tariff, so that all households receive the same amount of energy for free, and everyone pays the same premium price or further energy above this. They also argue that the government should create a new permanent energy element in all means-tested benefits – similar to housing or child benefit – to help the poorest families cover their remaining energy bill, paid for by increasing capital gains tax. Finally, the package includes a £750 “cost of living allowance" for all households funded through a reformed windfall tax on oil & gas.the package would  The package costs half that of freezing the price cap for 12 months, increases incentives to improve home energy efficiency and increases disposable incomes for 80% of families on average (for the poorest 50% it would be enough to fully reverse the squeeze since April 2021). Fuel Poverty Action is handing in a petition with nearly 650,000 signatures to 10 Downing St. today calling for a universal band of free energy, paid for by ending fossil fuel subsidies, windfall taxes on excess profits and higher tariffs on excessive energy use.

Mortgage affordability and the cost of living crisis. As financial markets remain in flux following the government’s mini-budget, commentators and analysts have been debating the effects of rising interest rates on the housing market. Higher interest rate expectations are leading to soaring costs of mortgage repayments for homeowners, exacerbating the already chronic affordability crisis in the UK housing market.

• Housing market crisis? Last week, the interest rate on a typical two-year fixed rate mortgage surpassed 6% for the first time in 14 years. If mortgage rates remain at 6%, a family with a £300,000 mortgage, coming off a 1.5% fixed interest rate would end up paying £659.79 more a month in mortgage repayments (a ~65% increase). Sky’s Ed Conway notes that “the impact for mortgage affordability will be the worst this country has seen since the late 1980s/early 1990s…the worst housing crash in the modern era.” MoneySavingExpert Martin Lewis argues that a “ticking time bomb” on mortgages may come in the Spring, where higher mortgage rates interact with more difficult affordability tests and falling house prices. He called for a raft of regulatory changes put in place before Christmas, including “forcing the banks - with the extra money they’re making by putting mortgage rates up and not putting saving rates up - [to have] much stronger forbearance measures for people who can’t pay.”
• End of an era. The sharp rise in the Bank of England base rate and therefore in mortgage rates brings to an end the post-financial crisis era of rock bottom rates, which has been the only reality that many younger homeowners have known. This era has been defined by cheap mortgages, soaring house prices, and demand-side policy interventions such as Help to Buy, which have encouraged people to borrow huge sums in the belief that rates would remain low and the value of their property would continue to rise. Adjusting to the end of this era will be painful, especially when put alongside high levels of inflation.‍
• Ongoing fiscal fallout and interest rate predictions. Chancellor Kwasi Kwarteng has brought forward the date of the next fiscal event to the end of October in an attempt to calm financial markets. There will now be a ‘medium-term fiscal plan’ with associated independent assessments and forecasts from the OBR, but no formal spending review until next year. Chair of the Treasury Select Committee Mel Stride says that if the OBR’s forecast “lands well with markets then the MPC meeting on 3rd Nov may result in a smaller rise in interest rates”. However, the interest rate on government borrowing is now (at the time of writing) almost the level before the Bank of England announced its bailout less than two weeks ago, making a steeper interest rate rise more likely. (Read last week's Digest for more on the impact of the government’s tax-cutting fiscal plans on financial markets.)

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The housing market and the Conservative’s electoral coalition. A drop in house prices and increase in mortgage interest rates could harm the government's chances of winning the next election. Resolution Foundation’s Torsten Bell highlighted that although 50% of Conservative voters own their home outright, two in five households in Red Wall seats will be affected by rising mortgage rates. A recent YouGov poll for the Times asked respondents who is most to blame for fixed-term mortgage rates rising beyond 6%: 52% blamed the UK government, 24% blamed the global economy and 5% blamed the Bank of England. Academics Jane Green and Roosmarijn de Geus have previously highlighted the cost of living crisis could ‘very easily change’ the Conservatives’ electoral fortunes as more people become economically insecure. 

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Could a housing market dip increase affordability? Credit Suisse have predicted house prices “could easily fall 10 to 15 percent” next year. City economist Roger Bootle argues that this “plunge in house prices is now inevitable” as interest rates constrain people's ability to afford to buy housing and demand falls through the floor. However, he notes that there may be benefits to this as, “For new borrowers, lower prices will improve affordability”, but they must fall gently as “it is in no one’s interest that they should crash” due to the risks of financial and macroeconomic instability. (For more on the relationship between the financial system, housing and land read this summary of Rethinking the Economics of Land and Housing)

• Navigating a crash. If a wave of homeowners are forced to sell their homes, there is a risk that richer buyers (without the need for expensive mortgages) could snap up more of the UK’s housing stock, further increasing asset inequality. An independent report for the Labour Party from 2019, Land for the Many, explored the risk of falling house prices for recent buyers. Chapter 4 proposes setting up a Common Ground Trust, a publicly-backed but member-owned organisation that supports housing demand by buying up the land underneath houses being sold. Tenants apply to take out lower mortgages on the bricks and mortar, usually at only 30% of the average property price. In a situation of lower housing demand, having a public entity standing ready to buy up properties that come on the market can ensure that tenants can afford the houses being sold to protect demand. Longer term, this also “creates a mechanism for the gradual, voluntary, but potentially large scale, transfer of land – our single most valuable asset – into a form of shared ownership, so that the associated land rents can be pooled and distributed according to need (in the form of discounts), rather than captured by private landowners and banks at society’s expense.”

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Could renters benefit from falling house prices? The New Statesman’s Emma Haslett explores whether falling house prices could bring a “silver lining for the UK’s beleaguered renters”. Katrina Hill, of the estate agent Chestertons, explains how decreasing mortgage affordability could lead to more homeowners renting out their houses when they need to move, instead of selling their homes at lower prices. This would, she argues, create more rental stock and provide a solution to “one of the rental market’s most inflationary problems”. However, Haslett argues that instead, landlords are more likely to pass on higher mortgage rates in the form of increased rents meaning that it is “unlikely” that renters will benefit from falling house prices. 

• Rent controls are growing in popularity. Rent controls are a form of price control which are used in many cities across the world to prevent housing becoming unaffordable. Economist J W Mason explains how and when they work (for a wider survey of the evidence see this by the Economics Observatory). The Scottish government has recently introduced legislation which will freeze most rents until the end of March 2023 and put a six month ban on evictions. However, exceptions apply to situations in which a landlord faces increased property costs, mortgage interest payments or some insurance costs leading the Scotland tenants’ union, Living Rent, to say that the legislation is not comprehensive enough. The New Economics Foundation has called on the government to “protect those most exposed to the cost of living crisis” and freeze social rents at a cost of £2bn.‍
• Renters reform. The Times’ Steven Swinford reports that Liz Truss “is shelving Michael Gove's plans to end no-fault evictions”. However this move has met with criticism, including from Onward’s Will Tanner who argued that “there is now broad consensus between landlords, tenants and campaigners on the package of reforms that's needed, including abolition of no fault evictions. Everyone agrees.”

Financial markets vs neoliberalism? As economic fallout from the ‘mini-budget’ continues and a chaotic Conservative party conference concludes, Onward’s Will Tanner writes “The party of free markets has been clobbered by the invisible hand.” This week the Chancellor Kwasi Kwarteng attempted to calm financial markets by bringing forward publication of his plan for how the government will pay for their planned tax cuts (see our analysis of the mini-budget here). The Bank of England’s Deputy Governor, Sir Jon Cunliffe, has written to the Treasury Select Committee to clarify the mini-budgets' direct impact on undermining the price of long-term government gilts, which triggered panic among pension funds who were highly exposed to falls in gilt prices, in turn prompting a significant intervention from the Bank to sure up gilt prices. 

• The smallest of U-turns. After the IMF recommended that the government “consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high income earners”, and amid pressure from backbench Conservative MPs, the Chancellor quickly announced a U-turn on their plans to abolish the top rate of income tax, claiming that the tax cut was a “distraction” from their “overriding mission” to deliver economic growth. But this was not an admission that tax cuts are a poor strategy for growing the economy (as 50 years of evidence suggests) because £43bn of the original £45bn package of tax cuts still remain. In the words of the IFS’s Paul Johnson the U-turn has “limited fiscal significance” as it “represented only a small fraction of the Chancellor's mini-Budget announcements.” (The Resolution Foundation’s analysis shows that the remaining tax cuts still disproportionately benefit the top 5%.) 
• Staying the course despite widespread opposition. The government is (at the time of writing) still committed to a tax-cutting growth strategy, despite widespread opposition from commentators in the Economist, the FT, the Telegraph and others. Sovereign credit rating agency Fitch lowered its UK rating from “stable” to “negative”, despite the 45p u-turn: “We consider that statements by the Chancellor hinting at the possibility of additional tax cuts and the likely modification of fiscal rules legislated in January reduce the predictability of fiscal policy”. The CBI’s Tony Danker told LBC that abolishing the 45p rate of income tax wouldn’t even be “in the top 30 things that would get growth going”. The Director of the LSE, Minouche Shafik, notes that the World Bank “did hundreds of investor surveys on what determined their willingness to invest in a country...Low taxes and enterprise zones were always near the bottom."
• A reminder on government borrowing. It is important to note that financial markets did not react negatively to the £150bn package of energy bills support. In the words of Wall St Journal’s Jon Sindreu: “the turmoil in financial markets may have more to do with the plan’s unclear return on investment than its hefty borrowing requirements… The problem with ‘Trussonomics’ isn’t as much the spending as where the spending will go.” Read NEF’s Frank van Lerven’s piece explaining the difference between borrowing for investment and borrowing for increasing the wealth of the already-rich. 

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Free-market zealots in the driver’s seat. Commentary has shone a light on the influence of free-market ideologues over the government’s new economic strategy. The Spectator’s Fraser Nelson notes that Liz Truss’s “premiership has so far been distinguished by major decisions being taken by a tiny number of advisers, very much excluding her cabinet.” Those advisors include many alumni of free market think tanks. The IEA’s director, Mark Littlewood’s praised  the Chancellor’s “revolutionary new economic playbook” after the mini-budget was announced, arguing it “could be seen as merely the first move in a much wider and most intrepid game of economic chess”.

• Libertarians vs communitarians. Not all conservatives are happy. Onward’s Will Tanner argued that “the libertarians who claim a monopoly on conservatism are not, in fact, conservative” after the IEA’s Kristian Niemetz criticised “communitarian bores”. More splits have occurred between conservative environmentalists such as William Hague reiterating “why an attack on nature is a mistake Tories can avoid” after the IEA’s Andy Mayer called for scrapping the Net Zero target at their panel during the Conservative Party Conference. Unherd’s Aris Roussinos notes: “there is no home for postliberal Tories, always wary of the free market as a force destructive to tradition and social order, in the Conservative party that now exists…the libertarians have discredited their doctrine as electoral poison in a few short and tumultuous days.”

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Will they drive the Conservative’s electoral fortunes off a cliff? While the market reaction to the mini-budget may have been dramatic, it is the seismic shift in the polls that will really have Conservatives worried, with current numbers suggesting a landslide win for Labour at the next election. Boris Johnson’s former Director of Communications Lee Cain suggests that Liz Truss’ reputation may never recover because: “Beginning her tenure with a flurry of unpopular policies without considering how they would land as a package has allowed her opponents to frame her government as being in favour of the uber-wealthy, at the expense of those on lower incomes.” Cain also notes that “This will be exacerbated if the government drops the existing pledge to raise benefits in line with inflation.“ 

• The politics of austerity, again. Media commentary has pointed to the difficulty of finding departmental budgets with anything significant left to cut to pay for the tax cuts, but the FT’s Stephen Bush points out that political opposition on the Conservative benches also makes deeper rounds of austerity difficult to deliver: “There is no viable course on tax and spend which won’t be vetoed by one faction in her party or another”. This has played out over conference with senior Conservatives such as Michael Gove and cabinet member Penny Mordant voicing their opposition to rumours of uprating benefits inline with earnings rather than inflation. The Resolution Foundation calculated this could save £5bn, but reduce the already stretched incomes of low income families by £500 and “would therefore deepen - and extend - the cost of living crisis well into next year, and possibly beyond that”. NEF’s Frank van Lerven argued that “Instead of looking for funding cuts across the public services... it [the government] could stop paying interest altogether” on reserves it owes to commercial banks. (See NEF’s paper on the case for a tiered reserve monetary policy framework.)
• More tax cut U-turns coming? Tax Justice UK argue that the government should “scrap its inequality budget’, particularly given they are still committed to revoking the planned corporation tax rise, which costs a similar amount to the £18bn spending cuts coming to public services. NEF’s Jeevun Sandher calculated that more than half of the corporation tax cut will go to the most profitable companies and the IPPR’s George Dibb explained why won’t increase business investment. (Telegraph’s Ben Riley-Smith thinks the corporation tax vote won’t go through parliament until Spring.)

“A Fairer, Greener Future”. If there is one economic message Labour wanted people to take away from their party conference in Liverpool, it is that their plan for growth is a green industrial strategy. The Shadow Chancellor, Rachel Reeves, and later the Labour leader, Keir Starmer, used their conference speeches to outline an alternative to Liz Truss’ “trickle-down” vision for growth which Starmer says has “lost control of the economy” and “crashed the pound”. In launching a “Green Prosperity Plan”, Starmer regularly linked growth to the climate, outlining a future in which people look at Labour as the party that “built a fairer, greener, more dynamic Britain by tackling the climate emergency head on and used it to create the jobs, the industries, the opportunities of the future”. The word “mission” was used several times to describe the proposed Green Prosperity Plan, echoing Mariana Mazzucato’s language of a “mission economy” in which productivity, industrial strategy and strong economies are built by a state focus on country-wide missions. In this case, the mission is tackling the climate crisis, with Labour’s 2022 strategy putting meat on the bones of Rachel Reeve’s £28 billion climate pledge last year.

• National wealth fund. In plans outlined on Monday, Rachel Reeves announced that in Government, Labour would introduce a National Wealth Fund for green investment, inspired by the sovereign wealth funds of the likes of Norway and France. The fund would allow the state to retain a share in the renewable assets in which it invests. The £8 billion fund acts as Labour’s answer to levelling up, with £2 billion earmarked for eight new ‘gigafactories’ in the West Midlands, the North East, the North, West and the South West. A further £3 billion would be spent on six new clean steel plants Cardiff, Rotherham, Sheffield, Port Talbot and Scunthorpe. £1 billion of the fund is set aside to create “net-zero industrial clusters” in Grangemouth, South Wales, Humberside, Teesside, Merseyside, Southampton and the Peak District. Both Reeves and Starmer stressed the role of the private sector, with Starmer saying that Labour would “make sure” that public spending would spur on private investment. The New Statesman’s Freddie Hayward argues that the problem with the national wealth fund, along with Labour’s other big commitments, is that the economy is in a very different place to what it was back when Reeves began writing her speech in July.
• Great British Energy. One of the most significant announcements was saved for Starmer’s speech on Tuesday: the establishment of a publicly owned Great British Energy company within Labour’s first year. Starmer said that GB Energy would be “right for jobs…right for growth…right for energy independence from tyrants like Putin”. The plan does not involve nationalising any existing companies. Instead, GB Energy would enter the market as an energy producer that would compete with private firms. Though operationally independent, GB Energy would have a mandate to invest in clean energy, which it could do individually or in partnership with the private sector. Labour hopes that GB Energy would be able to make riskier investments, such as new tidal technology or modular reactors, that the private sector may often “shy away from”. Public ownership campaigners We Own It welcomed the move as “a hugely important first step” towards a shift in energy ownership. Common Wealth’s Mat Lawrence said that public ownership of energy was “superior and more affordable” due to the state’s ability to invest in clean energy technology at lower rates and the fact that it would not have to consider shareholder interests. 
• 2030 clean energy target. Labour’s proposed industrial strategy is underpinned by a mission to reach 100% clean energy by 2030, giving the party less than six years to achieve this mission should it come to power at the next general election in 2024. Targets include doubling the UK’s onshore wind capacity, trebling solar power, quadrupling offshore wind, investment in tidal, hydrogen, nuclear, carbon capture and the insulation of 19 million homes. Starmer hailed the mission, which would start within 100 days of governing, as “the biggest partnership between government, business and communities this country has ever seen”.  Right wing commentators have criticised the plans as hypocritical for still using fossil fuels as Labour have said that it would “maintain … a strategic reserve of backup gas power” if renewable resources were scarce. However, Carbon Brief’s Simon Evans argues that it is perfectly possible for the UK to rely 100% on clean energy, “even during so-called “kalte dunkelflaute” with cold weather and little wind or sun”.
• What business wants. Labour’s plans involve significant state intervention in the economy, but Labour insist they are more in tune with business opinion than the government. Rachel Reeves argued: “When I talk to businesses, they don’t tell me that their priority is corporation tax”. Likewise, “don’t be fooled into thinking they buy into the Tory trickle-down fantasy”, said Starmer. Instead, Labour affirmed its commitment to replacing business rates with a “fairer system”. While many welcomed the proposals, some businesses criticised the proposals as “woolly” and expressed concerns that business rates could be replaced with a Land Value Tax. 

