Posted on by mickfoster

Why is there so little empathy in the world?

The question in the title was prompted by the apparent indifference of Western Governments to the appalling plight of people living in Gaza, and the grotesquely different values placed on human life depending on nationality, religion and ethnicity.

My May 2003 article on how to assess the case for overseas aid1 developed some criteria for analysing the circumstances in which it was reasonable for a Government to tax its own citizens in order to benefit non- citizens. In addition to some rather dry technical analysis, this developed the idea that the value that citizens place on the lives of specific groups of noncitizens depends on the perceived distance between the donor population and the intended beneficiaries. The concept of distance encompasses not just geographical distance but also perceived cultural differences and differences in time ( how much will today’s citizens pay to benefit future generations?).

The interesting point is that this concept of ‘distance’ is not absolute but is influenced by knowledge. Our willingness to deny or ignore the common humanity of others responds to how much we know about them. The response to Band Aid reflected the fact that we were watching the distress every night on news bulletins. The great Tsunami reinforced our sense of common humanity because Europeans and Asians were impacted and were seen helping and supporting each other.

It is not difficult to find reasons why we might be less able to recognise our common humanity in 2025. Our consumption of news has become fragmented and more partisan. Foreign coverage has reduced, with the BBC for example focusing on a very narrow range of subjects and reflecting a strong Western perspective that does not give much space to other viewpoints. Many people elect to avoid news coverage and, with the relative decline in terrestrial channels and national newspaper readership, they can easily do so.
A Labour Government could choose to promote empathy for our fellow human beings, and between different populations, wherever they live. That sounds like an idealistic fantasy, but the previous Labour Government achieved a lot through the exercise of soft power, and might have done more if it had not wrecked its reputation by joining the Iraq war. The previous Labour Government spearheaded global efforts to resolve the debt problems of many low income countries. It was central in persuading donors to signup to the millennium development goals, and to commit the necessary funding to achieve them. The Department for International Development established a strong reputation for competence and leadership on development issues. Most remarkably, it was the first Government to make the objective of reducing Global Poverty sufficiently popular to gather the support of both parties for a commitment to higher aid flows to help achieve it. Explaining what it was doing and why were key elements of this.

The Government could also choose to rebuild other aspects of our soft power. Al Jazeera has shown how investment in a trusted news source can give a country as small as Qatar disproportionate influence in the world . It has taken that role away from a much diminished BBC. The BBC did much to train Al Jazeera but has now been eclipsed by the Qatar station which has far better coverage of the world, far deeper analysis, and reflects a far wider range of views.

Government can also choose to distance itself from a belligerent and unreliable USA and its genocidal ally Israel and work instead with others to rebuild the multilateral system. We have in the past refused direct requests from the USA for support without wrecking our relationship with the Americans. A bit of distance from them and their genocidal ally might help us to establish a reputation for fair dealing and for seeing both sides of an issue. The use of aid, cultural ties, our educational institutions and a genuine commitment to a free press and the rule of law could win us more influence.

This could be reinforced by a commitment to explaining the policy to our own population and thereby educating empathy into our politics. When shown suffering, normal people want to alleviate it.
Sadly, it seems that our Government is even more indifferent to foreign suffering than to the poverty of our own population. It has chosen to cut aid and other sources of soft power in order to spend more on lethal weapons. It is choosing to do this in order to counter a paranoid fantasy about the extent of the threat from Russia, an economy smaller than ours. It is bizarre to believe that the very expensive nuclear armed aircraft we are proposing to buy will be at all useful in any realistic conflict- but the defence lobby is brilliant at persuading gullible Governments to spend billions on toys to fight non existent threats. The Government waves the threat of Russia at us while ignoring the unspeakable evil being done by our friend and ally Israel to the population of Gaza.

Far better value would be achieved at far less cost if we spent it instead on soft power. This would require an end to the double standards that reflect Israeli and US views that place a near zero value on Palestinian lives, and not much more on poor populations living elsewhere. We could make a real contribution by seeking to reduce the distance between nations and populations, rather than reinforcing it by ramping up spending on weapons of doubtful utility.

  1. Mick Foster, Criteria for Assessing the Case for Overseas Aid, a note, Development Policy Review, Vol 21 Number 3, May 2003 ↩︎

Posted on by mickfoster

UK Spending Review: promoting the wrong type of growth to benefit the wrong people in the least effective way

The stated aim of the Government is to boost economic growth through investment while maintaining a sound economy by bearing down on other forms of spending to keep within fiscal rules. This is intended to allow us to grow out of our difficulties by generating enough income to gradually reduce the debt burden and generate the revenue to improve living standards in the medium term.
The assumption is that higher economic growth requires a tight focus on higher investment including public investment. After 15 years of neglect of all public services this assumption is clearly wrong. The most valuable public infrastructure in any country is the infrastructure that already exists. That is why it was built first. In the UK, public infrastructure is crumbling through years of neglect, and is performing poorly due to inadequate operating funds and insufficient and poorly trained staff. The biggest impact on growth will come by remedying those problems. This will have a much quicker and more visible impact than grandiose investments that will take years to complete. It involves providing a substantial real increase in funding for local government. It also requires a shelving of the hugely disruptive reform of local Government structure that is currently planned, and that is a major distraction at a time when local authorities are in acute financial distress. We also need action to address the expensive legacy of Tory privatisation of natural monopolies in water, energy and transport.

