Good afternoon from New Economy Brief.
This year Rachel Reeves addressed the Labour Party Conference with the government in a challenging economic and political situation. In her speech, she set out an ambition to build “a Britain founded on contribution”. The Guardian reports that “this focus on ‘contribution’ comes amid concerns among some in Labour that the government needs to offer voters a clearer vision of its agenda.”
What could the new focus on 'contribution' mean for policy? This week's New Economy Brief explores the economic themes in the Chancellor's speech and what they might signal ahead of the Autumn Budget.
The meaning of ‘contribution’.
The Chancellor’s conference speech was light on policy substance – understandably, given the Autumn Budget looming at the end of November – but a paper from Labour Together set out ‘the case for contribution’ a week earlier. This had been trailed in the Times as not just the basis of the Chancellor’s speech but also part of a wider reset of the government’s political strategy. The paper’s author, Labour Together Chief Policy Advisor Morgan Wild, explains that a focus on ‘contribution’ could inform policy in a wide range of areas including migration, criminal justice, welfare reform and fiscal policy. The crux of the Chancellor's speech touched on some of these themes, explored below.
Youth job guarantee via threat of sanction.
Rachel Reeves stressed the need for "hard work matched by fair reward". One announcement builds on a previous policy of a ‘youth guarantee’, which promised every 18- to 21-year-old in England access to an apprenticeship, training, education opportunities or help to find a job. The carrot: The Chancellor will now try to reduce the nearly 1 million young people not in education or training (NEETs) by offering guaranteed work placements to all young Universal Credit recipients who haven’t been “earning or learning” for 18 months. The stick: those who refuse without a “reasonable excuse” could face sanctions like having their benefit entitlement cut.
The case against a sanctions-led social security system. The Chancellor was at pains to explain the difference between a Labour government and its Conservative predecessors. However, critics might draw some similarities with 2010-era reforms of benefit conditionality which reflected a shift in welfare policy towards a punitive system that aimed to improve work incentives by sanctioning claimants and reducing their entitlement to means-tested benefits. A 2016 report from the National Audit Office found no evidence that benefit sanctions are an effective way of helping claimants find a job, while commenting that “the overall impact of sanctions on wider public spending is unknown.” Peer-reviewed academic research has found many flaws in the economic case for benefit conditionality in the UK welfare system. For instance, it is “largely ineffective in facilitating people’s entry into or progression within the paid labour market over time” and many businesses dislike the way it wastes their time with “large numbers of unsuitable and unfiltered job applications” while often making it even harder for people who are sanctioned to find jobs.
The case for a contributory welfare system. The Labour Together paper advocates linking people’s individual benefits with their contributions and moving away from a means-tested social security system “towards one that aims to insure, reskill and match to well paid jobs.” It does not represent a complete break with sanctions, arguing that “modern day free-riders”, such as “people who won’t develop the skills they can to contribute properly to society”, should receive less. However, its authors think Universal Credit should continue providing everyone with a guaranteed minimum income, but that those seen as contributing should get extra benefits. These might include more help with childcare, a more generous pension or additional short-term earnings-linked payments if they lose their jobs. The aim is to acknowledge individuals' contributions to society, and make it clearer what society is doing for them in return. Many people feel what they do for others isn't appreciated and that they get little or nothing back if they ask for help themselves; the paper argues that linking benefits to contributions will be essential for changing this.
“In place of decline, we have chosen investment”.
The Chancellor emphasised her commitment to public investment, highlighting a change to fiscal rules in the 2024 Budget which enabled the government to invest over £100 billion in infrastructure and public services. However, she was also at pains to underline that they could only do this due to “responsible management of the public finances”. She took a characteristic pop at the Liz Truss mini-budget and the way it increased interest rates and eroded disposable incomes of people with mortgages. But she also laid into “those who peddle the idea that we could just abandon economic responsibility and cast off any constraints on spending”.
Burnham, borrowing and the bond vigilantes. Many have interpreted this as a thinly veiled critique of suspected leadership hopeful Andy Burnham, who recently argued that we should get away from the idea of “being in hock to the bond markets”, and proposed the government take essential utilities into public ownership to reduce the cost of living. The current leadership have called this economically illiterate, but the Times’ Mehreen Khan had more sympathy with Burnham’s point: “it needs to be told to the British public that [bond vigilantes] limit democratic choices…most don’t know what the fiscal rules are…they just want lower inflation and interest rates”. Read our previous explainer on the interaction between bond markets and fiscal policy, and this briefing from Invest in Britain on why you should be sceptical of claims that more government borrowing for public investment would mean higher inflation and mortgage costs.
Tax and the Autumn Budget.
As set out in our recent briefing, the Office for Budget Responsibility is likely to show the Chancellor is on track to miss her fiscal targets at the forthcoming Budget. With the government digging even deeper into its opposition to further borrowing – a position which appears to be driven both by the fear of adverse bond market movements and the desire to draw clear divides with political opponents – the real elephant in the room in the Chancellor’s speech was tax.
The Labour Together paper argues that a politics of contribution “would mean continuing large increases in growth investment and starting to devolve tax-and-borrowing powers to places”. It explains what equalising capital gains tax with income taxes would mean for a fictional small business owner, “so that workers, business owners and investors each have to make equal contributions to the common good.” (Read CenTax’s paper explaining why such a reform could improve productivity and economic growth.) Many will likely view the focus on contribution as pitch rolling for higher taxes in the Autumn Budget – will we finally see the equalisation of CGT?
Greening monetary policy. A coalition of ten campaign groups including WWF, Positive Money, NEF and Greenpeace have called for the Bank of England to step up its work on climate change, including through a review of monetary policy. This comes 10 years after Mark Carney made his ‘Tragedy of the Horizon’ speech which warned the short time-horizons of politicians and policymakers made it difficult to tackle the climate emergency, despite the threat it posed to the global financial system.
Private finance won’t fix the nature crisis. Modelling from Future Economy Scotland has found that using private finance for woodland creation and peatland restoration in Scotland (via NatureScot) will drive up costs by up to 48%, divert taxpayer money to investor profits and slow Scotland’s path to net zero. They offer a publicly-led alternative where the Scottish government replaces grants with interest-free government loans, repayable if the landowner sells the carbon credits for a profit in future.
“Big Pharma is at war with the UK”. Global Justice Now’s (GJN) Nick Dearden warns pharmaceutical companies are pulling their investments from the UK to try and increase the prices of drugs sold to the NHS. GJN, Just Treatment and the Balanced Economy Project wrote to the Competition and Markets Authority last week asking them to investigate cartel behaviour.
Mission-oriented school meals. Economist Mariana Mazzucato argues “meal programs are about more than expanding welfare provisions and providing basic nutrition to vulnerable children”. She explores how to properly design and incorporate them into broader industrial strategies to transform entire food systems and advance other development goals.
Pro-growth tax reforms for the Autumn Budget and beyond. The Institute for Government has published a short comment on the fiscal outlook for the budget, which proposes that the Chancellor should ‘reset her fiscal strategy.’ A separate piece recommends various pro-growth tax reforms in this Budget and beyond.
US-UK Tech Deal. The Counterbalance looks back at the recent US-UK Tech Prosperity Deal and assesses “who’s really gaining”? The Balanced Economy Project calls on the UK government to build a digital strategy that prioritises the public interest and common good over the commercial interests of foreign based monopolies.