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Public services. Starmer focused on public services for much of his speech, saying that “Strong public services are the foundation of a successful economy– always”. Labour have rejected a narrative that spending on public services must be balanced with helping the economy, instead arguing that long NHS waiting lists and expensive childcare are some of the factors undermining economic performance. However, Starmer also warned that while he “would love to stand here and say Labour will fix everything”, the “damage [the Conservatives] have done” will mean that “the rescue will be harder than ever”. 

• Health. Health made up a large chunk of Labour’s announcements on public services, with Shadow Health Secretary, Wes Streeting, stressing the need to “modernise and change the NHS”. NHS workforce announcements included doubling the number of medical training places and creating an extra 10,000 nursing and midwifery clinical placements each year. Streeting also announced 8,500 additional mental health workers while Rachel Reeves affirmed last year’s pledge of one month waiting times for mental health support. 
• Childcare. Shadow Education Secretary Bridget Phillipson used her speech to focus heavily on childcare announcements, saying that a Labour government would “build a modern childcare system” including fully funded breakfast clubs for every primary school in England. Phillipson used social infrastructure framing around her childcare announcements, saying that giving “mams and dads choices” would “help us build the economy we all need and the society we all want”. Labour have hinted that more policy on childcare will be forthcoming, and a new internal pressure group has been formed to argue for childcare reform.

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Equality and work. The government’s new economic strategy also opened the space for Labour to make a more philosophical argument about the relationship between equality and prosperity, with Starmer saying that “Britain won’t be better off just because we make the rich, richer”. Inequality and low pay were central to Starmer’s critique of Britain’s low growth, arguing that insecure, low-paid work and public services that can’t support people make for “weak” economic foundations for growing an economy. 

• Pay. Rachel Reeves announced that Labour would introduce a “genuine Living Wage” that “reflects the real cost of living”, though what this figure would exactly be is so far unclear. The announcement comes as the Living Wage Foundation, supported by Resolution Foundation research, raised its living wage by the largest margin since it was established to £10.90 an hour (£11.95 in London). The TUC has previously called for a £15 minimum wage.
• Industrial relations. Rachel Reeves announced that if elected, she would “bring together a National Economic Council that will bring together industry and trade unions, so working people and businesses were at the heart of economic decision-making”. The Guardian’s Larry Elliot described the announcement as “a revival of the tripartite approach pioneered in the early 1960s and scrapped by John Major three decades later”. This comes on the back of a previous set of policies dubbed a ‘New Deal for Working People’ including fair pay agreements.
• Tax. Labour have said they would not reverse the Government’s cut in the basic rate of income tax, but there was a clear message that tax cuts for the rich would not be welcome in a Labour government. On the Government’s recent cut in the top rate of tax, Starmer told conference: “Don’t Forgive. Don’t Forget”. He also suggested that corporation tax cuts are not a priority for business. 
• Home ownership. Starmer pitched Labour as “the party of home ownership in Britain today”, setting a target of 70% home ownership. The Labour leader also stressed that home ownership support will be focused on first time buyers, saying that Labour would introduce a mortgage guarantee scheme. 

£45bn worth of tax cuts by 2026/7. Chancellor Kwasi Kwarteng announced the biggest tax cutting event since 1972 in a ‘mini-budget’ aimed at ending the UK economy’s ‘cycle of stagnation’ and boosting growth. The IFS’s Paul Johnson noted the similarities with former chancellor Anthony Barber’s attempted a ‘dash for growth’ via tax cuts, which ultimately failed and led to stagflation. The Resolution Foundation notes that “the decision to combine the largely unavoidable higher deficit caused by rising energy prices/interest rates with permanent tax cuts will drive up borrowing by £411bn in coming years”. (NB. See NEF’s Frank van Lerven’s paper explaining when borrowing is good and when it is bad.)

• Growth via tax cuts? 'Growth is not as high as it needs to be, which has made it harder to pay for public services, requiring taxes to rise,' said Kwarteng. 'This cycle of stagnation has led to the tax burden being forecast to reach the highest levels since the late 1940s. We are determined to break that cycle. We need a new approach for a new era focused on growth'. (For more resources on the relationship between tax cuts and economic growth, read our previous digest.)
• This approach lacks evidence. Trickle down economics has been debunked, perhaps most comprehensively by analysis published by the LSE which found that tax cuts for the rich have not had a significant impact on unemployment or growth, but they have increased income inequality. IIPP’s Josh Ryan-Collins provided a thorough critique of the package as a strategy to increase economic growth: “Firstly, it is well established that tax cuts have a weaker impact on growth than public spending, as households and firms save a proportion of the new income. Second, wealthier people tend to spend a smaller proportion of any new income than poorer households, so further weakening the multiplier effect of the borrowing. Third, the major challenge facing the UK economy is a lack of public and private capital investment; and there is no evidence that cutting business or personal taxes results in more investment, employment or growth.” 

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Which taxes have been cut? 

• Income tax. The 45% higher rate of income tax has been abolished and the basic rate of income tax will be cut to 19p in April 2023 (a year earlier than planned). IPPR’s Henry Parkes calculated that the personal income tax cuts “overwhelmingly channel cash to the richest households, with nearly half (48%) going to the richest decile” and those who live in London and the South East.
• NICs. The government will cancel the increase in National Insurance Contributions in November. This was originally dubbed as the ‘Health and Social Care Levy’, branded to raise money for the NHS. However achieving the Chancellor’s key metric for fiscal sustainability (falling debt) by the mid-20s will require spending cuts of £35bn by 2026-27.
• Corporation tax. Kwarteng cancelled the planned corporation tax rise to 25% which was previously promised by ex-Chancellor Rishi Sunak. The new chancellor vowed 'we will have the lowest rate of corporation tax in the G20’, but, as the BBC’s Andy Verity notes, business tax cuts don’t necessarily lead to growth, e.g. if £18bn worth of tax cuts gets spent share buybacks rather than investments that improve productivity. Further, the Women’s Budget Group notes that this cut will largely benefit men, who are more likely to be businesses owners and shareholders.
• Investment zones. The Chancellor announced the government is “in discussions with 38 local authorities to establish investment zones in England.” These are areas with localised deregulated planning permission and lower taxes aimed to “encourage rapid development and business investment”. Fair Tax Foundation’s Paul Monaghan explained how this “mini-tax haven network” distorts local economic activity and depresses areas around the zones as firms move to exploit tax and regulatory advantages. Women’s Budget Group highlights HMT’s previous studies which showed enterprise zones only creating 32% of the jobs expected, which were mainly low-skilled.
• Stamp duty. The government raised stamp duty threshold from £125,000 to £250,000 and also increased the threshold for first-time buyers to pay stamp duty from £300,000 to £425,000 and enabled them to claim relief on properties up to a value of £625,000 (up from £500,000), partly as an attempt to prop up a housing market that is being depressed by spiralling mortgage costs. NEF’s Frank van Lerven notes that stamp duty cuts increase asset prices and make housing more unaffordable. Housing market analyst Neal Hudson notes that the previous stamp duty holidays were “a tax cut for the top end of the housing market with large numbers of investors and second home buyers also taking advantage of the savings”. IPPR’s Shreya Nanda argues replacing stamp duty with an ongoing proportional property tax would be a fairer way of building a stronger economy. Her previous paper outlines the economic benefits and explains how the political barriers could be overcome.
• Other measures. Aside from tax cuts, the mini-budget also included a number of other controversial measures. The Chancellor placed further restrictions on the right to strike, with a pledge to introduce minimum service levels and to force unions to ballot on every pay offer. There was also an announcement of further obligations on universal credit claimants to demonstrate they are seeking work or face cuts to their benefits (See our previous digest for more on the economics of sanctions). In a move welcomed by climate campaigners, the Chancellor lifted the restrictions on onshore wind development, and provided a small amount of extra money for home insulation projects.

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Responses: Tax cuts mainly benefit rich men. Many responses highlighted the distributional impact of the tax cuts being “one of the most regressive in living memory”. The Resolution Foundation calculated that almost half (45%) of the gains from personal tax cuts will go to the richest 5% alone, while just 12% of the gains will go to the poorest half of households. Women’s Budget Group have calculated that “Around 80% of those who benefit from the nearly £2.4bn a year spent cutting the 45% tax rate will be men” and that “77% of workers who earn too little to pay income tax, so will gain nothing from the nearly £5.3bn a year spent cutting the basic rate, are women.” The TUC dubbed the budget “Robin Hood in reverse”.

• Inflation and monetary policy. Financial markets appear to have lost confidence in the government, with the pound at a 37-year low against the dollar at the time of writing and yields on 10-year government debt jumping to almost 4%. IIPP’s Josh Ryan Collins notes that the collapse in the exchange rate will add even more inflationary pressure through rising import costs. The tax cuts are likely to provoke a sharper contractionary response from the Bank of England, which already increased interest rates again this week; the market is potentially predicting an unprecedented emergency hike and foreign central banks have also been applying pressure. 
• Free market think tanks in the driving seat. ConservativeHome’s Founder Tim Montgomerie called the mini-budget a “massive moment” for free market think tank, the IEA, who have been advocating for many tax cuts for years. Similarly, the CPS’s Director Robert Colvile called it a “CPS full house”. The TaxPayers’ Alliance’s John O’Connell welcomed “the most taxpayer-friendly budget in recent memory” and called on the Treasury to “get serious on spending and ensure borrowing doesn’t weigh down on generations to come.” ‍
• Public not convinced. Snap polling from YouGov gas found that the tax package is being met with scepticism by voters. 52% of voters said they thought the measures would not be effective at growing the economy, compared to just 19% who think it will lead to growth. Meanwhile only 19% of voters think the budget will leave them better off, and an overwhelming majority think that the richest in society will benefit the most. Interestingly, even a majority of Conservative voters agree with this assessment. Further polling by Patriotic Millionaires found strong support (70%) for raising taxes on extreme wealth to help cover the cost of living crisis and pay for public services, with a majority (64%) of Conservative voters also in agreement.

Energy Price Guarantee. Freezing consumer energy prices at current levels or below has become a key policy demand from all sides of the political spectrum over recent months (see our recent New Economy Digest where we have examined various proposals to freeze the energy price cap). Pressure on the government to take action intensified over the summer as Ofgem announced that the energy price cap would increase to £3,549 per year from October. Last week, after mounting pressure, the new Prime Minister Liz Truss announced an ‘Energy Price Guarantee’ package which will limit average annual household bills to £2,500 over the next two years. The plan also involves retaining the £400 energy bill discount as well as a temporary suspension of green levies, bringing down bills by a further £150. 

• Support for businesses. Though support for households spans a two year period, support for businesses and non-domestic energy users is capped at six months. After this, the Government will provide targeted support to “vulnerable industries” following a review of the businesses that need to be targeted. However, businesses may face delays of several weeks in receiving this support. Emma McClarkin, the chief executive of industry body, the British Beer and Pub Association, said these businesses “will not be able to wait days, let alone months to get clarity on their energy bill”. The TUC has highlighted that there is no guarantee that the support for businesses will be used to protect jobs. 
• Liquidity support for energy companies. The plan will not be funded, as some have suggested, through further windfall taxes on energy companies. Instead, the Government will provide a £40 billion “liquidity facility” to support energy companies deal with market volatility. Progressive Economy Forum’s James Meadway compares the six month package for regular businesses with “the extraordinary generosity the government has found for the energy companies” through liquidity support. However, even this support for energy “middlemen” pales in comparison to the excess profits that energy producers will be able to continue making thanks to the government scheme, he argues. 
• Oil and gas extraction. The Government aims to increase domestic energy production by controversially lifting the ban on fracking and licensing new North Sea oil and gas projects. The first fracking licence in nearly three years is due to be issued as soon as next week, despite warnings from the British Geological Survey (BGS) about the “significant existing knowledge gaps” on the link between earthquakes and fracking. The publication of the report has been postponed due to the death of Queen Elizabeth II. “A wave of protests” is likely over the coming months as campaigners plan to step up action in response to Government plans to double down on fossil fuel extraction.

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Is it enough? The Energy Price Guarantee caps bills at £2,500 per year, which is still significantly higher than last year’s cap of £1,138. Some have criticised the plan for not targeting support to lower income households. The Institute for Fiscal Studies outlines how over half of the £60 billion earmarked for households will go to the top half of the income distribution. Consumer finance expert Martin Lewis also highlighted that the plan “means those with the biggest bills (often the wealthiest) gain the most”. Through the case study of one family, the Guardian explores how households will still suffer this winter despite the Energy Price Guarantee.

• Won’t somebody think of the price signal? One additional criticism of a price freeze is that it will do little to discourage energy saving in a time of scarcity as it disrupts the price signal. Some have warned that this could lead to blackouts and rationing this winter. 
• Impact on inflation. The Government has argued that its new plan will curb inflation, but figures suggest that lowering energy prices, rather than maintaining them, would have a much more significant impact on inflation. Research conducted by the Institute for Public Policy Research (IPPR) finds that while maintaining energy bills at current levels could reduce projected inflation by 3.9%, lowering prices to the level of the October 2021 cap could reduce project inflation by 5.6%. 

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Funding the freeze. The Telegraph reports that the government is still unclear about the exact cost of the scheme, and may only announce the cost for an initial period of a few months. The plan is expected to cost around £150 billion, however this could be more depending on the wholesale gas market. For comparison, £70 billion was allocated to the pandemic furlough scheme. It will be funded by borrowing rather than an extension of the windfall tax on energy companies as many have called for, however this has not been outlined in any great detail. The Institute for Fiscal Studies’ Paul Johnson said: “Given the scale of the package, the failure to provide any official sense of a costing was extraordinary, and deeply disappointing”.  

• “Tax profits properly”. Energy bill support could be partially funded by a 95% tax on the “record breaking profits” of oil and gas producers, according to Tax Justice UK. Tax Justice UK’s analysis shows that UK oil and gas producers are predicted to make £51 billion in excess profits over the next year, which is nearly four times more than the £13.5bn excess profits predicted in May. Such a tax would raise £44 billion a year for two years, which would represent a significant chunk of the £150 billion expected to be spent on the Energy Price Guarantee. 
• Creating future problems. Despite the opportunity to raise revenue through taxing excess profits, the Government’s decision to fund the scheme through borrowing is “an unnecessary waste of its capacity to borrow and creating the risk of a future row about the size of the government debt and the need for spending cuts”, argues James Meadway. Stephen Bush argues that this marks a “new fiscal policy era” in which borrowing is the order of the day. 

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Free basic energy? An alternative plan has been put forward by the New Economics Foundation, who argue that a short-term price freeze should be superseded by tariff reform including a system of free basic energy. Under this system households would be entitled to a basic allowance of free energy, with additional usage charged in rising block tariffs. NEF’s Alfie Stirling argues that this would protect the lowest income households and discourage excess energy usage, while costing the government less than the price freeze. NEF has also proposed a new energy element of universal credit to ensure more targeted support.

Green finance. While most proposals for funding the green transition focus on fiscal policy, private financing will also play a key role as the need for more green investment intensifies. Creating the conditions for that private green investment is a key policy challenge, and one that governments around the world are grappling with. Much of the debate so far has occurred in an era of historically low interest rates, but that era may be coming to a close with rising base rates in response to high inflation. How to adapt to this new lending environment becomes increasingly urgent as there is a risk of vital green investment slowing down at a point where we need it to accelerate.

• The green finance gap. This year, the UK government received two awards from the Climate Bonds Initiative (CBI) for its work as a “global leader in green finance”. This comes despite the fact that there is a large gap in green finance with the Climate Change Committee estimating that annual capital investment needs to increase by around £50 billion per year in the second half of the decade.
• Private sector investment. Private sector green investment currently falls far short of what is needed according to Office for Budget Responsibility (OBR) statistics. The OBR estimates that private sector investment must exceed £30bn of additional green investment over the next three years which would be a 10% rise from current levels. However, UK private sector green investment grew by roughly 0% in the three years leading up to the pandemic meaning that this would be a significant jump. At the same time, since signing the Paris Agreement, UK banks have financed over £287 billion worth of fossil fuel projects with over £200 billion of this coming from HSBC and Barclays alone. 
• Interest rates and the impact on green finance. In 2020, the Climate Change Committee argued that “historically low interest rates” should be taken advantage of to further green investment. However, as inflationary pressures have grown this year and central banks have steadily increased base rates, green finance is already starting to suffer. The issuance of green bonds globally fell by 34.63% from the first quarter of 2021 to the first quarter of 2022, according to the Climate Bonds Initiative, or CBI. China was the leading issuer for green debt in the first three months of 2022 with $21.4 billion green bonds issued, followed by Germany and France. 
• Financial Services and Markets Bill. The Financial Service and Markets Bill has its second reading in the House of Commons on 7 September and is an opportunity to implement a statutory objective requiring regulators to ensure financial institutions make progress against their net zero transition plans, according to Green Alliance. For more on the bill, see our previous Digest. 