The Government appears to think of private sector growth in terms of big firms investing huge amounts in mega projects. The kind of growth that will happen more quickly and will transform more lives is about unlocking the potential of millions of people through practical improvements in local infrastructure and in the incentives to work and to invest.

The benefit system for example at present places obstacles in the way of people wishing to work or to work longer hours, and actually encourages people to stay on disability benefits for fear that any work they take might prove temporary. If the work doesn’t last, they are exposed to debt, uncertainty and the risk of extreme poverty while waiting for benefits to be reinstated.

Spending more money to alleviate poverty and raise living standards is not only good because it improves lives but will also have a positive impact on economic growth. Unlike the wealthy who currently benefit from unnecessary tax breaks, the less well off actually spend their income, and they spend more of it locally. Transfers of cash to people who need it help to support hundreds of thousands of local businesses providing shops and services in their local area, and providing employment at a fraction of the cost of larger scale enterprises. Because it is spent, and spent locally, a larger share of the expenditure will flow back to the treasury in revenue from VAT, national insurance and income taxes.

This more local approach to raising the economic growth rate can also support the innovation and investment in new technologies that Government is keen to see. Entrepreneurs want to live and therefore invest in a pleasant and peaceful country with well maintained roads, good education and health services, pleasant parks and libraries and museums. They want access to a skilled workforce- which means allowing our universities to continue welcoming foreign students and researchers as well as a more relaxed attitude to immigration and allowing our young people to travel freely. It would help if we also committed wholeheartedly to a closer relationship with Europe- with the aim of eventually rejoining.

Where is the money for higher spending in these areas to come from? I think there’s scope for reducing the investment spending ambitions. The more ambitious large scale projects could be postponed with little short term harm. It seems absurd for a country as strapped for cash as we are to be discussing new runways at Heathrow and major investments in nuclear power. Whatever the rationale, these will not deliver in a time frame we should be discussing when the population is faced with so many short term problems. There’s definitely scope for altering the tax system in ways that place more of the burden on the better off. This needs to focus on taxation of capital and reforming the financing of local Government.

We should also be very wary of calls for us to spend more money that we don’t have on totally unproductive defence spending. The MOD has a long and inglorious history of spending huge amounts of money on kit that proves to be ludicrously expensive and entirely redundant for the tasks they are required to undertake. Our Governments in recent years have also shown an unpleasant tendency to use lethal force against civilians and often in conflicts for which there’s no public support. Continuing to sell arms to genocidal Israel is just the latest example where we are clearly on the wrong side. The idea of spending further billions on nuclear weapons is particularly obnoxious. We should resist calls for more defence spending, and slow down any response we are forced to make. We don’t need it, can’t afford it. Trump (and probably Putin) will be gone long before it makes any difference.
In summary: let’s have a more efficient and equitable tax system, and focus our spending on fixing up what already exists and on alleviating the suffering of so many in our population. This will not only improve living standards more quickly, it will also be a more effective way to generate the GDP growth that Government says it wants.


Turning to the debt and the consequent

Posted on by mickfoster

Rachel Reeves’ Economic Policies

The Guardian leader on 30 th January rightly says that Ms Reeves approach lacks ‘compassion or moral purpose.’ This is because it confuses means with ends. GDP growth only matters if it makes life better- a point also made by the heckler quoted by Aditya Chakraborti’s piece in the same edition (‘That’s your bloody GDP. Not ours.’)

The short term goals of Labour economic policy should be to improve the living standards of those who are struggling, and to rebuild our public services. The medium term goal should be to build a society and economy in which improvement in living standards and in public services is continuous and sustainable- environmentally and economically.

The two short term goals require a lot more money than Labour currently plans to spend, and a significant change in how it is raised. The current proposals, partly inherited from the previous government, include an increase in taxation paid by those on relatively low incomes and a decline in the real value of benefits. 

Raising the revenue needed without further harming those who are already struggling requires abandoning the foolish commitment not to use the most efficient and equitable methods of raising more revenue. We need income and corporation tax increases, a serious effort to end the over generous treatment of capital gains, and a reform of our property taxes.

It will be argued that a big, redistributive tax package to fund public expenditure increases and increased welfare provision will discourage private investment, and might reduce overall GDP growth. However, it also puts a lot more money in the pockets of people in every region of the country, people who will spend that money locally. That will boost ‘our  bloody GDP’, rather than further inflating the London economy. Untangling means from ends, it may be worth trading off a a slightly slower economic growth rate for a better distribution of that growth across the country.

There is also an argument that a large tax hike now to fund fundamental improvements would be preferable to a timid reform that leaves the economy struggling into the indefinite future with a mountain of debt, sluggish growth, terrible public services, collapsing infrastructure and stagnant living standards. Our tax burden is high by UK standards, but is still far short of some successful European countries. The private sector might be persuaded that bold measures today will create a better environment for future investment than the endless dreary trudge set out by the Government.

Two complementary measures would make a positive private sector response more likely. The first is an unequivocal commitment to a close relationship with the EU, preferably  including a commitment to seek to rejoin the single market. This is the one measure that would unequivocally deliver the increase in economic growth that the Government wants to see. The second is increased financial support to enable local authorities to provide the services they are required to, preferably combined with far less interference in how they spend it. Local people are those best placed to decide how best to use limited resources. 

