Our In Focus section this week examines the emerging narratives around austerity, public spending and public finances that will shape next year's economic policy debates.
Read our In Brief and Reflections sections for the latest research and analysis around economic recovery and reform Beyond Covid.
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In Focus: Public spending narratives
No return to austerity? In advance of the Spending Review last week, both the Chancellor and Prime Minister were keen to emphasise there would be “no return to austerity” - a continuation of the shift in economic policy emphasis from the Cameron and May premierships.
Cuts to spending. The Institute for Fiscal Studies notes that the “key core Spending Review decision was to reduce public service spending… relative to March plans”. Accounting for Government commitments on e.g. health and defence, there looks to be little left for remaining departments. Considering that public service spending per head outside health has been cut by 25% over the past decade, the coming year will likely feel pretty austere for unprotected departments.
“Fiscal emergency”. The Chancellor spoke of the “economic emergency” in his speech. Notably, he justified the government’s increased borrowing to fund its Covid-19 response because “the price of inaction would have been far higher”. This, however, slipped quickly into talk of a “fiscal emergency” - shifting the focus away from the economy as a whole and towards the public finances - to justify, for example, breaking the Conservatives’ manifesto pledge to maintain foreign aid spending at 0.7% of GDP, and the public sector pay freeze.
~~Public sector pay freeze. We covered the public sector pay freeze in advance of the Spending Review last week. The announced measures differed from expectations - notably, no pay freeze for public sector workers below the median income - but the arguments against the freeze based on macroeconomics, the need to rebuild public sector capacity and ongoing recruitment/retention problems remain. Read our summary here.
~~Foreign aid spending. The cuts to foreign aid spending have been roundly criticised across the political spectrum, including for the potential to undermine the UK’s authority on the international stage, which will be crucial for making COP26 a success. Former UN Gen Sec Ban Ki Moon writes in The Times.
~~Why bother? Conservative-aligned think tank Bright Bluehas noted that the savings from these two measures are small fry compared to overall public spending. They argue we are not facing a fiscal emergency and that these cuts are “very odd”.
~~Local government.Professor Diane Coyle writes in the Conversation that, following a decade of financial uncertainty, local government leaders had asked for a meaningful, multi-year funding settlement, but that their calls have fallen on deaf ears.
It’s the economy, stupid. Economists across the board have warned against a focus on “repairing the public finances” at a time when borrowing costs are so low and the economy is so weak. The OECD has warned that the UK will face the slowest economic recovery of all its members bar Argentina, as a result of both Brexit and repeated failures to control Covid-19’s spread, necessitating sudden-onset, strict lockdowns.
~~Learning the lessons of austerity. The OECD's Chief Economist has argued against a repeat of austerity: “We made the mistake in 2010; we need to learn from the mistake. We need to keep up the support for the people and those in and out of jobs. We must make sure income is supported.”
~~Borrowing costs. The Government can currently borrow at record low interest rates, so much so that the government is set to spend less on debt interest over the next five years than previously forecast, despite the rise in national debt over the course of the pandemic.
~~What if rates rise!? This appears unlikely; the interest rate charged on the 50-year gilt is less than 0.7%. Government could “lock in” low interest rates through borrowing now. Further, as Stephen Bush has argued, a rise in interest rates would likely indicate an improvement in the economy that would compensate for the increased public outlay.
~~Public investment. Persistent low interest rates indicate an appetite for investment that has not been forthcoming from the private sector in recent years. The IMF and OECD have called for investment-led recovery, and IPPR modellingindicates that a positive side effect of a major green stimulus package could be that the debt-GDP ratio falls.
Narratives. The narratives, analogies and frames used in media discourse around the economy have reinforced misconceptions around the public finance constraints faced by government. Last week, 24 economics professors wrote to the BBC Director General, urging its journalists to avoid inaccurate and politically contested analogies (e.g. “the government has maxed out its credit card") in their reporting - Times coverage here.
~~Fundamentalists, centrists and heretics. Professor Daniela Gabor wrote a more detailed analysis of the warring fiscal policy camps and how these powerful but misleading narratives constrain economic policy for the Guardian.