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Greening targeted credit policy. The Bank of England must adapt its “policy toolkit” to combat the climate and cost of living crises, according to a new report by the New Economics Foundation (NEF). NEF argues that instead of “demand management relying on a blunt single interest rate tool”, green targeted credit policy interventions could both help the transition to net zero while also enabling the bank to better meet its price and financial stability targets. The report notes that both China and Japan have recently greened their targeted credit policy in the form of refinancing operations providing cheap credit to banks to lend for sustainable investments. NEF makes five recommendations for how to green targeted credit policy: 

• Repurposing the Term Funding Scheme (TFS). The TFS offers funding to banks lending to businesses and households on specific conditions on rates either close to or at the base rate. The TFS could be used to incentivise projects such as retrofitting or investment in electric vehicles and related infrastructure. 
• Decarbonise the existing TFS. As well as steering the TFS towards green investment, NEF also suggests ensuring that the current TFS is not implicitly subsidising banks to lend to carbon intensive activities. 
• Additional TFS conditionality. The TFS already requires banks to prove that they are using the TFS to expand their lending to households and firms, so a green TFS must also require evidence of lending to green initiatives, NEF argues. 
• Bank lending metrics and targets. While the Bank of England’s remit now accounts for climate change, it does not put quantitative targets on the central bank to plug the green investment gap. NEF suggests this should be changed and that a green TFS could be part of new quantitative targets.‍
• Lending to state-owned investment banks. Finally, NEF suggests that the TFS could be extended to the state-owned investment banks: the UK Infrastructure Bank and the British Business Bank in order to boost lending to the alternative banking sector and transition activities by small businesses.

Drought, flash floods and extreme weather. Heavy downpours hit parts of the UK last week resulting in flash floods in the South East, and the closure of train platforms and theatres in London. The flooding came after experts warned that rain would “offer little relief” after the driest spell in almost 50 years. Several parts of the country have announced hosepipe bans including Thames Water, Yorkshire Water and Southern Water. Recent flash floods have also caused serious problems in other parts of Europe as well as western China where at least 16 people have died due to the recent extreme weather.

• UK adaptation to climate change. Last October, the Environment Agency warned the government to “Adapt or Die”, pointing to the impacts of more extreme weather from increased rainfall and flooding in the UK in a 2 degree warming trajectory. 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 3rd 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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Water companies. The UK’s current water crisis has been dramatically compounded by a myriad of failings by water companies. The Environment Agency has described the environmental performance of England’s nine water companies as “the worst we have seen for years”. 

• Sewage dumping. Companies have recently come under heavy criticism for the huge increase in the amount of raw sewage they have pumped into seas and rivers. According to new figures from the Environment Agency, since 2016 raw sewage has been pumped into waters around the UK for more than nine million hours. Despite the Environment Agency reporting faulty monitoring systems, data shows a 2,553 per cent increase over five years in the amount of sewage found in seas and rivers. Environmentalists unsuccessfully pushed for a legal duty on water companies to stop discharging raw sewage into rivers in the Environment Act 2021. However, after a House of Lords revolt, the bill was amended to require companies to deliver a “progressive reduction” in sewage. 
• Water wastage. Water companies in England and Wales lost more than one trillion litres of water via leaky pipes last year, according to Ofwat. This equates to 2.9 billion litres per day which, if spread across an area of the same width and depth as an olympic swimming pool, would stretch from Westminster to Reading. 
• Where are all the reservoirs? The National Farmers Union (NFU) has called on both Conservative leadership candidates to tackle “immoral” water wastage as farmers worry about the effect of the drought on their crops and call for more reservoirs to be built. According to the former head of Natural England, water companies have sold off 25 reservoirs since the 1980s and have not replaced them. 

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Has privatisation been a failure? As the water and sewage crises worsen, many (including Jonathan Portes who worked on the privatisation of water companies in 1989) argue that the private ownership of these companies is to blame. “It’s time to admit that water privatisation has been a failure”, argues former David Cameron advisor Camilla Cavendish, saying that “as customers, we are captives with nowhere else to go”. Similarly, musician and campaigner Feargal Sharkey recently argued that the current crisis is the result of “30 years of underinvestment, 30 years of regulatory failure, 30 years of mismanagement and all of it topped off with 30 years of a political vacuum, devoid of oversight and scrutiny”.

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Calls for renationalisation. The Green Party has called for the renationalisation of water companies to “end the scandal of wasted water”, as has the Guardian, which argued in an editorial that services such as water “can clearly be managed by the state in a way that makes sense”. We Own It has long campaigned for the public ownership of water, with director Cat Hobbs arguing that as the UK anticipates an increase in extreme weather, “we need to bring water into public hands so it can be run for people, not profit”. The renationalisation of water is overwhelmingly popular with the public, with 91% of Express readers saying that they would back bringing private water companies back into public control.

• Funding. One argument frequently put forward in defense of water privatisation, for example by Director of the Centre for Policy Studies, Robert Colville, is that it plugged an investment gap, after an “extraordinary backlog” under nationalisation. However, water privatisation has failed to deliver a promised “new era of infrastructure funding”, argues Paul Waugh. Since privatisation, water companies have borrowed large amounts of debt not for investment, but to pay for dividends. In contrast, all £123 billion of capital expenditure since 1991 has been financed by customer bills. Similarly, Labour for a Green New Deal’s Chris Saltmarsh argues that “if we do not remove the profit-motive from our water system, we will not see investment in infrastructure upgrades”.
• “Nationalisation by stealth”. The project of bringing water back into public ownership must start with regulation, argues Paul Mason. “The regulator has to set prices and profits so low that only a non-profit or mutual ownership structure makes sense. Then the government has to oversee the creation of successor companies to privateers… by creating democratically elected regional water authorities to oversee a sector composed largely of mutuals or public corporations, you would achieve something close to “common ownership” by stealth”, Mason explains. 
• Other ownership options. The “straightforward state ownership through nationalisation… is not the only alternative”, according to a paper by Common Wealth. Public-common partnerships (PCPs) could “be used to govern a diverse range of assets”, such as water companies, it argues. PCPs enable communities to work with local authorities in a “commons-led approach” for collective ownership. 
• “Build back wetter”. Water management should be “considered one of the key ‘public goods’ we provide through public money”, argues Ali Morse of the Wildlife Trusts. Beyond ownership, public intervention could look like an effort to “build back wetter”, Morse argues, describing how the restoration of wetlands can “play an important role in retaining more water”. 

The policy debate around rising energy bills. Politicians from different parties have proposed freezing the Energy Price Cap at its current level as a way of easing the impact of rising energy bills, which the latest forecasts predict to reach £3,582 on average per year from October and £4,266 a year by January 2024. Labour outlined their £28.9bn plans to freeze the energy price cap for six months, amongst other measures. This followed similar calls from Liberal Democrat leader Ed Davey, the SNP’s Nicola Sturgeon and former Prime Minister Gordon Brown. 

• Inaction will lead to a bleak winter for many. The Bank of England now estimates the UK inflation rate to peak at 13% this year. As a result, households face a once-in-a-generation fall in their real incomes. And inflation is not predicted to fall back to its 2 per cent target until 2024. The latest forecasts show the expected annual real pay will fall by an unprecedented 7.75% in the last quarter of 2022 as inflation erodes disposable incomes. This marks the biggest quarterly fall in real wages for 100 years, which comes after the longest wage squeeze (period of stagnant wages) for 200 years. Analysis carried out for CPAG shows that more than half of British households will be in fuel poverty by October and two-thirds by January; 6m households will be forced to spend an unprecedented 25% of their income on energy. The Resolution Foundation calculated that almost half of annual gas use occurs in the January - March period, where the typical household could find its energy bills rising from £82 a month this summer to over £500 a month. 
• What is the government currently planning? The Times reports that the Treasury under Nadhim Zahawi is planning a government-backed lending scheme to compensate suppliers and enable them to cut an extra £400 off energy bills, costing £9bn. Whether this is adopted or not will depend on who wins the Conservative leadership election; Liz Truss has flip flopped about whether to provide more “handouts” and emphasised her preference for tax cuts over direct payments (read our previous digest on the limitations of using tax cuts to ease the cost of living crisis) and Rishi Sunak proposed scrapping VAT on energy bills and extending the Energy Bill Rebate to provide targeted financial support for pensioners and the most vulnerable. 

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Reducing inflation with fiscal policy. The Bank of England estimates that half of the headline rate of inflation is due to rising energy and food prices. New analysis from IPPR calculates that freezing the Energy Price Cap at its current level could reduce the peak rate of inflation by 3.9% from 13% to 9.1% and save households £2,050 on average in energy bills over the next year, costing £45bn - less than Liz Truss’ £50bn plan for tax cuts and extra spending. If this was funded, at least partially through windfall and/or wealth taxes, inflation could be reduced by a further 0.7%. (IPPR also calculated that reducing the Energy Price Cap to its November 2021 level could reduce the peak rate of inflation by 5.6% from 13% to 7.4% and save households £2,744 on average, costing £60bn. If this was funded, at least partially through windfall and/or wealth taxes, inflation could be reduced by a further 0.9%.) 

• The Bank of England’s contractionary response isn’t working. Criticism is mounting over conventional monetary policy’s failure to tackle inflation properly. The Bank of England is trying to prevent inflation becoming embedded into expectations through ‘second round effects’ of price increases spreading to other goods and services. Earlier this month the Monetary Policy Committee was criticised for the largest interest rate rise since 1995 even though it will have little immediate impact on today’s inflation and is likely to exacerbate the now-forecast recession. The TUC argues this will further erode household incomes through the loss of one million jobs. 
• ‘Fiscal price caps’ are a more effective response to the cost of living crisis. IPPR argue that ‘fiscal price caps’, such as setting an upper limit for the energy price, subsidised through fiscal policy, could reduce inflation straight away, protect households from the increase in bills this winter, and help prevent inflation from becoming embedded by reducing the risk of further snowballing price rises in the future. About half of European economies have some form of price limiting measure in place; e.g. the French government has frozen gas prices and limited electricity increases to 4 per cent, with an estimated cost of €38 billion. 

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Funding the energy price cap freeze.  Labour argues their £28.9bn proposal can be funded by backdating the windfall tax imposed in May to January and closing the investment loophole that grants oil and gas producers a tax break worth up to 91p in every £1, scrapping the £400 Energy Bill Rebate and by making £7bn in savings on debt interest payments by reducing inflation. The IFS’s Paul Johnson called this latter point as an ‘illusion’ because it wouldn’t bring inflation down permanently, however IPPR argues that it could have a significant effect by reanchoring expectations and reducing ‘second round effects’. (A YouGov poll for the Times found that 75% of Conservative voters support “fixing the cap on energy bills even if it means more government borrowing”.)

• Consider other options as revenue-raisers. Windfall and wealth taxes have also been proposed as revenue-raising options to fund proposals to reduce inflation and stabilise energy prices. Tax Justice UK modeled how a 95% tax on excess profits could raise £12.9bn instead of the £5bn in the government's package. (NB The tax rate on oil and gas was 75% in 2015 and 80% in 2014, and the global average is 70%.) Excess profits taxes could also be expanded to other sectors (e.g. commodities companies) that have been reaping windfall profits, as argued here by IPPR’s Carys Roberts. (Read the first report from Unite’s Corporate Profiteering and the Cost of Living Crisis. Private Eye exposes the profits of top companies benefiting from the pandemic, with testing company Randox Laboratories Ltd making £308 million in profit since the pandemic having only made a profit of £12 million before Covid.) The package could also be accompanied by reforms to the UK’s unequal taxation of wealth. Rebalancing taxes on work and wealth has increasing support on the centre-right. 

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Criticism and counterarguments. The proposal has come under fire for a variety of reasons, detailed below. One free market counterargument was given by IEA fellow Julian Jessop, who argued that price caps distort price signals such as “increasing the incentives for producers to raise output and for consumers to economise”. IPPR provides a rebuttal to this, arguing that a 73% increase in energy prices since last year is enough of a strong incentive to transition to lower carbon homes, and freezing the energy price cap at its current level should always come in combination with another package of support to increase investment in clean energy and energy efficiency upgrades, such as Labour’s ‘energy efficiency revolution’.

• Why not target support at those that need it most? Labour’s plan has also been criticised by economists, such as Tax Research Network’s Richard Murphy, on the basis that it “delivers a significant gain to the best off households”. However Resolution Foundation Chief Economist Mike Brewer argues that the higher prices go, the more justification there is for a universal intervention while the FT’s Stephen Bush points out that even among the richest fifth of households, median income is £62,700, so there is a case for intervening high up the income distribution. (A YouGov poll for the Times shows voters slightly favouring support applied equally to all households (47%) than means tested (40%).)

• What about other types of support? IPPR have argued that, though gas prices could remain well above their 2021 levels until 2025, freezing the price cap in place for an extended period has “significant costs”. They argue that “Instead, it could be better to use the time provided by a one-year freeze to put in place a ‘social-tariff’, a measure designed to cap or reduce energy bills for those on the lowest incomes, and accelerate a programme of clean energy and reducing energy demand through home retrofit (though the benefits of the latter two policies will take time to come to fruition).” Retrofitting proposals, such as NEF’s Great Homes Upgrade, and income support proposals such as a Living Income could be seen as complimentary packages and not mutually exclusive. The TUC’s Kate Bell argues that the price cap freeze should come alongside other measures such as increases to social security and minimum wage “at least in line with inflation to October”, funding decent public sector pay rises, fair pay agreements and replacing Universal Credit with a decent system paid at 80% of minimum wage.
• What about businesses? The FSB has been calling for more support as the Energy Price Cap and cost of living packages of support have so far failed to protect businesses from rising costs, some of which are facing five-fold increases in their energy bills. Commenting on the FSB’s Small Business Index, the FT’s Oliver Barnes predicts that “many SMEs, which together employ around three-fifths of the UK’s workforce, will probably collapse without government intervention”. IPPR’s paper suggests that the energy price cap could be broadened to cover all or some businesses, which could further reduce the headline rate of inflation as high energy costs are likely to be feeding into non-energy price rises. (The Mirror’s Dan Bloom also reports that some schools are considering shutting at least one day a week to protect already stretched budgets from rising heating bills. NHS trusts are also struggling with rising energy costs.)

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Public ownership for bankrupted suppliers. So far, Ofgem’s logic in increasing the energy price cap has been to prevent energy suppliers making losses and eventually going bankrupt, which in turn would force consumers to absorb additional costs. (Martin Lewis has argued that “at every turn, in these desperate times where lives are at risk, [Ofgem] has ignored all asks for consumers and instead kowtowed to the industry”.) Bulb was bailed out by the taxpayer when it collapsed last winter, but campaigners such as We Own It want to see it nationalised on a more permanent basis.

• Prioritising protecting households over shareholders. Even energy companies have suggested freezing the level of the energy price cap, but their proposal still involves funds flowing to the shareholders of energy companies as the government might provide loans (up to £50bn to cover 22 million households) repaid over 10 to 15 years, “either by suppliers adding a small surcharge to customers’ bills, or through adding the cost to general taxation.” While Gordon Brown proposed temporary renationalisation of failed energy suppliers in his intervention, Starmer steered clear of committing to nationalisation of energy companies, arguing that all funds should go to compensating households rather than shareholders. (This article explores how much compensation a future Labour government might have to pay foreign energy investors if their 2019 manifesto proposals to nationalise energy were implemented.) However, Common Wealth argues that “unless the energy market is transformed, substantial parts of the £29bn package risks flowing to shareholders. A simpler, practical approach is public ownership: removing rent extraction and to deliver value for money.” 
• Nationalisation is affordable, popular and can reduce bills. The TUC calculates that energy retail company bailouts have so far cost £2.7bn, and taking the Big Five energy retail firms into public ownership would cost just £2.85bn, reduce bills, speed up energy efficiency improvements to homes and cut carbon emissions faster. New polling from We Own It found that 66% of voters support energy being in the public sector. Evidence from 15 Western European countries over the last 30 years has shown that energy prices are 20-30% lower in systems that have publicly owned energy suppliers. ‍
• Paradigm shift towards public ownership? PEF’s James Meadway argues that the “crucial point with the price cap freeze” is that “it has now been tacitly accepted that government *can* interfere in the price mechanism to help deal with inflation. [This is a] major breach in the neoliberal theology that inflation is something *only* the central bank and interest rates can deal with.” Tom Collinge, Progressive Britain’s Head of Policy and Comms, suggested that energy security “clearly cannot be left to the market” and that while not providing a short term solution to price rises, nationalisation “is a long term, structural, solution to long term, structural problems.” The Mail on Sunday’s Dan Hodges argued that “if the major private utilities are unable to provide basic services to their customers at a price that is affordable they should be brought under public control. Not handed subsidies… If the market fails, the state should step in and replace it.”