My final point is that this agenda is hard enough, and the Government needs to stop inventing new and challenging tasks that are costly and difficult and do not contribute to the main goals. This is not the time to ask local authorities or Government Departments to plan for major re-organisation and reform. It is definitely not the time to embark on discussions about a third London Heathrow runway that will not see aircraft flying until long after this Government has departed. 

Sent from my iPad

amazon.com/author/mickfoster

Posted on by mickfoster

How Labour can rescue the UK:is Keir Starmer taking the wrong lessons from history?

In 1997, the Blair/Brown Government famously committed to stick to the spending limits set out by the preceding Tory Government- the aim being to reassure markets and media that Labour could be trusted with the public finances. Keir Starmer has done something similar, refusing to rule out a Labour government keeping to planned Tory cuts to public spending. However, the 1997 context was very different.

In 2024, the UK is in a far worse state than in 1997. After 14 years of Tory rule, we have become one of the most unequal countries in Europe, while continuing austerity has left public services and infrastructure in all sectors and all parts of the union in a state of imminent collapse. We have seen a widespread return of levels of poverty not seen since the 1930s, with households unable to meet the most basic needs for food shelter and warmth. Buildings including schools and hospitals are collapsing, roads are full of potholes, dangerous nuclear waste is leaking from dilapidated buildings at Sellafield, almost all local authorities are heading towards bankruptcy and inability to meet statutory requirements, while prisons are a disgrace, our once wonderful health service is starved of funds and unable to cope with waiting lists , while privatised utilities provide poor services while extracting billions and despoiling the countryside by discharging sewage into our rivers. Rather than deal with the dire legacy, Tory spending plans envisage further deep cuts in public spending to pay for promised tax reductions- though those tax ‘reductions’ are actually no more than a partial rollback of stealth tax increases. The conservatives can offer these completely unrealistic tax and spending plans in the secure knowledge that they will be out of Government and not required to implement them.

The conservatives have set a trap that Starmer is in danger of falling into. If Starmer rules out significant public expenditure increases funded by higher taxes , he has guaranteed that little will be achieved in a first Labour term, and thereby increased the likelihood of an early return of the Tories.

I do not deny that the outlook for the public finances is extremely difficult. Keir Starmer is right to say that the debt burden is too high and there is little scope for borrowing more to pay for more public spending. He is also correct to argue that, at least in the medium to long term, economic growth needs to increase in order to enable us to afford the living standards and public services we aspire to. However, he is wrong to argue against tax increases in the short term. Our entire public realm is in crisis and needs an urgent response. That immediate response is entirely compatible with a focus on increasing our dire economic growth rate, and I would argue that sustainable economic growth is dependent on us addressing the many issues being faced across the public sector.
The biggest drags on UK economic growth are stagnation in living standards, the increasing difficulty of international trade post BREXIT, and the poor state of public services and infrastructure. Although the tax burden is high by UK standards, it is not high compared to other major European countries, and is not a significant factor in explaining our growth performance. Paul Johnson in his recent book’ Follow the Money’ has set out ways in which our tax system could be improved and significantly more revenue raised in ways that are both equitable and economically efficient.

Higher taxation need not be a drag on economic growth if it is appropriately targeted. It is also worth emphasising that the composition of economic growth really matters. The Tory path of lower taxes is likely to further increase inequality between London and the rest of the economy, with further pressure on housing and other asset costs and little benefit to ordinary households. By contrast, growth based on higher public spending and more cash in the pockets of those who need it most will be far more widely distributed, and will build the foundations for sustained improvement into the future. Research into economic growth repeatedly shows the importance of a healthy and well educated population living in a country with low inequality and good infrastructure and public services. As the climate crisis worsens, we will also find that those countries that invest in a green future will be those that succeed in improving the lot of their populations. Labour have recognised this- but have restricted what they can achieve by ruling out tax increases.

The biggest question is whether Labour can win an election based on promising higher taxes and higher expenditure. I think that it can. The extent of the crisis we are in is widely recognised and I think a strategy that recognises the need for bold but fair steps to tackle it would stand a better chance of success than one based on an approach perceived as little different from the Tories. The extent of the problems will in practice inevitably force whichever party is in power to both tax and spend far more than is currently envisaged. It is better to explain this now and place the blame where it belongs, rather than to be forced to row back on promises immediately after the election.

Posted on by mickfoster · 1 Comment

How do the Tories keep winning elections?

The conservatives won a 66 seat majority in 2019, but less than 30 % of the electorate voted for them. They received just 44% of the votes of the two thirds of us who bothered to vote.

This is not unusual. Since 1945, not a single Government in the UK has taken power with a majority of the votes cast, and none has had the votes of more than 40% of the electorate. Ironically the party that came closest was Labour in 1951, when they received the votes of 40 % of the electorate and 49% of those cast- despite which they lost the election to the Conservatives who had a 17 seat majority.

The percentage of the electorate who voted for the winners has been less than 30 % in every election this century. This has happened for two reasons.

Firstly, turnout has fallen from an average of 76% in the 1945-1999 period to just 65% in the current century. The lowest turnout was 2001 when less than 60% of people voted and Tony Blair won a 167 seat majority with the votes of just 24% of the electorate.

