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.

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. 

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.

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.
Weekly Updates

Industrial strategy and work

Big Tech prioritised over workers at the AI summit. An open letter to PM Rishi Sunak by over 100 individuals and groups such as the Trades Union Congress (TUC), Amnesty International and Liberty warned about Big Tech’s influence over workers at the UK government's AI summit last week. The TUC’s Assistant General Secretary Kate Bell warned that “AI is already making life-changing decisions - like how we work, how we’re hired and who gets fired…It shouldn’t just be tech bros and politicians who get to shape the future of AI.”

  • Curbing Big Tech monopoly power. Nick Dearden from Global Justice Now (GJN) also warns that the government is using trade policy to protect Big Tech (and any AI technology they develop) from regulation. GJN’s Cleodie Rickard argues that the UK must follow the US’s lead in moving away from a deregulatory approach to AI and Big Tech firms and ensure new technologies are democratically accountable. 
  • Principles for AI safety. Carsten Jung and Bhargav Srinivasa Desikan of the Institute for Public Policy Research (IPPR) outline policies to help ensure AI creates ‘public value’, assesses its potential to cause structural harm to the economy (e.g. through consumer deception and market dominance by platform monopolies), and propose an ‘Advanced AI Monitoring Hub’ to oversee ‘systematically important AI infrastructure’. 

Green jobs and good jobs. Focus groups conducted by the trade union Prospect and More in Common have found that the public aren’t clear on what a green job is. Sue Ferns, Prospect’s Deputy General Secretary, explains that green jobs must give decent pay and include union recognition, and ultimately need to be seen as “good jobs first and foremost”. Prospect’s report Delivering good clean energy jobs explains how unions and industry can work together to secure, highly skilled jobs that pay a fair wage and support the transition to net zero.

Fiscal policy

1964 offers more lessons for Labour than 1997. In a piece for LabourList, the IPPR’s George Dibb suggests that Labour could learn more from the missteps of Harold Wilson than from Tony Blair, given Labour may inherit an economy in crisis: “a Labour government can choose how to govern in an age of instability, and the lesson to learn from the past is not to bind your hands too tightly”.

Fiscal rules. He argues that the Labour government’s “hard-and-fast” fiscal rules “send signals to the electorate which are tighter than markets call for,” and argues that “these rules should also acknowledge what bond traders already know - borrowing to invest in the productive capacity of the economy is not the same as borrowing to scrap the top rate of tax.”


Make clean heat accessible to all. E3G’s James Dyson has written a briefing on the options for lowering heat pump running costs. Per unit of energy, UK electricity prices are currently disproportionately higher than gas prices due in part to the imbalance of social and environmental levies, so E3G suggests “a targeted removal of levies for heat pump & direct electric users. For those with efficient heat pumps, this would make heat pumps cheaper than gas boilers – & much cheaper, for homes with a smart tariff.”

Climate change

Net zero delay is an election-loser. In a piece for ConservativeHome, James Frayne, Director of Public First, argues that the Conservative Party’s recent moves towards delaying climate targets may harm their election chances, and argues that “the Conservatives should run a mile from any Net Zero scepticism.“ Instead, he thinks returning to their levelling up agenda could be a better bet to improve their popularity.

Labour’s green prosperity pledge. Luke Tryl, Director of More in Common, uses new public opinion data to argue that Labour’s recent popularity is “driven by dislike of the Tories rather than enthusiasm for Labour” but suggests that building on existing pledges could help tackle voter apathy. More in Common’s polling shows that Labour’s Green Prosperity Plan is popular with both ‘Red Wall’ and ‘Blue Wall’ swing voters, so doubling down on green investment while the Government rows back on its climate commitments could provide them with a real opportunity to build positive support for their own policies.

Monetary policy

Firms struggle due to higher interest rates. Corporate insolvencies in England and Wales reached their peak since the global financial crisis, partly due to expensive  borrowing and slowing demand, according to the Insolvency Service. Higher interest rates are affecting green energy firms in particular due to their higher start-up costs - shares in Ørsted, the world’s largest offshore wind developer, plunged after it was forced to abandon two projects in the US last week.

  • Is green credit guidance the answer? New analysis from the New Economics Foundation (NEF) has found that a special lower interest rate for green investments like wind farms and home insulation could save businesses and households £6.2bn over the next four years and help the UK meet its net zero ambitions. (Read our New Economy Brief from June for an explainer on Green Credit Guidance.)