Prime Minister Liz Truss? Liz Truss has maintained and extended her lead over fellow Conservative leadership contender Rishi Sunak, despite several U-turns, most notably on regional public sector pay. According to Politico’s Poll of Polls, Liz Truss leads with the backing of 56% of Conservative members compared to Rishi Sunak’s 32% and 11% who don’t know. Neither candidate is currently performing as well among the wider electorate, however, with a YouGov poll finding that Liz Truss would not increase the Conservatives’ support.

• Who’s who. Politico has produced a handy guide to Conservative MP support for each candidate, including analysis of the political breakdown of Truss and Sunak supporters. 80% of those publicly backing Truss, for example, either supported Brexit during the referendum or have publicly stated their conversion to Brexit, while just over 40% of Sunak supporters are pro-Brexit. More than twice as many ‘red wall’ Conservative MPs back Truss (12) over Sunak (5), while Sunak has nearly double the number of ‘Traditional Tory’ supporters than Truss. 
• But, what about the members? Analysing the political divides behind Conservative member support for Truss and Sunak is a whole different story. The New Statesman’s Charlotte Ivers explains why demographic data on “the most powerful people you have never heard of'' is notoriously sparse and outlines the effect this has on polling.
• Appealing to the right. What we do know about Conservative members is that they like right wing policies and that appealing to this majority faction may be the key to Truss’ success, argues polling expert John Curtice. 54% back Liz Truss’ tax cut pledge while only 37% agree with Rishi Sunak’s argument that tax cuts could fuel inflation.
• Truss’ cabinet. As Truss remains the hopeful to be the next Prime Minister, speculation is well underway over who may be in her cabinet. Close ally and current Secretary of State for Business Kwasi Kwarteng is widely tipped to be chosen as Truss’ Chancellor. Kwarteng famously co-authored Britannia Unchained with the leadership frontrunner along with Priti Patel, Dominic Raab and Chris Skidmore. Others tipped for cabinet positions include Ian Duncan Smith, Suella Braverman, Simon Clarke and Kemi Badenoch. ‍
• Jumping ship. The Mail on Sunday reports that several members of the current Sunak camp have been in talks with Team Truss about joining her campaign as her lead widens. 

Economic policy. Throughout the leadership contest, economic policy - particularly taxation - has been at the heart of deep divides between the two candidates. Tax cuts are central to Truss’ campaign, where proposals include reversing national insurance increases, cancelling the planned corporation tax rise and temporarily removing green energy levies on electricity bills. While her opponent argues that tax cuts could fuel inflation, Truss has maintained that her plan could actually avoid recession. (Read Politico's piece on how Trussonomics differs from the 'sound money' principles of previous Conservative governments.)

• Tax. Though originally pledging to reverse the recent rise in National Insurance in April next year, Liz Truss now plans to rush through tax cuts in a September emergency budget. Writing for the Telegraph, the frontrunner confirmed her plans to cut taxes immediately, which could see cuts come into effect as soon as November. Truss appears to have surrounded herself with fellow low-tax Conservatives. Kwasi Kwarteng, tipped to become her Chancellor if elected, is a low-tax, free-marketeer who repeatedly clashed with Rishi Sunak in government over windfall taxes and net zero.
• Tax cut pushback. The reversal of tax rises would boost inflation and fail to boost growth, argues Conservative Home’s William Atkinson. What’s more, the public do not want tax cuts if it means spending cuts, according to a poll by Opinium. About a third (34%) of those surveyed said taxes and spending on public services should remain at current levels, while 26% think there should be an increase in tax to increase funding. Just over a fifth said that taxes should be reduced and less spent on public services. For more on the debate around tax cuts and inflation, see our Digest. 
• Growth. Truss has described the UK’s lack of economic growth as “the number one problem in this country” and has used this to justify her proposals for tax cuts. She links this to her commitment to government reform, stating that “happiness is a faster-growing private sector than public sector” in an interview with Conservative Home. 
• Handouts. Faced with a growing cost of living crisis, Truss has made the case against ‘handouts’, arguing that lowering the tax burden is the “Conservative way” to ease cost pressures. As the energy price cap is due to rise, many have interpreted this as Truss rejecting support packages in the Autumn. However, her team insists that she has not in fact ruled out cost of living support, with opponents accusing her of making yet another U-turn. 
• Bank of England. As the Bank of England warns that the UK will fall into recession this year, Truss’ camp has adopted a hostile tone towards the central bank. Supporter Kwasi Kwarteng argued that “clearly something has gone wrong” in the Bank’s handling of inflation and suggested that base rates could have been raised “slightly sooner”. In the Spectator, Matthew Lynn goes as far as to suggest that the Bank of England’s recent move to raise interest rates by half a percentage point was influenced by Liz Truss’ repeated argument that the bank has been too relaxed about inflation. Truss has said that she would review the Bank’s mandate if elected. The FT's George Parker also reports that Truss intends to give ministers powers to override financial regulators seen to be limiting post-Brexit reforms in the new Financial Services Bill.
• Treasury shake-up. Truss is planning a ‘Thatcherite shake-up’ of the Treasury, according to the Telegraph, which would give Number 10 more control over the economy. Truss clearly has a longstanding commitment to the shaking up of Whitehall, arguing in 2018 that to “unleash the UK’s potential, we need to fight the blob”. 
• Public sector pay. There are clearly limits to Liz Truss’ resolve to reform the Civil Service however, evidenced by her U-turn on public sector pay last week. Having originally suggested that she would introduce regional pay boards to effectively cut civil servant pay in poorer areas, Truss was forced to withdraw the proposal after heavy criticism of both the implications of the policy and the accuracy of the costings. The FT’s George Parker labelled the move a “case study of the danger in photocopying a Taxpayers' Alliance press release - adding a few billion - and presenting it as a programme for government”.  
• Climate. Reflecting on both candidates’ climate policies, Conservative Environment Network’s Sam Hall has said Truss will need to strengthen green policies if she is to meet the net zero target that she has confirmed she supports. Green Alliance’s Shaun Spiers warns that while both candidates may “pay lip service” to climate policies, they are likely to “dodge the difficult decisions”. 
• Good for women? Representation is not enough for Liz Truss to be beneficial to women, argues the Women’s Budget Group’s Mary-Ann Stephenson. Refinery 29’s Vicky Spratt argues that Truss’ “Destiny's Child” approach to feminism fails to recognise that women are disproportionately affected by the cost of living crisis.
• Farewell ‘levelling up’? Whitehall officials warn that the outgoing Prime Minister’s ‘levelling up’ agenda is being “quietly ditched” and will not survive a new leader. Though not a policy priority, however, Liz Truss is “advocating low-tax zones to encourage investment in deprived areas”, notes Politico’s Esther Webber. 

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Politics. If successful, Liz Truss would be the first Conservative leader since Churchill to have been a member of another political party. Hailing from a family that she describes as “left of the Labour Party”, Truss went on to become president of the Oxford University Liberal Democrats which she has labelled a “youthful error”. Upon entering Parliament in 2010 and first joined the government in 2012 as a Parliamentary Under-Secretary for Education. 

• An outsider? Despite having now been a Conservative party member for 25 years, Truss still “sees the Conservatives with an outsider’s eye”, argues Conservative Home’s Paul Goodman. In contrast to Sunak’s comfort with “conventional wisdom”, Truss is more of a libertarian, he argues, but at the same time is “remarkably flexible” in her views.
• Vibes? The reason why Liz Truss is positioned so clearly as the right wing candidate has little to do with her policies and more to do with ‘vibes’, argues the FT’s Janan Ganesh. Despite vocally supporting remain during the referendum, Truss consistently polls better with Brexit supporting Conservative members than Sunak. This contradiction, Ganesh argues, checks out in a world where “people’s ideological commitments are extraordinarily soft” and instead are motivated by “tribal signifiers”. 
• Trusting Truss. After several U-turns (or, as Team Truss would describe, instances in which her policies have been ‘misinterpreted’) even her backers are beginning to ask whether she can be trusted. Truss’ many U-turns are rooted in the clash between her classical liberalism philosophy and the ‘Red Wall of reality’, argues the Institute of Economic Affairs’ Emily Carver. 
• Approach to experts. Former cabinet minister David Gauke argues that the thread running through Liz Truss’ politics is her skepticism of experts. The Spectator’s Fraser Nelson that the two candidates’ approach to experts and economic forecasts in particular is one of their “biggest differences”. As the Bank of England warns of recession, Truss is right to say that “forecasts are not destiny”, argues Nelson. 
• The new Thatcher? Comparisons between Truss (and indeed any aspirational Conservative politician who is a woman) and Thatcher are predictable, argues Martha Gill. However, it is actually the current Prime Minister, rather than Margaret Thatcher, that Truss is channeling, argues the New Statesman’s Rachel Cunliffe.  
• Rick Perlstein. Liz Truss is allegedly inspired by historian and “man of the left” Rick Perlstein. Nick Cohen outlines some of the lessons Liz Truss may be learning from her favourite historian’s analysis, such as how to ‘Mobilise resentment’ and ‘Never accept defeat’. 

Prime Minister Rishi Sunak? Rishi Sunak himself acknowledges that he is an ‘underdog’ in the campaign, referring to his unfavourable odds of winning against Liz Truss (although one poll does suggest the result may be closer than generally assumed). However, after leading the pack during the initial phase of the contest and attracting the support of more Conservative MPs than any other candidate, Sunak should not be written off. Whatever the result, his positions and economic philosophy is likely to remain important within the party during the next Cabinet and beyond. 

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Political history. Rishi Sunak had a rapid rise to the top of British politics. He was elected to Richmond in 2015 and became a Junior minister in DHCLG under Theresa May’s government in 2018. He was then promoted to Chief Secretary to the Treasury by Boris Johnson - a move that was widely regarded as a reward for publicly backing the Leave campaign during the 2015 Brexit referendum and for publicly supporting Boris Johnson’s leadership campaign to replace Theresa May in the Times alongside two other MPs; “This was widely seen in Westminster as a decisive turning point: the one where Johnson won over ‘the sensibles’ and pivoted the backbenchers.” Sunak was promoted to Chancellor when Sajid Javid resigned in February 2020. His economic record is summarised below: 

• Pragmatically fiscally expansive (when pressured)... The Chancellor delivered his first Budget that oversaw unprecedented levels of fiscal support and deficit spending during his first month in office and throughout the Covid-19 pandemic (as well as providing £37bn in support for the energy price crisis so far). However, he consistently refused to provide adequate funding for a variety of Boris Johnson’s policy agendas and much of the emergency packages of support given throughout the cost of living crisis have arguably been a result of sustained political pressure from campaigns that forced a U-turn whilst the government was weak; e.g. the Windfall tax on oil and gas producers or ‘Energy Profits Levy’. 
• …but the dead hand of the Treasury often prevailed. Economist Michael Jacobs explains that he “sabotaged Boris Johnson’s policies” through his choice of fiscal rules that arbitrarily limit public investment to 3% of GDP, meaning he underfunded almost every policy agenda ranging from the Integrated Rail Plan, the Leveling Up White Paper, the Net Zero Strategy, the plan to fund Health and Social Care, and more recently, the Energy Security Strategy (click through to read our analysis and summaries of each at the time.)
• Inflation hawk and ‘tax cutting Chancellor’? Sunak has since reinforced this position of ‘sound money’ and ‘fiscal responsibility’ against competitor Liz Truss’s expansionary campaign of tax cuts, which he refers to as “peddling the fantasy economics of unfunded promises” and warns about their inflationary effects. He often referred to himself as wanting to be a ‘tax cutting’ Chancellor despite Conservative critics pointing out that he presided over a steady expansion of the tax take to x% of GDP. This prompted the IFS’s Paul Johnson to call Sunak a “fiscal illusionist” in their analysis of the 2022 Spring Statement. If elected Prime Minister, Sunak has pledged to slowly reduce income tax in 2024 from 20 per cent to 19 per cent (1p cut), followed by further cuts to eventually reach 16 per cent by 2029 (a further 3p cut) as he believes we “need to get a grip of inflation first”. Sunak oversaw “one of the largest single-year tax giveaways ever enacted by a government” - the Super Deduction tax break for capital investment (see our analysis)  - which had limited effects on productivity and growth and has since hinted about wanting to “cut the taxes on business that actually make a difference to growth and productivity” more if he becomes PM. He also clarified he will retain his plan to increase corporation tax from 19% to 25% in April 2023.
• Ambiguous approach towards public ownership. The Treasury under Sunak also began developing new approaches towards public ownership, ranging from taking equity stakes in struggling businesses (such as Bulb energy) and becoming one of the largest venture capital funds in Europe. See our previous digest for analysis of State intervention after Johnsonomics for more.

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Which policy agendas will survive if Rishi becomes PM? Sunak has stated that “a screeching U-turn on lots of policies that were in the 2019 manifesto” would “be tricky to implement”, so which of Boris Johnson’s flagship policy agendas might survive under Sunak’s rule? Public First has updated their Conservative Leadership Election Policy Tracker, key parts of which have been summarised and elaborated on below: (accurate at the time of publication)

• Leveling up. Sunak pledged his support for Tees Valley Mayor Ben Houchen’s five-point plan for levelling up, which includes: a commitment to keep the Department for Levelling up with a Cabinet level Secretary of State, reform the Treasury Green Book evaluation process so public spending prioritises towns, rural areas and the North of England more, give mayors greater powers to control tax through devolution and fully construct Northern Powerhouse Rail. He has also committed to Northern Research Group’s pledge card to create a Minister for the North, two new vocational institutions in the North of England (“the national vocational equivalents of Oxford and Cambridge”), and commit to greater devolution and rebalancing of government spending formulas. Sunak was a supporter of creating freeports - low tax zones - as part of the Levelling Up agenda and invested £4.8bn through the Levelling Up Fund to redevelop in ‘left behind’ communities in the UK (see our analysis and critique here). 
• Net zero (and energy security). Sunak has committed to retaining the Net Zero 2050 target and the Conservative Environment Network’s pledge card, which includes a “baseline commitment to maintain recent progress” in areas such as designing post-Brexit nature-friendly farming subsidies and switching to renewable energy, rolling out home insulation (perhaps based on Northern Ireland’s energy efficiency strategy) and electric vehicle charge points, implementing the Environment Act and “turbocharging clean growth through backing the technologies of the future”. On energy, Sunak has pledged to keep the ban on building any new onshore windfarms but start a massive expansion in offshore wind, introduce a legal target to make Britain energy self sufficient by 2045 and re-establish a separate Department of Energy and create a new Energy Security Committee tasked with reforming the market to cut future bills. CEN’s Sam Hall also notes that Sunak is “open to lifting the fracking moratorium if there is local support”.
• Cost of living. Whilst Sunak has spent over £37bn in measures to ease the cost of living crisis as Chancellor so far, it may be too early to tell whether this will continue if he wins the Leadership race. During his campaign he has only pledged to scrap VAT on energy bills for a year from October as a temporary measure and announced longer term plans to tackle supply-side inflationary pressures that increase prices of UK imports, such as increasing trade with Dutch and Danish ports. 
• Welfare and public services. Sunak’s only pledge on welfare so far has been to double the number of hours someone on welfare has to work a week in order to avoid having to look for a full time job from 9 to 18. He has various proposals for reducing NHS waiting lists in “an emergency package to force down NHS waiting lists through tougher targets led by a ‘backlogs taskforce’.” He has been silent on both child care and social care so far.

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The Cabinet under Sunak? Speculation about who might be picked to be in Sunak’s Cabinet is still contested. The Guardian’s Jessica Elgot and Aubrey Allegretty think that Sunak might pick Steve Barclay as Chancellor but the Telegraph’s Gordon Rayner suggests that Michael Gove might be picked instead. 

• Campaign team. Sunak’s campaign is being run by former Chief of Staff in the Treasury, Liam Booth-Smith, a former chief executive of think tank Localis; LGC’s briefing states that “under his tenure Localis played an important role in the development of the government’s industrial strategy” implemented by Theresa May (Liam has also written multiple articles on the need for places to develop their own local strategies with Bright Blue’s Ryan Shorthouse). His communications are being ran by Narissa Chesterfield (formerly comms manager at the IEA and worked for Vote Leave) and Cass Horowitz (former special advisor to Sunak and former journalist who has worked with Allegra Stratton on Peston). ‍
• Policy team. Public First’s Director of Strategy Nick Park is helping Sunak’s campaign with policy research, who has a long track record of energy policy and political advisory roles, alongside Eleanor Shawcross, a “highly respected former senior aide to [George] Osborne when he was chancellor”, “a key adviser in the months leading up to the June 2016 European Union Referendum” and who “could be closely involved in drawing up the Conservatives’ manifesto for the next general election”.

Mansion House speech. Last week, Nadhim Zahawi stressed the “critical role of financial services” in his first Mansion House speech as Chancellor. Along with controlling inflation and creating “the conditions for a private sector recovery”, Zahawi identified financial services as one of his three priorities. Speaking the day before the publication of the Financial Services and Markets Bill, the new Chancellor set out how the Government will replace “hundreds of pieces of retained EU law” with a new vision for financial services. 