The second reason why Governments can win power with a lower share of the vote is that the two main parties no longer command the loyalty of nearly all of the population. Until 1970, the combined share of the vote taken by the conservative and Labour parties averaged over 90%. The rise of the SNP and other nationalist parties and later of UKIP have split the vote. The share of the two main parties fell to 65% in 2010 before recovering to 83% in 2019 as BREXIT and the coalition dimmed the appeal of UKIP and the Liberal Democrats. More fundamentally, the drastic decline in manufacturing jobs and in trade union membership has eroded the class basis of political parties in the UK. The main dividing lines in voting patterns in the UK are no longer social class but are instead age and education- with younger and better educated people more inclined to vote for Labour and other left and centre parties, though unfortunately they have lower turnout. The Tory bias in policy in favour of the elderly is no accident.

The situation would be bad enough if parties only had to gain the support of 30 % of the population, but in practice they need to influence even fewer voters. Over 500 of the 650 seats in parliament were won with majorities of more than 10%, and 68 seats had majorities of more than 45%. This means that the votes of many of us simply don’t matter- the incumbent party is very unlikely to be ousted. It also means that parties can achieve power by appealing to the interests and prejudices of a very narrow group of voters in a fairly small number of relatively marginal constituencies. The scope for unethical and even corrupt practices in order to sway the vote is obvious, and can be seen in the politically biased allocation of levelling up funds, and the dog- whistle policies of scapegoating refugees to name just two policy areas.

Posted on by mickfoster

UK Economic Growth Performance since 1960

A 2015 post on this blog looked at economic performance under Labour and Tory Governments and concluded that there wasn’t much difference overall, but that Labour distributed the gains of economic growth more equitably and was a better custodian of public services. This post provides a partial update focusing on economic growth.

I compared UK economic growth with the average of all of the wealthy countries that are members of the OECD using data on the World Bank web site accessed on 11th March 2023. This reveals:-

I. The UK has been falling behind the average of OECD countries for most of the last 60 years. The average OECD country had a GDP that was nearly six times larger in 2021 than in 1960 whereas UK GDP had increased less than fourfold ( OECD average 588% of 1960 level, UK just 388%).

2. The UK economy did keep pace with the average of the OECD countries over the period from 1992-2010, the improvement having started under the Conservatives from about 1993 but being maintained under Labour from 1997-2010, with the financial crisis of 2008 resulting in only a modest dip in relative performance. The performance under Labour is all the more impressive because improvements in economic growth were successfully used to reduce poverty and improve public services.

3. The period of conservative Government since 2010 has seen a return to relative decline. The UK economy was only 10% larger in 2021 than in 2010, whereas the rich countries as a group had grown by 20% – twice as much.

4. As documented in other posts on this blog, the Tory Government has not only performed poorly on economic growth. It has also presided over a collapse in the quality and availability of public services, and a massive increase in poverty and inequality, while it’s BREXIT policies have significantly increased the difficulty and cost of investing in and trading with the UK, reducing our future growth potential.

Posted on by mickfoster

Alternatives to Hunt/Sunak Strategy

This note roughly costs some policy alternatives to the Sunak/Hunt approach .  It supplements my previous post that examined the implications of the Chancellor’s autumn statement. That included some suggestions for an alternative strategy. This post tries to put some rough numbers on their potential impact, looking specifically at:-

  1. A closer relationship with the EU, broadly equivalent to re-joining the single market.
  2. A set of tax changes along the lines proposed by TaxJustice.UK.

Estimates of the impact of BREXIT on the UK economy vary widely though most economists acknowledge that it has been negative and significant. The OBR estimates that the UK economy by the end of the decade will be 4% smaller because of BREXIT. I have assumed that a decision to re-join the single market would boost GDP growth sufficiently to recover this, reaching a level of GDP in 2007-8 that is 4% above the level forecast by the OBR if the Sunak/Hunt proposals are implemented. The boost amounts to an average increase of 0.75% p.a. over the five-year period. The implicit assumption is that any costs of re-joining have been netted out from this figure. That is not unreasonable given the very high cost of additional administration to undertake roles that were not required when we were members.

With tax: GDP unchanged from the OBR forecast, the higher GDP growth from a decision to re-join the single market would on these assumptions raise Government revenue by amounts rising to £47 bn by the final year of the forecast (see Table).

TaxJustice.UK estimate that the UK could raise £37bn per annum from a range of tax measures primarily aimed at the better off, and particularly at wealth and at capital gains. These include introducing a wealth tax (raising £10 billion per year), taxing capital gains at the same rate as income tax (£14bn), applying national insurance to investment income (£8.6bn), reforming non-dom status (£3.2bn) and closing inheritance tax loopholes (£1.2bn). I have assumed that the additional taxes would be implemented in full by 2024-25, and revenue would then grow in line with nominal GDP. The TaxJustice.UK analysis usefully illustrates that increased revenue raising from those who could most easily bear the burden is feasible on broadly the scale proposed.