~~~~instinctively thought that it was bad to run a budget deficit - participants often could not give a detailed rationale for this view, other than it seemed logical.
~~~~understand economic issues through the lens of their familiar personal economy rather than the abstract national economy.
~~Communication challenges. There is an acute need to develop new frames for communicating these issues, building on e.g. efforts made by the Framing the Economy project.
Better metrics? Professor Simon Wren-Lewis has written on how a public sector net worth target - which would capture the assets created by government investment, and not just its liabilities - would be a more appropriate fiscal target given the acute need for major green investment, though there also needs to be a broader de-emphasis of fiscal targets in favour of a more holistic economic outlook. See his piece on fiscal policy during and after the pandemic.
Brexit chaos looms. Andrew Bailey, Governor of the Bank of England, warned that a no-deal Brexit will do more damage to the economy than the coronavirus when speaking to the House of Commons Treasury Select Committee. (Video clip here)
~~Financial regulation. Positive Money’s Director Fran Boait gave evidence to the Financial Services Bill Committee, warning that current proposals for post-Brexit regulation of the financial sector fall short on environmental and social goals and risk handing over too much power to regulators, without accountability.
~~No deal? No data. NEF released a report outlining the economic cost and implications of the UK not receiving a data adequacy decision from the EU, estimating the aggregate cost to UK businesses between £1 billion and £1.6 billion.
~~Farming after Brexit. DEFRA unveiled its "path to sustainable farming roadmap" outlining its Environmental Land Management Scheme to incentivise sustainable farming after Brexit. (Twitter thread here)
“A post-covid caring revolution”. Sam Smethers, Chief Executive of the Fawcett Society, argued for strategic investment in childcare infrastructure on Bright Blue’s blog, pointing to deepening gender inequalities around childcare during the pandemic.
“Lifting the lid on fintech”. The Finance Innovation Lab published a report examining the acceleration of technology-driven innovation in finance and the implications for democracy, sustainability, justice and resilience.
Ethical use of AI. The Centre for Data Ethics & Innovation published the final report of a review into bias in algorithmic decision making, proposing significant measures for government, regulators and industry to act on to tackle the risks of algorithmic bias.
Tracking green recovery. Carbon Brief updated its green recovery tracker tool to include the UK’s Ten Point Plan for a Green Industrial Revolution, allowing for easy international comparisons.
4 Day Week in Scotland. Autonomy released a new report titled “A Scottish Four Day Week: initial costings for the implementation in the public sector”. (Coverage in the Scotsman here)
Levelling up? IPPR North published "State of the North 2020/21: Power up, level up, rise up", identifying key tests for the government's levelling-up agenda. (Guardian coverage here/ MEN coverage here.)
Net Zero North Sea. IPPR released a new report outlining ‘A managed transition for oil and gas in Scotland and the UK after Covid-19’. (The Times coverage here/ Guardian coverage here
Central banking gets weirder. The Bank of Japan is now the biggest owner of the nation’s stocks, with the total value of its holdings well above $400bn.
Tax justice + climate justice. Sarah Hall, head of movement and partnerships at Tax Justice UK, wrote for the Green Alliance blog on the link between progressive taxation and a green recovery.
Keynesian debt management. The IPPR’s Carys Roberts and Carsten Jung wrote for Prospect Magazine, explaining why a Keynesian stimulus is best for both the economy and the public finances.
Green growth vs degrowth. Beth Stratford wrote for openDemocracy on the need for increased unity between supporters of degrowth and green growth.
Marketisation of higher education. Bethan Staton wrote a long read for the FT on the pandemic’s exposure of deep cracks within the country’s market driven higher education system.
Fixing the housing market. Ed Conway wrote for the Times suggesting how Sunak can end Britain’s generational divide between people who bought their first home before 1999 and those who bought their first home after 1999.
We are not ready. Laurie Laybourn-Langton wrote for The Ecologist, arguing that the political system is not equipped to deal with the climate crisis.
“God asks us to dare to create something new”. Pope Francis argued in the New York Times that “we cannot return to the false securities of the political and economic systems we had before the crisis. We need economies that give to all access to the fruits of creation, to the basic needs of life: to land, lodging and labor.”