• A green speech? Zahawi’s address to the financial and professional services sector took a surprisingly green turn, according to Green Alliance’s Zoë Toone and James Fotherby, but stopped short of fully linking his three key priorities with net zero ambitions. While demand management and green infrastructure can tackle inflation and private sector recovery, they argue, alignment between the financial sector and net zero targets could create opportunities that would “revitalise the London Stock Exchange”. 

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Financial Services and Markets Bill. Following the Mansion House speech, the Government published its Financial Services and Markets Bill in response to its findings from the Future Regulatory Framework (FRF) review which concluded in February this year. Before publication, the Bill was tipped to be a “regulation bonfire” with outgoing Chancellor and Conservative leadership hopeful Rishi Sunak hoping that post-Brexit changes to regulation would result in a “Big Bang 2.0”. The bill is due to have its second reading in Parliament on 7th September this year.

• The competitiveness agenda. At the heart of the proposed reforms is a focus on making ‘competitiveness’ a formal objective for regulators. There was previously such a competitiveness duty placed on regulators, but this was removed as part of the 2012 Financial Services Act. Writing for OpenDemocracy, Chaminda Jayanetti highlights that a Treasury consultation document published at the time partly blamed the competitiveness agenda for the financial crash, stating that there is “a strong argument that one of the reasons for regulatory failure leading up to the crisis was excessive concern for competitiveness”. 
• Mistakes of the past. The competitiveness agenda “risks sleepwalking into the mistakes of the past”, argues the FT’s Helen Thomas. “A regulatory race to the bottom harms everyone except those who have something to keep from public scrutiny”, argues Professor Sir John Kay. In May, over 50 leading economists wrote to the Chancellor warning of the risks of a new regulatory goal of competitiveness. For more on the competitiveness agenda, see our Digest. 
• “Cheerleaders for the City”. “Regulators don’t want to be undermined by being tasked with becoming cheerleaders for the City”, argues Positive Money’s Fran Boait. Bank of England governor Andrew Bailey has warned of the proposed “call-in power” in the new bill that would allow the Treasury to override decisions made by regulators. 
• What’s driving the “deregulation agenda”? The Government’s commitment to deregulation can be attributed to the “enormous power” of the financial sector, argues Boait. Over the past two years, financial institutions and individuals closely involved in the sector donated more than £15m to political parties and around a third of Treasury minister meetings are with financial institutions and their lobbyists.
• Treasury committee pushback. The Treasury select committee has warned the Government of the risks of too much deregulation and of making competitiveness an objective for regulators. The committee argued that “pursuing international competitiveness in the short term is unlikely to lead to economic growth or international competitiveness in the long term if it is achieved by weakening the UK’s strong regulatory standards”. 
• The alternative? Positive Money’s Fran Boait suggests that we must confront the “financialisation of all our public assets” and that the Treasury and Bank of England must instead work together to drive credit away from “property and speculative assets” towards a green transition. Central to this proposal is an “ecosystem of cooperatively or publicly owned banks” which would invest in the interests of communities rather than shareholders. 

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Finance for our Future. A group of civil society organisations under the name of ‘Finance for our Future’ is calling on the Government to use the Financial Services and Markets Bill as an opportunity to “address the biggest challenges we face as a country today” including climate change, economic stability and accountability and transparency in financial sector lobbying. It has already made several media interventions and provided a briefing for MPs. The coalition, which includes the Finance Innovation Lab, Positive Money and the New Economics Foundation, has proposed six key recommendations, outlined below. 

• 1.5 degrees. Finance for our Future urges the Government to oblige regulators to commit to “align the financial system and its regulation with the 1.5 degrees temperature goals of the Paris Agreement”. Finance Innovation Lab’s Jesse Griffiths raised concerns that the climate crisis is overlooked in the Government’s bill. 
• Financial inclusion. Financial products and services, such as insurance, are often inaccessible to a large number of people. The coalition suggests mandating regulators to ensure that the financial system is inclusive. 
• No statutory objective for competitiveness. Strongly opposing proposals for competitiveness objectives, the coalition argues that while there are plenty of organisations already promoting financial services, regulators should be there to act in the public interest and maintain independence. 
• Parliamentary scrutiny. The joint statement warns that the current proposals risk giving too much unchecked power to the executive (the Treasury) via “opaque secondary legislation”. It therefore proposes establishing a new parliamentary committee, representing “all facets of public interest in the financial sector”. 
• Checks on lobbyists. Current proposals “could facilitate untransparent lobbying that steers policy away from the public interest”, argues the group of organisations. It suggests that there should be a register of lobbyists and monthly reports by lobbyists on their communications with government, including written communications.
• Stakeholder engagement. Finally, the coalition calls for a requirement of the Financial Conduct Authority and Prudential Regulation Authority’s statutory panels to consist of a maximum of 50% industry representatives and at least 50% public interest representatives. Currently, only one of the FCA’s panels is for consumers, while the PRA has no public interest panel at all. 

Johnsonomics, state intervention and political expediency. New forms of state intervention in the economy have been quietly normalised throughout Boris Johnson’s premiership, partly in order to maintain the Conservatives 2019 electoral coalition and partly as a reaction to political events such as the Covid pandemic. As the Conservative Leadership Race continues, ConservativeHome’s Mark Wallace explains “what the Conservative Party wants from its next leader…fulfilling the 2019 promise to those first-time blue voters, to help people survive painful economic conditions”.  

• The 2019 electoral coalition required an activist state... Concerns with regional inequality, lower productivity and wages in more deprived parts of the country culminated in the levelling up agenda, which was in many ways a repudiation of the economic model introduced under the last period of sustained Conservaitve government under Thatcher and Major. This agenda required a more activist state than previous Conservative governments would have been prepared to accept; for example the more interventionist approach to regional economic development adopted by Tees Valley Mayor Ben Houchen. Christine Berry and Laurie Macfarlane explains how Johnsonomics evolved into ‘state rentier capitalism’, where the Conservatives are “catering to their new voters in the so-called ‘Red Wall’ with promises of a more activist state, whilst also seeking to reassure and protect their core constituency – rentier capital.” Christine explained this “mode of governing that may well outlast his premiership” in a recent interview with Politics Theory Other. (Political economists Will Davies and Nicholas Gane explain how the political right’s reactions to the Covid-19 pandemic could signal a break with neoliberal orthodoxy ”and, in particular, from their overriding concern for the market”.)
• …but this is also part of an emerging global consensus. Other countries have also been moving away from a free market approach to managing the economy. Such new forms of intervention reflect an emerging global consensus about industrial strategy, such as through the US approach to reshoring supply chains to ‘Revitalize American Manufacturing’, or the EU’s relaxation of state-aid rules. In 2018 UNCTAD found that 84 countries (accounting for 90% of global GDP) had adopted formal industrial policies in the previous five years. 

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Public ownership under Johnsonomics. Various forms of public ownership that have been employed under Boris Johnson’s premiership range from nationalisation of ‘defence-critical assets’, public equity stakes as a last resort for struggling businesses and mission-oriented innovation strategies.

• The National Security and Investment Act. Earlier this year the government passed the National Security and Investment Act; a law allowing UK regulators to block foreign takeovers of UK companies and strengthen the government's powers to investigate and intervene in 17 “sensitive sectors'' of the economy on public interest grounds. The Act outlines the government’s approach to bringing ‘defence-critical assets’ into public ownership, such as the Ministry of Defence’s acquisition of Sheffield Forgemasters to protect high skilled jobs and invest in green infrastructure.
• British Business Bank’s “Future Fund”. In 2021, Bloomberg calculated the Government had taken public equity stakes (£30.4 million) in 37 start-up companies through the British Business Bank’s Future Fund program, after the startups couldn’t repay their loans. The Future Fund became the largest venture capital fund in Europe last year, making £1.2bn of convertible loans to businesses. The FT reported that the fund was originally launched in April 2020 in “an attempt to stop a slew of start-up and early-stage businesses going under as other sources of funding dried up” and that now “the government seems to have a taste for the VC life”. (UCL IIPP’s policy brief on public wealth funds explains how taking public equity stakes in threatened, strategically important firms can support economic recovery.)
• Advanced Research and Invention Agency (ARIA). Originally the brainchild of former Johnson aide Dominic Cummings, ARIA is an agile organisation with £800m in initial R&D funding to develop ‘transformational science’ projects. It is inspired by the successful US-based Advanced Research Projects Agency (ARPA), which was instrumental in creating transformational technologies such as the internet and GPS. Activate’s Ilan Gur was announced as the new CEO this week. ARIA’s Statement of Policy Intent states the organisation can “take equity stakes in companies, for instance, start-up ventures for developing and exploiting scientific research.”

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Ambiguity towards the role of the state. Despite developing these significant policies and bills, the government adopted an ambiguous approach to public ownership, for instance Boris Johnson’s celebration of ‘greed’ and ‘capitalism’ in the development of the Covid-19 vaccine (despite the Industrial Strategy Council concluding “government played a key role in expediting every stage of the OX/AZ vaccine development process” in their paper outlining six lessons for future industrial policy in the UK), or perhaps best exemplified by the Cabinet  split on the issue of protecting a UK semiconductor manufacturer (Newport Wafer Fab) from a Chinese takeover.

• Businesses want certainty. “In a report which will make essential reading for the new Chancellor”, the cross-party Treasury Committee of MPs warned about the government’s “chop and change” approach and “lack of long-term thinking in economic strategy, following the abolition of the Industrial Strategy [originally implemented by Theresa May’s government] and its replacement with the Plan for Growth.” The CBI also published an open letter to Conservative leadership candidates last week, urging them to develop "serious, credible and bold plans for growth...that dominates policymaking across every government department, not only the treasury." The CBI’s former Director General Carolyn Fairbairn spoke about the importance of a social partnership approach between unions, the business community and government at the Resolution Foundation’s conference last week.

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Will the next cabinet adopt a more consistent approach? Commenting on the Conservative Leadership race and the state of the UK economy, Andrew Marr describes the outgoing PM as an “undeclared big stater”. Following Johnson’s departure Marr argues that  “we need a full economic programme for recovery, going far further than a tax-cut auction – itself based on an outdated notion of Thatcherism." But will the next leader rediscover the value of industrial strategy in addressing some of the country's most pressing economic issues, such as the rising cost of living? 

• Temporary public ownership as a last resort isn’t working. Martin Lewis and E3G have separately warned that the next Conservative leader needs to act over the ‘financial time bomb’ of rising energy costs and develop a “long-term plan to wrestle bills under control from day one”, respectively. As energy suppliers are going bust, many have been taken under public ownership by being placed into ‘special administration’ through Ofgem’s Supplier of Last Resort regime. One of them, Bulb, was propped up with the biggest taxpayer bailout since RBS in 2008. The CEO and founder has been under criticism from MPs for “continuing to receive a taxpayer-funded salary of £250,000”. Common Wealth argues Bulb “should have been taken into full and democratic public ownership…our energy system needs to be remade in the public interest, tackling insecure supply, runaway CEO pay & unaffordable bills.” Common Wealth also found that a ‘fragmented system of private monopolies that delivers outsized returns for investors’ in electricity and gas distribution networks are partly to blame for rising energy bills, and argues that ‘in the long run these monopolies should be in public ownership. 
• Longer-term strategy: active forms of management and ownership. IIPP’s Laurie Macfarlane argues that deeper reform of the energy sector is required to protect consumers and accelerate decarbonisation. He proposes use of the British Business Bank’s Future Fund to purchase equity in the ‘Big 6’ energy firms. We Own It has launched a campaign calling for energy companies to be brought into public ownership to combat rising bills. Their demands of the government include a ‘permanent windfall tax’ and the introduction of a new state-owned renewable energy company. (Their latest polling shows that ‘Red Wall’ voters “overwhelmingly back nationalised energy”, as well as other utilities.) 

Conservative leadership race dominated by tax cuts. Candidates in the Conservative Party’s leadership contest are beginning to outline their economic platforms and there is only one topic on the agenda: tax cuts. The FT’s Sebastian Payne and Chris Giles note: “A dividing line is already emerging between Tory leadership hopefuls focused on maintaining the Johnson government’s approach of investing in public services and those who wish to pursue supply-side reform.” In the former camp is Rishi Sunak, the bookies’ favourite, who is broadly defensive of his economic record and has gone on the attack about ‘fairytale economics’. However the vast majority of the other candidates have argued for a change of economic direction, attempting to woo Conservative MPs and party members with promises that slashing taxes will revive the UK’s economic fortunes, an argument which is fast becoming orthodoxy within the governing party. (A reminder that Conservative MPs are significantly more right wing in their economic values than conservative voters, and the wider public.)

• Right wing manifesto for tax cuts. Conservative Way Forward, a new pressure group chaired by Steve Baker, put this case most succinctly in a manifesto calling for “a dash for growth” via tax cuts, “supply side reforms and a return to sound money”. A Charter for Tax Cuts provides costing for a range of tax cutting options totalling over £40bn: 1p off the basic rate of income tax (£5.3bn), £1,000 increase in personal allowances (£6.1bn), suspending the 1.25% Health and Social Care Levy (£17.1bn), 1pp off standard rate of VAT (£7.5bn) and 10p off fuel duties on petrol and diesel (£5.4bn).
• Positioning. The policy paper’s author Julian Jessop (associate of the Thatcherite think tank, the Institute of Economic Affairs) argues this package “does not have to be inflationary and could actually help to reduce the upward pressures on costs and prices” and that “concerns about the debt interest bill and the overall level of debt are exaggerated”. 
• Who is backing it? Playbook notes that leadership candidates Nadhim Zahawi and Suella Braverman have already endorsed Conservative Way Forward’s proposals (and gave speeches at the manifesto’s launch yesterday). Sajid Javid and Jeremy Hunt have also already pledged £49.4bn and £39bn in tax cuts, respectively and Liz Truss has pledged to cut taxes ‘from day one’. Agency Public First have put together a tracker of policy pledges by the different candidates.

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How will this be funded? The IFS’s Paul Johnson has warned tax cuts might require “dramatic” cuts to the welfare state and other areas of public spending and that it is “nonsense” to expect them to pay for themselves, e.g. through more tax receipts through economic growth. Nadhim Zahawi has already said he plans to cut funding for staff by 20% in every government department in order to pay for his proposed tax cuts. (Polling commissioned by Tax Justice UK shows that Conservative voters are “far from supportive of tax cuts, particularly if that means cuts to public services”.)

• Unfunded tax cuts via growth? The OBR’s Andy King argued that reducing the tax burden on either businesses or households to stimulate growth wouldn’t outweigh the costs to the Treasury: “While a tax cut will typically boost growth in some way, they, in our analysis, don’t do so sufficiently to pay for themselves. Tax cuts do not improve the long-term finances”. 
• Avoiding recession. The OBR’s Fiscal Risks and Sustainability report last week provided more impetus for stimulating the economy, calculating that a recession would cost the Treasury between £30-40bn and if energy prices remained high for the next five years, another £10-20bn would be added to the government’s debt repayments. The FT’s Chris Giles also explained why “cutting taxes will not magically improve the UK’s economic performance”; “it is productivity improvements that are necessary for sustainable economic growth”.

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Inflationary risks and the cost of living. Some economists, two former Conservative chancellors and the former head of the Treasury have warned that a “Dutch auction of tax cuts” may be inflationary due to increasing demand. The OBR’s annual assessment of risks to the public finances last week also warned that cancelling Rishi Sunak’s planned rise in corporation tax to 25% (as Nadhim Zahawi promised today) could stoke inflation higher: “If [tax cuts] are financed by greater borrowing, it puts more pressure on and arguably comes with additional risks in an economy that is running with high inflation”. (Polling by Tax Justice UK also found that 74% of 2019 Conservative voters support an increase in corporation tax.)

• Inflation driven by supply shocks. However, there are good reasons to think that excess aggregate demand isn't driving inflation, given the UK is at risk of recession. The Bank of England’s Andrew Bailey admitted recently at a select committee that around 80% of the inflation overshoot was driven by external shocks with only 20% caused by the reaction of firms and wages. (For a good breakdown of these external drivers read economist Michael Spence’s piece for Project Syndicate, The Supply-Side Fight Against Inflation.)
• “Fiscal policy also has an important role to play in managing inflation fairly”. IPPR’s Carys Roberts proposed the government should levy excess profit taxes to other sectors of the economy which have made windfall profits (beyond oil and gas) and use the receipts to support households and build more resilient supply chains to tackle external causes of inflation (e.g. for critical commodities). This could reduce inflationary pressure by discouraging profiteering, as recent research by IPPR and Commonwealth observed. Tax Justice UK’s Paul Hebden argued that if the planned corporation tax rise is reversed after increasing taxes on working people, then “the government will be showing its true priorities…Tax is about political choices yet ordinary people continue to bear the costs of the pandemic while the wealthy and big business are protected.” Polling commissioned by Common Wealth found ¾ of voters in ‘Red Wall’ seats would support a windfall tax on all large companies which have made excess profits to help families with the cost of living.