Revenue Impact of Re-Joining the Single Market and Implementing TaxJustice.UK Proposals

£ Billions, Cash

Financial Year ending2425262728
Re-join EU single market: Additional tax revenues from increased GDP growth4.7512.3622.9934.5746.96
Additional Revenue from Tax Justice proposals18.0037.0038.5540.4642.47
Total increase in Government revenues (£Bns)22.7549.3661.5475.0389.43
Equivalent to a % increase in Government spending of:1.9%4.2%5.1%6.1%7.0%

The additional revenues could be used to fund any combination of higher public spending, reduced taxes on the lower paid, or faster progress towards reducing the deficit and hence the cost of servicing it. The additional revenue builds up to be equivalent to 7% of the currently proposed level of public expenditure in 2027-28.

The analysis is very crude. It will doubtless be argued that the assumed growth boost is on the high side. On the other hand, the estimate does not take account of some other significant positive impacts. For example, higher growth will reduce pressure on the benefits system, releasing resources for other spending. The post also ignores the potential impact on the cost of Government borrowing. It could be plausibly argued that markets would be reassured by a commitment to policies that will raise economic growth and do away with the need for public expenditure cuts that are economically damaging and politically unrealistic. A 0.5% cut in borrowing costs would save an additional £14 bns per year but would still leave HMG borrowing costs above those of Germany and France.  

Though crude, the post illustrates that resources could be generated that would be sufficient to transform the miserable outlook currently facing those on middle and lower incomes. We could improve the safety net, shield them from increased taxation, and still have resources left to begin to address the need for higher public spending.

Posted on by mickfoster · 1 Comment

The Autumn Statement: clever politics but dreadful economics

Summary

This summary just states my main conclusions- the evidence to support each point follows below.

  1. The UK faces deeper economic problems than other developed countries.
  2. The blame rests squarely on major and predictable policy mistakes made by conservative Governments since 2010.
  3. Restoring market trust after the disastrous Truss premiership required the Chancellor to promise harsher measures than would otherwise have been required.
  4. He has tried to minimise the political cost by delaying painful measures until after 2024- gambling that the markets will be satisfied by promises that the next Government will have to deliver.
  5. The specific measures in the Autumn statement appear at first sight to be well targeted: increased spending on health and education, updating benefits and the minimum wage to protect the poor and vulnerable, while the identified tax measures focus on high income earners and substantial additional revenue from windfall taxes on profits. However, the impression is misleading.
  6. On the revenue side, the largest single contribution to growth in tax revenues over the next 5 years comes from the freezing of tax thresholds. These stealth taxes will require millions of low and middle income households who are already experiencing declining incomes to pay significantly more tax.
  7. The increases in public spending over the next two years are welcome but totally inadequate to deal with the cost pressures that have built up over 12 years of neglect.
  8. The biggest single risk is that cost and wage pressures will make the assumed public expenditure cuts that are envisaged to take place after the 2024 election impossible to achieve- perhaps less a risk than a near certainty.
  9. An alternative strategy is feasible. It would involve re- joining the single market ( the most obvious near-term way to increase economic growth), introducing a significant wealth tax and other measures to raise revenue from those best able to pay. This would finance a more realistic response to public expenditure cost pressures, help reduce the impact on living standards and still keep the debt burden to a manageable level, with the prospect of a falling debt:GDP level in the medium term.

UK Economy is in worse shape than other developed countries

Compared to other G7 countries, the UK suffered by far the steepest fall in output during the pandemic with GDP falling 11% in 2020. Some of this was recovered in 2021, but the Ukraine crisis has again found the UK the least able to cope:- we are in recession with output 0.4% down over the pst year, while the Eurozone has grown by 2.2% and the USA by 4.2% (House of Commons Library, International Comparisons, Key Economic Indicators, 11November 2022). The UK is the only G7 country that has not yet recovered to pre-pandemic output levels. The OBR forecast that living standards will fall by 7% in the current and following year, and will be no higher in 2024 than a decade earlier. Recovery after that remains painfully slow:living standards as measured by real disposable income per person are projected to remain below pre-pandemic levels until 2027-28 (OBR forecast).

The Conservatives are to Blame

The war in Ukraine can explain why the global economy has slowed, but not why UK performance relative to other developed countries has been so poor. This is not a new phenomenon. UK economic performance has stagnated since the 2008-9 financial crisis.

During the 1997-2007 period, UK productivity growth of 1.9 % per annum was second only to the USA within the G7. This was achieved while also investing more in health and education and reducing poverty. From 2009-2019, productivity growth fell to 0.9% p.a., below the G7 average with only Italy performing worse (Office of NationalStatistics, based on OECD data).. Our relative performance subsequently deteriorated further due to the grotesque waste and mismanagement during the pandemic. After growing faster than our competitors and closing the productivity gap during the Labour years, the conservatives have presided over a long period of relative decline.

Previous posts on this site have looked at the policy errors that contributed to our inadequate growth performance.

BREXIT has caused a significant increase in the cost and difficulty of trade, and is estimated to have permanently reduced GDP by 4% (OBR, October 2021).

The rot however started before BREXIT. Austerity and increased inequality have both damaged the economy and increased poverty, as set out in detail in the excellent report Stagnation Nation produced by the Resolution Foundation.. The poor state of our infrastructure and public services make us an unattractive location in which to invest. Because of the poor growth performance, austerity was not even able to restore the public finances, leaving us to face the pandemic with a small and debt burdened economy, collapsing public services and rising levels of poverty.

Is the pain really necessary?