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Tax cuts are poorly targeted. Economist Jonathan Portes explains why “broad-based, badly targeted tax cuts…will do little to help those who need it most”. Resolution Foundation’s Torsten Bell points out “only a fifth of the benefit of an income tax cut would go to the entire poorest half of the population.” (Also read our analysis of why business tax breaks such as the ‘Super deduction’ are a poor response to the cost of living crisis.)

• Tax cuts on the rich don’t create jobs or growth. Trickle down economics has been thoroughly debunked, perhaps most comprehensively by analysis published by the LSE which found that tax cuts for the rich have not had a significant impact on unemployment or growth, but they have increased income inequality. BBC Newsnight’s Ben Chu explained that “there is no compelling evidence that overall tax burdens determine economic outcomes” and that “there really isn’t a large constituency for the argument that sweeping tax cuts, as a share of the total economy, will do very much to boost the UK’s overall growth prospects” in this video explainer. (Watch economist Jeevun Sandher explain why tax cuts won’t solve the UK economy’s long term growth problems in an interview with Julia Hartley-Brewer.)

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Long-term solutions to UK stagflation. Leader of the Opposition Keir Starmer has dismissed the Conservative leadership election as an “arms race of fantasy economics.” The FT’s Martin Wolf also doubts that the Conservative leadership candidates will provide any solutions to the UK’s stagnant economy: “The answer will not be tax cuts: taxes are already lower than in our European peers. Nor will it be deregulation: the UK economy is relatively deregulated, except in the use of land. It will depend on higher investment and bringing lagging firms and regions to the frontier. It will depend on improvements in corporate governance and capital markets, which encourage investment and innovation. It will depend on exploiting the energy revolution, to accelerate growth and lower emissions.“

• Bearing down on energy prices. The FT’s Stephen Bush notes that the election of the new PM is likely to coincide with Ofgem’s announcement of the Winter Energy Price Cap rise, which analysts predict could push average annual household energy bills to £3,244.54. As former Conservative Business Secretary Chris Skidmore explains, “At a time of high inflation and a global cost of living crisis, a clear policy priority for any future prime minister must be to deliver better living standards and lower costs. Global energy prices have skyrocketed recently, entwining the debate between living costs and energy provision.”
• Across the aisle. Keir Starmer has reiterated Labour’s pledge of £30bn of green investment a year, which includes plans to decarbonise energy supply and use £6bn per year to insulate 2 million homes this year and the other 19 million that need it this decade. They calculated that this could cut energy bills by up to £400, gas imports by 15% and reduce fuel poverty. Rachel Reeves recently quoted US Treasury Secretary Janet Yellen’s approach of “modern supply side economics”, which gives a stronger role for the government in stewarding economic growth and tackling structural challenges.

Watchdog warns UK climate plans “will not deliver net-zero”. The Climate Change Committee (CCC), the UK government’s statutory advisory body set up by the Climate Change Act 2008, released its 2022 Progress Report to Parliament last week. The report comes with a new monitoring framework which outlines the indicators used to track the UK’s progress in transitioning to a zero-carbon economy by 2050.

• “The government is failing in much of its implementation”. Whilst the UK’s domestic 2030 climate targets are compatible with the Paris Agreement’s goal of limiting global warming to 1.5C above pre-industrial levels, the CCC has warned that 61% of these commitments are not backed by credible plans to reduce emissions. The CCC praised “warm words” in the Net Zero Strategy but noted “little concrete progress made” as only 8 of 50 key indicators are on track. Carbon Brief’s Simon Evans provided a summary of the progress made so far in a Twitter thread and pulled out this key graph illustrating the gap between the government’s current “credible” policies and the delivery pathway for net-zero.
• Risk of relying on technological salvation. NEF’s Chaitanya Kumar blamed the government's “over-reliance on technological solutions with high risk & no plan Bs” in sectors such as aviation, carbon capture and storage and nuclear energy generation. Read this article from a group of respected climate scientists who warned that net zero policy “helps perpetuate a belief in technological salvation and diminishes the urgency surrounding the need to curb emissions now”.

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Decarbonisation of heat and buildings remain a huge gap. The CCC identified the decarbonisation of heat and buildings as one of the most important policy gaps, as buildings are the UK’s second largest source of emissions (20% in 2021), where energy efficiency in non-fuel poor homes was “the most significant policy gap in the buildings sector”. The report states that “current policy is insufficient” to upgrade as many homes as possible to EPC rating C by 2035 and the “Government’s responses to rapidly rising energy bills have so far missed the opportunity” to address this. 

• Energy efficiency and the cost of living crisis. Many figures from the CCC highlighted that the cost of living crisis increases the importance of improving energy efficiency. CCC outgoing chair Lord Deben explained that bringing forward energy efficiency plans due to be completed by 2030 could reduce household bills by £125 a year and argued that high fossil fuel prices “should have given added impetus to improving energy efficiency, yet the necessary programmes are not in place.” The report criticised the Energy Security Strategy for “failing to offer any solutions” for reducing energy demand, and advocated for “increasing funding and accelerating plans for energy efficiency policies” (Pg.157) 
• The risk of relying on market-based approaches. The government’s current approach to increasing the supply of low-cabon heating systems relies on a market-based mechanism for rolling out heat pumps and driving delivery in heat networks. The CCC noted “This is an untested approach, and if market participants don't respond to incentives as expected low-carbon heat roll-out will not take off, with significant impact on planned emissions reductions.” As the cost of living crisis continues to erode household incomes, demand for low carbon heat systems may suffer, therefore the CCC recommended intervening with additional measures, such as public funding and more regulation to mitigate risks of low take-up (Pg. 204).
• Rationing as a last resort to avoid blackouts. Campaigners have hoped that the government would bring forward energy efficiency measures to insulate enough homes to reduce demand in time for a particularly acute energy crisis this winter. Instead, the Times’ Emily Gosden reports that the National Grid is “working urgently to establish a scheme to pay consumers with smart meters to ration their usage voluntarily…to reduce the risk of blackouts”.

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Action prevented by Chancellor’s fiscal rules. Business Secretary Kwasi Kwarteng suggested in a Select Committee meeting that any new funding for energy efficiency has to be taken from other existing pots of money as no new money has been committed since the Chancellor’s Spending Review (11:52:20). 

• “Robbing Peter to pay Paul”. When asked about rumours that any funding for a future home insulation scheme would be taken from Boiler Replacement Voucher Scheme and the Public Sector Decarbonisation Scheme (PSDS), Kwarteng said: “I think some of the money has to be reallocated...I've made those decisions...If we’re going to have a high speed ambitious energy efficiency rollout, we can't simply print more money...I can't simply go beyond my CSR envelope... There has to be some degree of reallocation of existing money.” Given the CCC identifies a shortfall in funding for public building decarbonisation as another gap in the government plans, Chris Stark says this is “just the wrong approach”, despite “the value for money case of energy efficiency has never been stronger”.‍
• Overcoming ‘Treasury Brain’.  Economist Sir Nicholas Stern argued that net zero cannot be achieved with an austerity mindset and has written a paper criticising the use of high ‘discount rates’ in the Treasury's policy making processes, which “grossly undervalue” the lives of future generations and present children. Commenting on the Stern Review of the Economics of Climate Change, James Meadway explains why “shocks that produce permanent losses in growth increase the value of taking action today”. The Social Market Foundation has published a report on the intergenerational issues that arise from paying for the net zero transition. They also argue that the UK should reduce the ‘discount rate’ and spend much more on emission reductions now to avert future costs to the Treasury. ICYMI, read our analysis of the OBR’s report explaining how the costs of net zero are greater without “decisive action” and “early steps” to mitigate climate change‍
• Economic case for urgency. The CCC emphasised that high fossil fuel prices following Russia’s invasion of Ukraine “reinforce the case for a rapid transition away from fossil fuels” which could save the economy 0.5% of GDP. Carbon Brief’s analysis noted that previous reports estimated the transition to a net zero carbon would cost less than 1% of GDP (“not including health benefits, the benefits of avoided climate impacts or the potential economic benefits of investment in infrastructure for net-zero”).

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Policies for improving energy efficiency. Given that the CCC’s Director of Analysis, Mike Thompson argued “This is the time for a government to be bold and to help people do what a lot of people want to do anyway. There’s no shortage at all of good ideas out there”, we have collated some proposals for decarbonising heat and buildings below:

• Improving energy efficiency in your constituency. NEF’s campaign for a Great Homes Upgrade has produced a campaign toolkit to lobby local MPs to demand action on energy efficiency. CLES have co-produced an Energy Futures Toolkit to help community-led energy planning, an approach which: allows local people to engage in energy transition planning and action, generates valuable neighbourhood-level data to inform the approach to and delivery of the local energy transition, and enables the activation of community-led and owned initiatives which can build community wealth as part of the energy transition. 
• Low carbon heat installation and skills shortages. A new report from the TUC and Electrify Heat Coalition outlined the role of heat pumps in building a high-wage, high-skill economy. The report is particularly timely as the CCC outlined skilled worker shortages as a ‘major risk’ in the government’s plans to decarbonise heat and buildings. 
• Ban on gas boilers. Chairman of the National Infrastructure Commission, Sir John Armitt, has called on the government to ban gas boilers, replicating the ban on new petrol and diesel cars by 2030. In the University of Birmingham’s Energy Institute report ‘Pathways for Local Heat Delivery’, Sir John argues that “unless we replace 24 million gas boilers, we will never reach net zero”. 
• Funding to permanently lower household bills. The Director General of the CBI, Tony Danker, has called for “all-out” action on energy efficiency measures to combat the cost of living crisis. Danker advocated for a “new normal of energy efficiency” instead of a “new normal of billion-pound bailouts every quarter”. He argued that £5.2 billion was needed annually to insulate homes (with £1 billion dedicated to retrofitting) which he compared to the £22 billion worth of cost of living support announced in Spring by the Chancellor and further £15 billion in May. 
• Labour’s ‘energy efficiency revolution’. Shadow Climate and Net Zero Secretary Ed Miliband outlined 5 recommendations for the upcoming Energy Bill, advocating Labour’s £6bn per year plan to insulate 2 million homes this year and the other 19m that need it this decade. They calculated that this could cut bills by up to £400, gas imports by 15% and reduce fuel poverty.

Summer of glory? Yesterday, criminal barristers in England and Wales began a strike over legal aid fees, following three days of industrial action by the RMT union last week. Other public sector groups such as NHS staff, teachers and care workers could also go on strike, leading some to predict a ‘summer of unrest’. Progressive Economy Forum’s James Meadway puts a positive spin on the planned industrial action, dubbing this the ‘labour movement’s summer of glory’. 

• A break with a failing past. Meadway refutes comparisons of today’s situation with the 1970s, arguing that there is no wage-price spiral and that trade union membership is "far below" what it was during the winter of discontent. However, he also says that "one way in which the 1970s comparison can work’ is that public sector industrial action could lead to a change in the economic paradigm. In the same way that the disputes of the 1970s led to the ‘consolidation of neoliberalism’, today’s disputes could usher in a different economic settlement and a ‘break with a failing past". 

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Further restrictions on union freedoms. Transport Secretary Grant Shapps has said that agency workers could be brought in to break what he calls ‘Marxist’ strikes and says that the measure will be introduced during the current RMT dispute if it is not resolved. Plans to ‘bus in’ agency workers to cross picket lines is "just the latest attempt to curb the right to strike", says the TUC’s Tim Sharp. Sharp argues that the use of agency staff to replace striking workers could put the public ‘at risk’ due to lack of training and would "most likely breach international law". The UK has already been criticised in this area, with the ILO Committee of Experts already concluding that British law does not do enough to protect strikers from being replaced by agency workers. Even the Spectator’s Brendan O’Neill has criticised the government’s proposal, saying that "the right to withdraw labour (is one)of the most important freedoms people enjoy."

• Rights for agency workers. Agency workers have very little power to avoid breaking strikes if the government’s plans go through as they will often not be told before turning up to a shift that they will be breaking a strike. Furthermore, they are not protected from ‘suffering a detriment’ if they refuse shifts on the basis that they are replacing striking workers. 
• History of anti-trade union legislation. Barrister and author David Renton gives a backdrop to the current situation and provides a history of the UK’s anti-trade union laws and explains why Britain has "the most restrictive anti-union laws in Europe". Renton outlines how the promotion of tribunals as an alternative to strikes - by both Conservative and Labour governments - has played a key part in weakening trade union power and how the RMT’s recent action has bucked this trend. 
• The Trade Union Act 2016. Many barriers to industrial action today were introduced as part of the Trade Union Act 2016 (TUA). The TUA brought in new restrictions on how trade unions and their members could take industrial action, fund political parties, and conduct their duties. The bill brought in a higher threshold for ballot turnouts and doubled the amount of notice trade unions must give to employers before going on strike. The Institute of Employment Rights (IER) has published a handy guide to the Act. 
• Electronic strike ballots scrapped. As the government escalates its ‘war with unions’, the Business Secretary, Kwasi Kwarteng, is rowing back on plans to allow unions to introduce electronic strike ballots. The move, which was first introduced by David Cameron in 2016, would have made it easier for unions to organise strikes. TUC General Secretary Frances O’Grady called Kwarteng’s decision an "absurd", "hypocritical" and "a feeble attempt to look tough by a government that wants to stoke a culture war against unions". 

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Trade union membership today. The general trend of trade union membership over the past few decades has been one of steady decline. While over half of workers were unionised at the peak of trade union membership in the 1970s, the figure today stands at just over 23 percent. What’s more, only 13.7 percent of private sector workers now have their pay set by bargaining between unions and employers, claims Sarah O’Connor in the Financial Times. However, membership has started to rise very slightly in recent years. In 2020, 23.7% of workers were unionised compared to the low of 23.3% in 2017.

• Different demographics. According to government statistics, this rise has been largely due to the rise in female trade union membership. From a low of 25.6% in 2017, the percentage of female workers now unionised stands at 27.2%. 
• ‘Good news and bad news’. The TUC unpacks the data behind the steady increase in trade union membership over the past four years, claiming that while membership has increased in the public sector, union membership in the private sector has fallen by more than 100,000. 

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The case for collective bargaining. The government’s new offensive against trade unions is against the tide internationally, where unions and collective bargaining are coming back into vogue among governments and policy-makers.The OECD has said that collective bargaining is the best way to deliver better work. Though it has previously promoted breaking up sectoral bargaining institutions, it now argues that collective bargaining can tackle inequality, boost productivity, manage industrial change, keeps people in jobs and is good for employment. The TUC’s Kate Bell outlines the OECD evidence that trade unions can benefit from. 

• Collective bargaining key to post-pandemic recovery. The International Labour Organisation (ILO) has said that collective bargaining is crucial to global recovery post-pandemic. ‘The higher the percentage of employees covered by collective agreements, the lower the wage inequality’, argued the ILO’s Director-General Guy Ryder. 
• Collective bargaining across the world. At the end of last year, Spain passed legislation restoring sectoral collective bargaining in law. Similarly, the New Zealand government has announced its intention to move forward with sectoral ‘Fair Play Agreements’. 
• Collective bargaining prevents inequality in Europe. In a comparative analysis of trade unionism in Europe, a study by UNI Europa finds that weakening collective bargaining is a "key driver behind increasing income inequality in Europe". Declining collective bargaining has been associated with a rise in income of the top 10% in both Germany and the UK while countries which maintained high levels of collective bargaining (such as Austria and Belgium) have ‘kept inequality at bay’. 
• Collective bargaining and industrial strategy. Unite the Union has proposed a "new industrial strategy for post-Brexit trade" based on collective bargaining. The union calls for a new approach to support coordination between reps across industries to take account of the fact that industries are now organised so that all workplaces exist within supply chains rather than in isolation.

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‍Labour’s position on collective bargaining. The Labour Party has been criticised by unions for not backing recent and proposed strike action. However, at its conference last year, the party launched its Green Paper on Employment Rights which included a commitment to Fair Pay Agreements. It said it would "empower workers to act collectively through Fair Pay Agreements’ which would be negotiated ‘through sectoral collective bargaining – starting in the adult social care sector". The agreements would see government bring together worker and employer representatives from sectors to negotiate pay and conditions.

Fanning the flames of inflation? As RMT members press ahead with strike action this week, Boris Johnson has warned of a ‘wage-price spiral’ should workers demand higher pay. In a speech delivered in Blackpool earlier this month, the Prime Minister said that wage increases could ‘fan the flames’ of inflation and argued that the ‘one cure’ to such a spiral would be ‘to slam the brakes on rising prices with higher interest rates’. The sentiment echoed Andrew Bailey’s instruction to workers not to ask for a pay rise and Treasury minister Simon Clarke’s warning that employers should be ‘very careful’ in setting pay rises. 

• Are wages rising? Warnings of a wage-price spiral come as real pay in the UK falls at the fastest rate in at least 20 years. Figures for April this year saw a drop in pay of 3.4%, the highest monthly fall in pay in two decades, according to ONS figures which date back to 2001. The Resolution Foundation’s Torsten Bell notes that average pay fell, in real terms, across the months of March and April and said that anyone seeing signs of a wage-price spiral must have had ‘something strong in their coffee’. 
• The response. Following the PM’s Blackpool speech, 67 leading economists and economic policy experts wrote to the Prime Minister saying that his warnings of a wage-price spiral were misplaced. The letter argued that inflation comes from ‘huge external factors’, and ‘is not a product of domestic wage demands’. Economists urged the government to take further action to combat the cost of living crisis with ‘substantial increases in the minimum wage, public sector pay, and social security payments.’ The TUC held a ‘Demand Better’ rally on Saturday 18th June (livestream recording here). 

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A myth? Grace Blakeley argues that the current ‘wage-price spiral’ debate is based on a myth and that any current union action is focused on demanding wage increases in line with inflation, not above it. With workers ‘simply not in a position to demand higher wages’, external factors such as the war in Ukraine and supply chain issues clearly have a much stronger impact on inflation than wage demands, she argues. 

• It’s not the 1970s. Meanwhile, a wage-price spiral is unlikely due to weak unions and a fragmented labour market, argues Sarah O’Connor. Comparing the current situation to the 1970s makes little sense when only 23 percent of workers are unionised compared to over half of employees during the peak of union membership, she explains. What’s more, only 13.7 percent of private sector workers now have their pay set by bargaining between unions and employers and much higher percentages of self employed workers mean that the relationship between wage setting and inflation looks very different in 2022. Likewise, Sam Ashworth-Hayes argues in the Spectator that wages will only rise due to a labour market running hot, not because of successful union bargaining. 
• Overshoot: Even the Bank of England have admitted that it is not wage claims that are driving this inflation crisis, arguing recently at a select committee that around 80% of the inflation overshoot was driven by external shocks with only 20% caused by the reaction of firms and wages.

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Public sector pay. There is little evidence of a wage-price spiral taking hold, argues Richard Partington. While headline pay has risen by 8% in the private sector, public sector workers are seeing pay growth of only 1.5%, making this ‘the worst decade for real-terms pay growth since the Napoleonic war’. In real terms, nurses and paramedics are £2,000 a year worse off, while pay growth in the education sector is at just 0.3%. On Monday, Simon Clarke, the Chief Secretary to the Treasury, confirmed that public sector workers should not expect a pay rise in line with inflation and therefore should expect a real terms cut. 

• Skewed by bonuses. Even relatively high wage inflation in the private sector may be skewed by bonuses for top earners, according to ONS data. While growth in average total pay including bonuses was 6.8% from February to April this year, the growth in regular pay excluding bonuses was only 4.2%. The TUC has found that bonuses for high-paid City workers in the finance and insurance sectors are rising six times faster than average wages.

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Profits-price spiral. Inflation is being driven by run-away profits, not wages, according to new research by the IPPR and Common Wealth. The analysis finds that the profits of the largest non-financial companies were up 34 percent at the end of 2021 compared to pre-pandemic levels. However, these profits are highly concentrated, with only 25 firms making up 90 percent of increases in profits. Furthermore, these companies are mainly located in a small number of industries - particularly in energy. With such considerable market power, these companies are able to drive up prices and have a disproportionate impact on the cost of living, the report argues. Common Wealth has summarised the key findings of the report in this thread and the IPPR’s Carsten Jung has more detail here. 

• ‘Using inflation as an excuse’. Servaas Storm argues that by using ‘algorithmic pricing and AI’, large corporations are using inflation as an ‘excuse’ to drive up prices and increase profit margins, which they are able to do thanks to their large market share. 
• Across the Atlantic. Hal Singer, managing director of Econ One, argues that the answer to the cost of living crisis in the US is not to curb wages or to raise interest rates but to tackle monopolies and to pursue ‘anticompetitive conduct’. ‘Biden needs to communicate to the public that he supports efforts to tamp down inflation outside of the traditional interest-rate-hike paradigm’, he argues. (For more on New competition policy emerging in the US, see our previous digest.)
• Competition policy in the UK. Andrea Coscelli, CEO of the UK’s Competition and Markets Authority warned that uncompetitive markets are driving up the cost of living in the UK: "The level to which markets are dominated by a limited number of companies is higher than before the 2008...If competition is weak, firms do not face the same pressures to keep prices down”. Michelle Meagher, John Christensen and Nicholas Shaxson have launched the Balanced Economy Project to tackle monopolies and excessive concentrations of market power around the world. 

Right to Buy extended. Last week the Prime Minister gave a speech announcing plans to help 1.5m housing association tenants buy their social housing through an extension of Right to Buy (RtB). Tenants will be given a 35%-70% discount on their mortgage deposits depending on how long they have lived in the property and the £6,000 savings limit (where Universal Credit payments begin to taper) altered to encourage claimants to save without it impacting their benefit entitlement. The PM also announced a mortgage review (due to report back in the Autumn) which could see the return of 100% or 98% mortgages, according to the Spectator.  

• History of Right to Buy. RtB was a pillar of Margaret Thatcher’s policy platform in the 1980s. It is estimated the sale of 2m social homes at discount rates through the Right to Buy scheme has led to the loss of £75 billion to the public finances since 1980. This has not been accompanied by sufficient investment to replace homes lost (Shelter calculates an average annual net loss of 29,000 social homes since 1991).
• Risks further reducing availability of housing. Consequently, Johnson’s proposal includes a 1 for 1 commitment to replace any social housing lost through the scheme. The Sunday Times’ Tim Shipman reported the policy caused division in the Cabinet between the PM and Michael Gove: “Officials had not even undertaken an impact assessment on how it will affect social housing stock, or how many new homes will be needed to replace those sold off…The Treasury is also refusing to provide extra funds, leaving Gove with a further headache about how to pay for it.” Gove explained the importance of building more social housing at the same time to prevent further loss of social homes and has previously been a critic of the RtB policy for this reason.

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Will it work? The success of the proposal relies on the ability of Universal Credit claimants to save enough to take up the mortgages, and on the ability of government to deliver increased supply of social housing. However, housing associations are not directly controlled by governments and demand-side stimulus alone will further fuel house price inflation, making home ownership even more unaffordable for those not yet on the housing ladder.

• Take-up. The proposal is based on a pilot from 2018 which showed that if it was rolled out nationally, only 17% of eligible tenants would be able to afford to participate. Lindsay Judge, the research director at the Resolution Foundation, said the changes to mortgages for those on benefits was likely to have limited impact. “More than four in five families on means-tested benefits have no savings at all and high cost of living pressures means a second change that allows benefit recipients to save into certain savings accounts without seeing their benefits cut is unlikely to lead to a surge in savings.”
• Building more social housing. There are over 1m households currently on waiting lists for social housing. Jonathan Rolande, from the National Association of Property Buyers, said: “Housing Associations are usually private entities who will need to be compensated for the enforced discount, so it appears that there will be a net loss for the taxpayer, rather than the ‘gain’ of the council house sales”. Kate Henderson, Chief Executive of the National Housing Federation, said: “Pilots have shown that there is not enough money from sales to build new social homes to replace those sold, meaning a net loss of social housing.” NEF’s Simon Hill argues that “Why would councils pay to build homes, only to sell them at a discount, lose income from future rental payments and not receive the full sale receipt?...Extending the policy to housing associations will only extend this disincentive to more providers of social housing, slowing social housebuilding when it needs to be sped up.” 

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Political maneuvering. The proposal has been widely interpreted as a piece of desperate political maneuvering from the Prime Minister after winning his vote of no confidence last week. The move to stimulate demand for home-ownership (and further increase house prices) could be seen as an emergent electoral strategy from the government; read Christine Berry and Laurie MacFarlane’s recent piece on the economic and electoral strategy of ‘Johnsonism’: ‘catering to their new voters in the so-called ‘Red Wall’ with promises of a more activist state, whilst also seeking to reassure and protect their core constituency – rentier capital.’ 

• Home-ownership and voting patterns. This chart from the House of Commons Library shows the electoral benefit the Conservatives receive from getting more people on the housing ladder. Author and academic Keir Milburn featured in a short video explaining how the political generation gap is rooted in the diverging material interests of the young and old, and mediated by property ownership: “The material interests of older cohorts might be leading some of them to look away from the pressing crises of the present.”
• Housing benefits and state-subsidy of landlords. The proposal aims to reduce the government’s housing benefits bill. £30bn of government investment goes to private landlords through housing benefits, referred to as the ‘state-subsidisation model’: “with the state paying landlords to house people, rather than building houses – and therefore owning assets – with which to house the population”. The OBR has warned that without action, the government could be paying £50bn per year in housing benefit to private landlords by 2050. Over 40% of council housing sold off through the original RtB scheme are now rented privately, known as ‘right-to-buy-to-let’. A new report from the CPS argued that the benefit system is fundamentally biased towards keeping people as tenants rather than owners, finding that just 2.3p is spent on incentivising ownership among low and middle earners for every pound that subsidises renting.
• Rentierism. The lack of housebuilding in recent years reflects the broader transformation of housing and the land it sits on into a financial asset and a public policy preference for private home ownership. Land and property have become both the most attractive form of collateral for the banking system and the most desirable form of financial asset for households and investors. Joe Bilsborough explains how “For decades, Britain's governments have designed public policy to benefit property owners and landlords to the detriment of everyone else” as the UK’s political economy becomes increasingly defined by “rentierisation; and the successful creation of a class of asset-owners whose wealth appears inextricably linked with the maintenance of Conservative control at Westminster.” The FT’s Stephen Bush counted the proposal as the 7th demand-side measure the Conservatives have introduced since 2010, all of which have pushed up house prices: “there was the revitalisation of Right to Buy in 2011, the two incarnations of the ‘Help to Buy’ scheme, the Help to Buy ISA, various measures to encourage shared ownership, changes to required deposit ratios, and the stamp duty cut.” (NEF explored the historic role of banks and the financial system, supported by government policies, in fuelling house price growth – with housing wealth now making up almost half of total household assets.)

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Proposals for a better housing system. Housing charity Shelter proposes that 3.1 million homes should be built over the next 20 years. While local authorities now have the power to borrow, the reality of their funding situation means they will need support from national government to deliver on that kind of ambition. 

• Stimulating housebuilding. In its review of the future of social housing, Shelter calls for a 'decisive and generational shift in housing policy'. Its proposed programme of investment and reform includes a new housing regulator, a renewal of public housebuilding in mixed communities, with all homes sold being replaced, and the creation of permanent tenancies as a legal minimum for all private renters. 
• New powers NEF are today launching Homes for Us, a new campaign which argues for a programme aiming to build 2 million affordable and desirable social homes by 2040 and proposes ending Right to Buy and granting new powers to councils to compulsory purchase poor quality rental homes. The Tony Blair Institute for Global Change calls for a Sovereign Property Fund – a national endowment to support local councils to build new housing. The Fund would centralise oversight of all the land in public ownership. ‍
• Community Land Trusts. In 'The Policies of Belonging', centre-right think tank Onward recommends giving communities the right to establish Community Land Trusts (CLTs) to develop community-led housing. The National Community Land Trust Network supports community land trusts through funding, resources, training and advice and works with government, local authorities, lenders and funders to establish the best conditions for CLTs to grow and flourish.

World’s largest 4 day week trial begins in the UK. Over 3,300 workers from 70 UK companies from a wide range of sectors began participating in the world’s largest trial of working time reduction this week. 

• Context. The 4 Day Week Global is organising the pilot in partnership with Autonomy, the 4 Day Week UK Campaign and researcher Juliet Shor along with other academics from Cambridge, Oxford and Boston universities. Researchers will measure the trial’s impact on productivity of the business, wellbeing of workers and the impact upon the environment and gender equality for six months. (The 4 Day Week Campaign’s Joe Ryle summarised the trials on Good Morning Britain.) 
• No loss in pay. Participants will be working 80% of the time for 100% of their pay, in exchange for a commitment to maintain at least 100% productivity. Workers in many countries (including the UK) already have the right to ask for shorter and more flexible hours, but this is very difficult for those on low wages. A key feature of many shorter working time proposals is therefore that this should not be accompanied by a reduction in pay, especially for low earners. 
• Public support. A poll by Survation showed that two thirds of the British public would support the government piloting a four day week with no reduced pay, with only 13% opposing. Surveys have shown “consistently” growing support for a four-day week since the beginning of the pandemic.  Nearly 300,000 small and medium-sized UK businesses and over 840,000 employees are already working a four-day week and over 1 million UK firms and 3 million employees could move to a four-day week in the near future. A survey by productivity charity Be the Business found one in five small British firms are at least actively considering a four day week.

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Background. There is nothing inherently fixed about the standard working week of 9-5 Mondays to Fridays. ‘Normal’ work hours have changed over time, with the weekend and bank holidays as we know them today being the products of campaigning by workers and trade unions in the past. Reducing working hours has been a longstanding proposal to improve working life and the balance between work, leisure and important unpaid activity such as care. 

• Future of work and automation. A previous report from Autonomy and the 4 Day Week campaign situated the shorter working week as a response to some of the fundamental factors changing the nature of work in the UK, such as precarious work, the threat of automation, and inequalities. The UK Labour Party’s Alternative Models of Ownership policy paper proposed a gradual implementation of a shorter working week to fairly share the productivity gains from increased automation with workers.
• Improving working conditions. More recently, firms have been increasingly using the four day week to attract and retain more staff whilst the labour market remains tight. This poses an alternative to competing on pay during an inflationary period.
• The relevance of shorter working time schemes after the pandemic. A widely cited template for a shorter working week is the German Kurzarbeit (short-work) scheme (summarised here by the New Economics Foundation), which was resurrected in the light of Covid to help support workers through its employment impacts. The TUC called for a permanent short-time working scheme to continue to support incomes and limit job losses in times of economic crisis as a replacement to the Coronavirus Job Retention Scheme and Self Employed Income Support Scheme. The TUC’s Kate Bell collated evidence showing the “undoubted success” of the schemes in protecting jobs and incomes over the course of the pandemic, but called for them to be built upon to protect workers from future economic change (such as the green transition), with an emphasis on training furloughed workers.

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Criticism. Critics of working time reductions argue that they would be expensive - even when productivity is rising in some sectors, it is not in all. Frederick Harry Pitts published a critical take on the issues that may arise in trying to implement a four-day working week, concluding that “the four-day week may seem impractical in the short term. But with talk of ‘building back better’ and ‘levelling up’ backed up by a more interventionist industrial policy across the political spectrum, the medium-to-long term picture offers proponents some measure of hope”. 

• Various methods of implementation. However, the four day week doesn’t have to be implemented through legislation. A poll of 500 C-suite business leaders found that 65 per cent of UK businesses were already implementing a four-day week for some or all of their employees. The TUC’s annual Congress last year passed a virtual motion calling for a three-day weekend with no reductions in wages, with a working group of trade union representatives discussing how to implement the policy in each sector. 

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Evidence so far. This trial follows many previous experiments with shortening the length of the working week. (Follow the European Network for the Fair Sharing of Working Time’s newsletter for developments in working time reduction across Europe.)

• Productivity. Supporters note that as productivity rises it is possible to take the gains as increased leisure time rather than income. This would have the additional benefit of spreading the available work more widely. Some advocates argue that it could even help increase productivity, as employees may work harder in their reduced hours. 4 Day Week Global has produced a White Paper which outlines guidelines for organisations to implement an outcome-based trial of a four day week and how to measure productivity changes.  
• Wellbeing. Autonomy has sought to estimate the net cost of the UK public sector moving to a four day week. The think tank's report on Iceland’s trials to shorten the working week for public sector workers with no reduction in pay concluded that productivity and service provision remained the same or improved across a majority of trial workplaces, worker wellbeing improved dramatically and the trials remained revenue neutral for the government and city council. 
• Environment. A study from the Four Day Week campaign found that a four day week with no loss in pay could cut UK emissions by 21%.‍
• Gender equality. Women’s Budget Group released a policy paper from the Feminist Green New Deal project which found that “a shorter working week, as part of a wider set of policy changes, can promote gender-equal distributions in paid work, unpaid work, and income, while facilitating a green transition. Paper authors Özlem Onaran and Robert Calvert Jump used time-use data from the pandemic and international case studies in order to understand the benefits of a shorter working week. The Japanese government’s annual economic policy guidelines include a recommendation that companies permit their staff to opt for a four day week to improve work-life balance, increase staff retention for those with caring commitments and encourage adult education.

The ‘Energy Profits Levy’. The government acquiesced to cross-party calls for a windfall tax last week, announcing a 25% “Energy Profits Levy” to partly fund a £15bn package of support for households struggling with rising energy bills. Paired with the Energy Bill Rebate, all households will now receive financial support ranging from £550 to £1200 depending on means-testing. (Read Carbon Brief’s summary of the package and surrounding media coverage, and read the Resolution Foundation’s analysis of the ‘broadly progressive’ distributional impacts.)