Government debt approaching 100% of GDP is high though by no means unprecedented. The problem is the increase in interest rates. Higher interest rates account for two thirds of the £75bn deterioration in the projected FY 26-27 Government deficit if no further action is taken (OBR forecast). The other factors are the energy price shock and the inflation driven increase in welfare payments.

The Government needed to convince the markets that debt would not spiral out of control. They needed to be convinced that action would be taken to ensure that debt:GDP would peak within the next 5 years, and would then begin to come down.

The OBR forcast shows that, with no further action, Government would still be borrowing 3.7% of GDP in FY 27-28.. With real GDP growth of 2.2% and inflation on target at about 2%, the cash value of GDP would grow by more than 4%. This would be just sufficient to ensure that debt would begin to decline as a share of GDP, even if Government took no further action and was still borrowing 3.7% of GDP. The markets might well have reacted calmly to this scenario had it not been for the ludicrous policy turbulence of the last few months. A new Government with a reputation for honesty and competence might still be able to be convincing.

The Conservatives probably had to do more. The poor reputation our Government has for economic competence is reflected in the’moron premium’, the extra interest that HMG has to pay in order to borrow money. The increased cost of Government borrowing has come down slightly from the premium demanded when Liz Truss was in charge, but it remains significant, reflecting the perceived risk of lending to an unstable and unpredictable Government. The implicit interest rate on 10 year bonds issued by HMG is currently about 3.2%, having peaked at 4.5%. It is perhaps no surprise that stolid and dependable Germany only has to pay 2% on 10 year bonds, but France is able to borrow at 2.5%, still much more cheaply than the UK (rates checked 20 th November). This matters: according to the OBR, a1% increase in borrowing costs adds £25 bn to the annual deficit in FY27-28, equal to one third of the increased deficit that made the autumn statement necessary.

HMG are Delaying some of the pain–

Measures in the Autumn statement actually increase public expenditure in the current and two subsequent years, with increases focused on health and education. Significant cuts in spending are envisaged from 2025-26, but these are not specified and will be for the next Government to decide and implement. They are planned to be very steep: holding current budgets to a 1% per annum increase, rather than the previously planned 3.4% while capital budgets are maintained in cash terms, implying a real terms cut in both.

On the revenue side, the big tax increases that are explicitly identified are targeted towards windfall taxes on energy companies, and higher taxes for high earners.

The most politically challenging of the explicitly identified measures is the change to the energy price guarantee in FY23-24, implying a £500 increase in average bills, but the £14 bn saving is offset by £12 bn of targeted support for the poor and vulnerable in cost of living payments to pensioners, the disabled and those on means tested benefits.

– While disguising and shifting the blame for most of the pain

The autumn statement contains a detailed table setting out the impact of each of the policy measures in the statement. On the face of it, this appears to show very little impact on the tax that most people will pay. The decision to freeze the income tax and NI thresholds for two further years is shown as raising just £1.26 bn, and that in the final year. The reduction in the additional rate threshold is more significant in money terms, but is better targeted, hitting those on relatively high incomes. However, the table is entirely misleading.

The decision to freeze the tax thresholds was made when inflation was far lower. The acceleration in inflation has massively increased the yield of this stealth tax. Supplementary tables published with the OBR forecasts show that income tax is forcast to increase by £97 bn between FY21-22 and FY 28-9, accounting for 34% of the forcast increase in receipts over the period. Most of this is the result of higher incomes with unchanged thresholds dragging more people into paying tax and subjecting existing taxpayers to pay tax on a higher share of their incomes. In the period from FY20-21 to FY 28-9, the economy is expected to grow by about 12%, but income tax receipts will increase by over 20%, adjusted for inflation. These tax increases will fall on households who have experienced a prolonged period of falling incomes as wages have failed to keep pace with inflation.

The public expenditure increases to address pressure on education and health and social care are welcome, but fall far short of the amounts needed. Average pay awards of 5% across the public sector are not fully funded when budgets have been increasing by only 3%, and they involve a real terms cut when inflation is at 10%. The NHS confederation estimate that the NHS needs an additional £4bn just to make up for inflation in the current FY 22-23, before considering the cost of tackling the backlog of maintenance, the staff shortages, the waiting lists, and the social care underfunding. The £5-6 bn p.a. extra over the next two years will not address these problems. Similarly, school funding restores FY 20-21 per pupil funding, but it remains significantly below 2010 levels in real terms.

For local Government, the cap on rate increases has been raised to enable local authorities to finance higher expenditure. This may be astute politics, with brutal implications. Wealthier authorities with mostly conservative controlled councils will be able to raise more and improve services. Poorer local authorities will struggle to raise more revenue, and will face resentment for the state of public services, but the conservatives will hope to place the blame on the party that controls the council- which in most cases will not be themselves.

Risks

The biggest risk is that the envisaged public expenditure cuts from FY 24-25 will not happen. Indeed, that is a near certainty given the dilapidated state of our public sector after 12 years of austerity. The growth and inflation assumptions are also subject to wide margins of error. The OBR forecast is for average growth of about 2.5% per annum over the last three years to FY 27-28, in line with most other forecasts but more optimistic than the Bank of England.

Does it matter if events do not turn out as forecast? Probably not very much. The key point is that the statement commits HMG to targets to reduce the deficit below 3% of GDP and begin to reduce the debt: GDP ratio by FY 27-28. Forecasts are a polite fiction, setting out a plausible scenario for how this might be achieved. In present circumstances, I doubt that anyone is paying too much attention to them. The key point is for the Government to convince the markets that it will take necessary action to manage the public finances and meet the targets in the light of whatever circumstances it finds itself in.

What is the alternative?

An alternative strategy with less pain is feasible.

It would include a closer relationship with the EU, preferably including a commitment to rejoin the single market. When both major parties acknowledge the importance of restoring growth to the economy, it is bizarre that neither will support the one measure that would do most to achieve this quickly and at minimal cost.

Public expenditure plans will need to be increased in order to address the many legacies of past neglect. In a situation where dire poverty also afflicts so many households, the safety net which is currently one of the least generous in Europe needs to be enhanced.

Increased growth alone will not be sufficient to pay for this without spooking the markets. We will need increased taxation to come from somewhere. The obvious source if we are concerned to shield lower and middle income households is to implement a wealth tax. The wealthy largely escape tax by declaring low incomes, letting wealth accumulate, and financing their lifestyle by borrowing against their assets. Detailed proposals for raising large sums by taxing wealth have already been prepared setting out how a wealth tax might work (Wealth Tax Commission: A Wealth Tax for the UK, LSE 2020). There may also be scope for raising taxation of Bank profits that have been swollen by higher interest rates, and for saving money by cancelling some of the large scale mega projects and focusing instead on supporting local initiatives.

An increase in the tax GDP ratio in the UK would raise it to a level that would be high for the UK, but not out of line with successful European countries. The tax:GDP ratio is projected by the OBR to reach 37.1% in FY 27-28, which is high for us but compares with 45% in France and 39% in Germany according to OECD data for 2019. Loading more tax onto an economy in such a weak state would only be reasonable if it is targeted towards those best able to pay- hence the attraction of a wealth tax.

The positive attraction of this alternative is that faster growth and higher taxes paid by the wealthy should enable us to reduce debt and the interest burden sooner. The earlier we can implement higher taxes, the sooner we can begin to reduce the interest burden and create the scope for spending more on public services. We are currently in a doom loop, where slow growth and high interest payments swallow money that could be used to restore public services and reduce the high tax burden on struggling households. Reversing this can potentially create a virtuous circle with earlier action both reducing the debt and encouraging the markets to reduce the premium they charge on our borrowing.

Digging our way out of the mess we are in will not be easy. But for a credible Government, it need not be quite as difficult and painful as implementation of the Tory Autumn statement will prove to be.

Posted on by mickfoster · 1 Comment

BREXIT and our current economic problems

Before discussing future economic policies, it is important to recall when we last had a successful economy, and to understand how we arrived at our present chaotic mess. Data to support most of the points made can be found in Stagnation Nation, the excellent interim report published July 2022 by the Resolution Foundation.

The Labour Government that took power in 1997 is the only post war UK Government to achieve faster economic growth than the average of the developed economies. It achieved this while also sharing the benefits, with major reductions in poverty (especially child poverty) and big improvements in public services including access to education and the performance of the NHS.

The progress was interrupted by the financial crisis of 2007-8, but it was the years of unnecessary austerity that followed that did the most damage.

George Osborne argued that the deep cuts aimed at reducing the debt to GDP ratio were ‘repairing the roof while the sun shines.’ It turned out that nothing much was repaired during those years. Austerity in practice meant that problems were simply deferred, resulting in a mountain of costs for a future government:- neglected maintenance of schools and hospitals, failure to train enough doctors and nurses, local authorities starved of cash resulting in fewer and poorer quality services, collapse in the value of benefits resulting in increased poverty, and a mounting pressure for public sector wage increases after a decade of relative decline. The main effect of the policy was to slow economic growth- with the tragically ironic consequence that the pain and suffering that was inflicted did not even succeed in reducing the debt burden. Net public debt to GDP actually increased under the coalition government.

A key point is that the subsequent economic shocks of BREXIT, the pandemic, the Ukrainian war, and the calamitous policies of Liz Truss hit an already enfeebled economy suffering stagnant growth and rising poverty, with public services under visible distress.

In the current economic crisis, a partial reversal of the most damaging aspects of the extreme version of BREXIT is one of the few areas of economic policy where the UK can take back control ( I think I might have heard that phrase before somewhere).

We have little control over the war or it’s economic consequences. The period of economic lunacy under Truss was brief but resulted in an expensive loss of control over our economic policies. The measures that had to be brought in to try to restore market confidence are significantly harsher and more expensive than they need have been, reflected in higher borrowing costs than other major economies and a weak exchange rate. Replacing irresponsible tax cuts with Austerity 2 may calm the markets, but will do nothing to increase economic growth and will further exacerbate the already critical state of our public sector.

It is bizarre that both major political parties ignore the one economic strategy that offers the fairly certain prospect of boosting economic growth and improving the public finances, at minimal cost ( or possibly negative cost if we are able to save on the army of public employees doing jobs only necessary because of our divorce from the EU). I refer of course to improving our trading relationship with the EU. The strongest single conclusion from the literature on economic growth is that more open trade policies boost the growth rate.