• Not a one-off, but time-limited, windfall tax. The levy takes the combined rate of tax on profits on oil and gas firms from 40% to 65%, raising ~£5bn. The government plans to use legislation to phase out the 25% tax rise “if oil and gas prices return to historically more normal levels” or by 2025 at the latest. 
• ‘Investment allowance’ for oil and gas extraction. The levy includes ‘a ‘super-deduction’ style Investment Allowance’. This gives fossil fuel firms a tax break (up to 91%) for immediate investments in fossil fuel extraction. There is no similar tax break for investing in renewables. E3G argues that this tax break of up to £5.7bn in “lost revenue could have instead supercharged an energy efficiency drive, insulating two million British homes over the same period, with an average bill saving of £342 per household every year.”‍
• Support for fossil fuels in the UK tax system. A previous report by NEF outlines how the UK government continues to subsidise fossil fuels by ~£12bn on average per year, despite pledging to phase out “inefficient fossil fuel subsidies” at COP26. The Treasury is arguing that tax breaks are not fossil fuel subsidies. Uplift’s response argues that UK taxpayers will be footing the bill with no obvious public benefit (as most new fields are oil, likely to be exported): “Every new field means money that should be going to households to keep warm this winter, is going to oil and gas companies.”

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Is the stimulus enough to prevent recession? Media coverage highlighted the generous size of the package, but the stimulus will not fully offset the effects of the Energy Price Cap’s rise in the Autumn on household incomes - described as ‘catastrophic’ by National Energy Action’s Adam Scorer. (NEF’s Chaitanya Kumar explains that the poorest households are still ~£700 poorer on average, despite two packages of support so far this year.)

• Will it be inflationary? Many economists are debating whether the Bank of England may respond to the ~£10bn fiscal expansion with more monetary tightening to attempt to bring inflation back under control. Economist Richard Murphy argues that the package is not inherently inflationary as it only reduces household debt and is primarily recaptured by energy firms as more households will be able to pay higher energy bills (not ‘an excess of funds to then be spent on other goods’), but the IFS’s Paul Johnson argued the package could herald higher inflation if it signals that government  are likely to spend more, including bowing to demands for higher public sector pay. (The Guardian’s Phillip Inman explains why the Bank of England is ‘duty bound’ to raise interest rates and trigger recessions.) 
• The need for better macroeconomic coordination. In February, the International Monetary Fund recommended the UK government raise ‘windfall or wealth taxes’ to reduce inflationary pressure, and suggested this would be preferable to the sole use of higher interest rates to tackle inflation. Read a previous paper from NEF’s Frank van Lerven and IIPP’s Josh Ryan-Collins illustrating examples of fiscal-monetary coordination that “proved useful in stimulating economic growth, supporting industrial policy objectives and managing public debt without excessive inflation.”

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Political fallout: free marketers vs pragmatists? Politico detailed the ideologies at play in the various responses given by different Conservative figures. Richard Drax accused the Chancellor of throwing ‘red meat to socialists’ in the Commons, but the package largely went down well with ‘Conservative MPs who are most worried about the cost of living crisis’, such as ‘Compassionate Conservatism’ advocate Robert Halfon who told Playbook: ‘I’m not interested in ideology. I’m interested in doing the right thing for millions of people in our country who are struggling.’ One unnamed Conservative MP told the Sun’s Kate Ferguson that colleagues criticising the package are “ideological nut jobs living in a fantasy world. They should spend less time at the Adam Smith Institute and more time down at Lidl.’ 

• Embedding the paradigm shift. The New Statesman’s Freddie Hayward argues that Labour has ‘set the economic agenda and further entrenched a paradigm shift towards a larger, more interventionist state’. The Times’ James Forsyth explains that Conservatives feared the windfall tax proposal as it ‘risks suggesting a sea-change in favour of Labour and left-wing ideas’. The Institute for Economic Affairs’ Kate Andrews warned that the windfall tax makes it easier for the government (or a future Labour government) to levy excess profit taxes on other sectors.

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Beyond the windfall tax? The cost of living crisis is far from over and political pressure for the government to provide future packages of support will remain high. The IFS has warned that “if oil and gas prices remain high” - and analysts say they will -  “then the government will doubtless come under pressure to continue the additional household support for at least a further year”. Similarly, the Times’ James Forsyth warns that ‘these sums will really only keep the wolf from the door. This living-standards crisis will go on long enough that it won’t be the final intervention that ministers will have to make.” So what form could future interventions take?

• A higher windfall tax. Tax Justice UK modelled how a 95% tax on excess profits could raise £12.9bn instead of the £5bn in the government's package. (NB The tax rate on oil and gas was 75% in 2015 and 80% in 2014, and the global average is 70%.) Tax Justice UK suggests that there will be “plenty of opportunities to push for a higher rate on energy giants as the windfall tax is debated in Westminster” as it “has to be voted through Parliament, probably in the Autumn.”
• Struggling businesses remain unsupported. Economist Duncan Weldon highlighted that the package ignored any financial assistance for smaller firms also struggling from higher energy prices. The FSB’s Craig Beaumont also noted in Politico’s London Playbook that the energy price cap doesn’t protect businesses from rising costs and the FSB has since called for more support as 500,000 small businesses are ‘at risk of going bust within weeks’.
• Energy efficiency. Reducing businesses’ and households’ exposure to volatile energy prices throughout the green transition will be key. The International Energy Agency’s Fatih Birol has explained the importance of government investment in energy efficiency to help economies weather the turbulence in energy prices. The Tony Blair Institute for Global Change has released a report calling for ‘Home Energy Plans’ to provide households with advice, blended loans and grants coupled with supply side drivers to reduce bills and decarbonize over time. NEF’s Great Homes Upgrade is campaigning for a £11.7bn investment to fund a 'national retrofit taskforce' to upgrade all homes to EPC rating of C by 2030. 
• Fixing the energy market. Global Action Plan’s Andrew Pendleton explains why the package locks consumers into high energy bills and doesn’t solve underling problems in the energy market, as the government is taxing energy producers to fund households to be able to repay the high prices set by energy suppliers. The Tony Blair Institute for Global Change’s Tim Lord outlines the problems with the energy retail market that enables Ofgem to protect suppliers interests at the expense of consumers. (Twitter thread summary here). 
• Contesting the price cap and the role of public ownership. Economist James Meadway argues for keeping Energy Price Cap at its current level and nationalising any energy suppliers that fail as a result, following the experience of Bulb in 2021. Common Wealth makes the case for taking the energy sector back into public ownership and We Own It calculated that bringing ‘the privatised monopolies of energy transmission and distribution’ into public ownership could save £3.7bn a year and other research has shown that energy prices are 20-30% lower in systems that have publicly owned energy suppliers. 

Easing the cost of living crisis through business tax cuts? Chancellor Rishi Sunak addressed business leaders at the CBI’s annual dinner last week, giving a speech that affirmed the role of businesses in the government's plan to ease the cost of living crisis. (Transcript here and video here.) A central part of the governments’ strategy is to use tax cuts to stimulate business investment: “higher productivity is the only way to raise living standards”, the Chancellor proclaimed.

• Philosophy: ‘New culture of enterprise’. The Chancellor outlined his vision to stimulate a ‘new culture of enterprise’ in his Mais lecture, which rejected a role for the state in boosting or guiding investment. Instead tax cuts hope to stimulate business investment, innovation and productivity, eventually feeding through into higher living standards through wage growth. (The PM also stressed ‘work’ as the fix for the cost of living crisis on Monday, despite the TUC’s latest forecasts predicting a 17 year pay squeeze with wages remaining lower than their 2008 levels until 2026.) 
• Conservative support for tax cuts. Tax cuts are supported by large swathes of the Conservative party and have growing support in the Cabinet. Conservative grandee David Davis called them a ‘fundamental tenet of Conservativism’ in his piece expressing opposition to the windfall tax proposal. Similarly, No.10 advisors David Canzini, Guto Harri, Steve Barclay and Andrew Griffith have resisted calls for a windfall tax on grounds of it being ‘unconservative’. Backbench MPs such as the Chair of the Northern Research Group Jake Berry, have been lobbying for tax cuts on business to ease cost pressures in Red Wall constituencies.
• How did business respond? Politico’s analysis details the “muted reception” from business leaders, with some calling the address “very bland and uninspiring” and “lacking anything new” despite growing pressure on the Chancellor to introduce an immediate package of support. 

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The 'Super-Deduction' tax break. The Sun’s Harry Cole reports that the Chancellor may increase R&D tax allowances and extend tax breaks for investments in the Autumn Budget. The 130% ‘Super-Deduction’ on corporation tax, introduced in the 2021 Spring Budget, was pitched as a way of incentivising businesses to invest in more capital machinery, boosting innovation and productivity - branded “the biggest business tax cut in British history” by its supporters and the ‘Amazon tax cut’ by its critics.

• What does the evidence say? The Treasury’s own analysis found that the government pays far more in R&D tax reliefs than businesses spend on investment, and that the UK continues to have one of the lowest investment levels in the OECD, despite the generous relief structure. A survey by Deloitte found that only 26% of CFOs expected the super-deduction to have a positive effect on their investment plans over the next year. The CBI’s survey found that, of the 56% of businesses planning to claim for the tax cut, only 19% said this brought forward existing investment plans. Tax Watch’s George Turner explains how the super-deduction benefits companies who have already made large windfalls during the pandemic and “who were planning to make capital expenditure regardless of the incentives available” anyway, such as Amazon and energy firms.
• Broad spectrum of criticism. Ex-PM Theresa May called increasing capital allowances “Treasury orthodoxy” in her critique of the super-deduction and instead called for “increasing investment and support investment in areas which encourage growth and innovation, and that means R&D”. IPPR’s George Dibb noted that the eligibility for the super-deduction was expanded to include landlords “to prop up the UK’s rentier economy”, despite being framed as a policy to increase investment and create a high-wage, high innovation economy. Industrialist Juergen Maier notes that business investment is 35% below pre-Brexit trend and called for businesses to “speak up” and call for “a more pragmatic version of Brexit”.

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Alternative industrial strategies to ease the cost of living crisis. Given that business investment actually fell by 0.5% in the first quarter of this year, there are growing calls from both Left and Right for alternative economic strategies to be considered both to address the immediate crisis and to put the economy on a path to higher wages and productivity.

• Short term packages of support. Martin McTague, the new national chairman of the Federation of Small Businesses, says the Chancellor should ignore calls to extend the super-deduction and provide more help for small firms with rising energy costs. The British Chambers of Commerce have called for a variety of measures to ease the costs of doing business and prevent firms passing on further price rises, including a temporary energy price cap for small businesses and widening eligibility for the Energy Bill Rebate to include small firms. NEF’s Alfie Stirling noted that the ~£13bn forecast to be spent on the super deduction this year is only ~£2bn shy of the cost of protecting Universal Credit claimants from their benefits being eroded by inflation. ‍
• Longer term industrial strategy. Theresa May’s former adviser Nick Timothy recently called for a “radical change to this economic model” which is overly dependent on consumption despite too many low-income people being trapped in “low-productivity, low-skill, low-paid jobs”. Sunak’s speech differs starkly from the one CBI Director-General Tony Danker gave last year, dubbed as a “damning critique of free-market capitalism”. This exemplified the new consensus (though not in the Government) around the importance of state intervention and industrial strategy to boost investment, productivity and pay. Danker noted that “we’ve had five decades where the free market has palpably failed” and called for a “partnership with government.” For a wealth of resources on industrial strategy, visit our resource bank page, Reshaping the Economy, and read chapters from The Political Economy of Industrial Strategy in the UK, edited by academics Craig Berry, Julie Froud and Tom Barker.

GMB and Deliveroo deal. The GMB union and Deliveroo have signed an ‘historic’ Voluntary Partnership Agreement. The GMB says that the deal will give the union ‘rights to collective bargaining on pay and consultation rights on benefits and other issues, including riders’ health, safety and wellbeing’. The deal does not change Deliveroo riders’ status as self-employed, a status which has been reaffirmed by a series of court judgements. According to GMB this represents an ‘innovative’ solution to organising gig economy workers. 

• PR stunt? The Guardian reports that the deal does not secure the minimum wage for Deliveroo couriers because they are not paid while they are checked into the app and waiting for an order. The Independent Workers’ union of Great Britain (IWGB) has dubbed the deal a ‘cynical PR move’ and says that it presents ‘no threat to [Deliveroo’s] exploitative business practices’. The IWGB has been organising Deliveroo riders since 2016 was due to bring an appeal to the Supreme Court over their collective bargaining case. Professor of Labour Law, Alan Bogg, explains the deal’s implications for IWGB’s legal case. 
• The gig is up. The Deliveroo case follows a judgement last year that was set to ‘reshape the gig economy’ which defined Uber drivers as workers rather than self-employed. The Institute for Employment Rights (IER) has more detail here. Similarly, Just Eat announced last year that it would move towards employing its riders as workers with hourly wages, sick pay and pension contributions.
• Barriers to collective bargaining. The International Labour Organisation (ILO) has analysed common barriers facing gig economy workers in their attempts to achieve collective bargaining. These include ‘1) promoting common interests – and overcoming competition – among workers; 2) determining a site (or multiple sites) of agglomeration – virtual, or preferably real – so as to overcome isolation; 3) identifying the bargaining counterpart, and 4) targeting a source of power to make a collective claim’.‍
• Not just food. Over recent years, there has been a rapid increase in the use of platforms to advertise care work. Helen Hester explores the ‘platform care economy’ and argues that ‘purely technical solutions’ are not enough to reckon with the conditions of care work itself. 

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Platform cooperatives. The same ILO study explores the rise of gig economy worker cooperatives and how they have generally taken on two different forms: platform cooperatives which operate in competition with standard gig platforms and cooperatives where workers can pool resources for improved services. Examples of the former camp include Wings, who pay workers the London Living Wage and various cooperatives across Europe. Kristin Toussaint explores how gig economy cooperatives flourished during the pandemic. Autonomy presents food delivery cooperatives as an alternative to the current system, and has produced a ‘how to’ guide for setting up a food delivery cooperative. Autonomy's James Muldoon argues that developing ‘digital economy’ cooperatives should be seen as just one aspect ‘of a broader shift of wealth and power towards workers’.

• Barriers to platform cooperatives. Edward Qualtrough explores why platform cooperatives have ‘yet to challenge Big Tech’, suggesting that cooperatives would be more successful with more government support. 
• ‘Disruption’ by workers? Rida Qadri argues that ‘disruption’ is a two-way street and that it is not just tech companies that can benefit from innovation. Examples include ‘drivers who reverse-engineer a popular mobility platform’s matching algorithm to make their work life better’ (more coverage in Vice). 

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Employment Bill. Conservative MP Damian Collins argued earlier this year that an employment bill would be a chance for the government to protect gig economy workers. However, the government has yet again shelved the bill despite promising to introduce it 20 times, with TUC accusing the government of “turning its back” on working people. The Employment Bill was expected to ensure that tips go to workers in full and also create a new single enforcement body offering greater protections for workers. The TUC says that such a bill is urgently needed to stop another P&O-type scandal from happening. (See our previous Digest for more on the P&O scandal and ‘fire and rehire’ policies.)

• The cost of insecure work. The TUC has said that insecure work costs the Treasury £10 billion per year in lost revenue due to chronic low pay in the gig economy and self-employed sectors. 

Deregulating childcare to ease family budgets. The government has hinted at plans to deregulate the childcare sector by raising the cap on the maximum number of children a childminder can look after, in an attempt to lower the cost of childcare and ease the cost of living for working families. 

• Fiscal rules continue to narrow the government’s policy options. The move comes after Cabinet ministers were tasked with coming up with ‘non-fiscal’ solutions as the Chancellor continues to limit departmental spending budgets outlined in the Autumn Spending Review.

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It’s important to address the high costs of childcare… Childcare is an under analysed driver of the cost of living crisis. A couple with median incomes and two young children pay more than 50% of the mother’s net income in childcare costs, more than double OECD average and worse than any other OECD country. In a survey of mothers by the campaign group Pregnant then Screwed, almost half of respondents had considered quitting their jobs because of childcare issues and a quarter of respondents skip meals or heating to pay for it. (Read the Women’s Budget Group’s recent briefing on the costs of childcare and the impact of the pandemic.)

• …but this proposal will reduce care quality and working conditions. Regulatory limits on ratios between childminders and children exist to preserve the quality of provision and working standards of carers. Pregnant then Screwed polled the government’s proposal and showed that only 15% of parents would be in favour of increasing ratios in childcare settings even if it would lower prices. June O’Sullivan MBE, CEO of London Early Years Foundation, wrote an open letter to the Prime Minister (with over 1000 signatures) explaining why relaxing staff:children ratios would be “catastrophic for children, parents and the sector” as it would reduce the quality of provision and reduce working conditions for staff. The sector is already facing an ‘exodus of low-paid staff’ due to poor working conditions. (Listen to writer Christine Berry, Associate Professor Kate Hardy and Pregnant then Screwed Founder Joeli Brearly discuss the ‘perfect storm’ hitting working conditions in the childcare sector on Ed Miliband’s Reasons to be Cheerful podcast.)