It is beyond dispute that leaving the EU has made trade in both goods and services more expensive and more difficult, resulting in a precipitous 9% decline in trade openness from 2019 to 2021, far steeper than the 2% decline in France (Resolution Foundation, op cit). Cutting ourselves off from the EU has made trade more difficult in all markets, not just the EU, because we are no longer covered by the many EU trade deals with third countries.

The second strongest conclusion from the growth literature concerns the importance of investment in human capital through education, training and research. Here also we have severely damaged our prospects by cutting ourselves off from collaboration in research through the EU Horizon programme and making ourselves a more difficult and less attractive place to live, research, work and invest.

It might not be politically realistic to argue for re-joining the EU and overturning the referendum result. However, the case for far closer trading arrangements is overwhelming, and how far we can and should go deserves to be at the centre of our political discourse.


Posted on by mickfoster · 2 Comments

The dirty secret behind low UK productivity growth: Low Pay is the cause, not the result

I think this is worth updating and publishing again in the light of recent discussions of low and stagnant UK productivity.

Productivity is usually measured as the value of the output produced by a worker in an hour. At national level, it is total GDP divided by the number of hours required to produce it. For a manufacturing economy this is conceptually easy to visualise (though not easy to measure). It conjures up comparisons between highly productive German workers with lots of shiny machinery producing more widgets per hour than British workers with older machines and fewer of them.

The problem is that we are now largely a service sector economy, where the concept of output per hour is harder to measure, the meaning of productivity is less clear, and the social benefits of alleged ‘productivity improvement’ can be ambiguous .

In the public sector, output is not sold and ( for international comparisons at least) we simply value the output according to how much it costs. If Government spends more but employs no more labour hours, then measured productivity increases. Of course output may have increased, perhaps as a result of spending on improving technology , but it could equally be the case that Government simply paid the cost of a wage increase and nothing changed at all, other than happier workers.

Productivity is also a tricky concept in the private sector and in the murky grey areas of public financing but private provision. If Government increases the minimum wage, for example, the outcome depends on whether firms are able to raise their prices. If they raise their prices by the full amount, then measured productivity will increase even if the same Amazon workers are delivering the same number of packages, or the same care workers are providing the same level of care to the same number of people. Higher prices raise the recorded value of output, and will be measured as a productivity improvement, even if the same workers are doing the same job in exactly the same way.

In practice the price increase is not the only change that will happen. There might be some fall in demand because of the price increase- which may mean some people losing their jobs because the enterprise they work for cuts costs or goes out of business. The loss of the least productive firms will raise the average productivity of the sector . There might be some increase in the actual output per hour as firms cut staff and remaining workers are made to take ever shorter breaks and given more challenging targets. Both the job cuts and the increased pressure to make those who stay work harder will be measured in the data as improvements in productivity, though neither is necessarily desirable. The firms that remain may be those that survive by cutting corners and over-working their staff. Reducing standards in care homes to avoid going bust is not what people usually think of when asked to describe productivity improvement.


The key point I want to make is that low productivity work exists because workers are willing to work for low pay in poor conditions. They are willing to do that because they have no alternative that offers them a better standard of living. The low productivity work at the lower end of the income scale will cease to exist if the state provides a reasonable safety net through a combination of benefit payments and/or the enforcement of minimum wages and conditions.

In the Labour years 1997-2007, the UK productivity growth measured by output per hour worked was second only to the USA among the leading economies of the G7. This was the period of increased minimum wages and improvements in the social safety net that dramatically reduced poverty. In the subsequent period of Tory Government, only Italy had slower productivity growth. This was the period of austerity when that safety net was allowed to collapse. The deterioration in relative productivity growth in the latter period is not an accident. It is a consequence.

The low level of unemployment in the UK is also a consequence of our inadequate safety net. As I have argued elsewhere in this blog, unemployment is a luxury good. Rich countries pay people to be idle because they are not willing to tolerate the levels of poverty that result if people are forced to subsist on the income from poorly paid jobs in harsh conditions.

Summarising, low productivity jobs are only profitable for employers if the cost of employing someone is lower than the value of what the worker produces. Stagnant productivity growth is a by-product of low wages, which are in turn made possible by the lack of a safety net that would have given workers a viable alternative. If the Government is serious about driving higher economic growth based on improving productivity, then a good place to start is by improving the welfare safety net, raising the minimum wage, improving employment conditions . Average productivity will rise . Unemployment may also rise as workers are no longer forced into jobs at poverty wages.

High net immigration to fill jobs that UK nationals are unwilling to do at current wages is a further symptom of a low wage and low productivity economy. UK nationals in serious poverty might be expected to take up these jobs but a number of barriers prevent this from happening on a sufficient scale. Lack of housing mobility, high travel costs, inadequate childcare provision, the high marginal rate of withdrawal of benefits, and the delay and uncertainty of getting benefits restored if the job is terminated combine to make low paid and precarious work unattractive.

Government policies to raise wages and strengthen the safety net will prevent firms from making high profits by paying low wages to workers who have few choices. It will not necessarily result in firms deciding to invest instead in the technology of the future- though it probably makes it more likely. The growth agenda still needs support- as I argued in a previous post this is about supporting trade openness and improved education and training. However, improvement in productivity that is meaningful for the majority of the workforce will need to encompass improvements to the safety net and to working conditions-the exact opposite course to the one the Tories are embarked on.