Expert blog: How to fix the poly-crisis of public services, poverty and productivity
Professor Will Rossiter, head of the Economic Strategy Research Bureau at Nottingham Business School, explores investment priorities ahead of the Government's autumn budget.
By Helen Breese | Published on 1 October 2024
Categories: Press office; Research; Nottingham Business School;
Whether we believe the £22bn black hole or not, the Chancellor Rachel Reeves is not wrong to suggest that recent Conservative governments have left her with an almighty mess to clear up.
But this is not just the result of the Truss debacle or the last couple of years during which Chancellor Hunt’s spending plans implied further austerity to come. Collectively Cameron, May, Johnson, Truss and Sunak presided over an unprecedented period of economic stagnation, falling real incomes and failing public services.
Apologists for the Conservative’s economic record will point to the twin economic shocks of the Covid pandemic and more recent energy price spike associated with the Russian invasion of Ukraine. But let’s not also forget the huge self-inflicted and now festering wound of Brexit. It should be non-controversial to state that Brexit has manifestly depressed UK economic growth and shrunk our international trade (as credible economists consistently predicted that it would).
Growth matters because, as Torsten Bell has most recently argued, if you have a growing population (as we do), the only way to maintain or improve living standards is to grow your economy. Furthermore, the only way to grow your economy when your workforce is contracting as a proportion of your population (as the population is aging) is to improve productivity. The UK’s long-term struggles to improve productivity relative to comparable nations have been well documented.
To these three economic shocks we must also consider the impact of austerity and the associated bonfire of good government. It was macro-economically illiterate, but enthusiastically pushed by Cameron/Osborne/Alexander and enabled by the Clegg confederacy.
Austerity depressed growth in an already stalling economy, while actively dismantling the institutional capabilities of the British state to respond to crises and undermining the public services on which we all depend.
A focus on reducing the social security benefit bill1, rather than addressing the circumstances pushing households into a reliance on benefits, further magnified the challenges faced by the poorest and most disadvantaged in society. Rising (child) poverty and stalling life expectancy provide some sense of the social and human cost of these policies.
Professor Will Rossiter, Nottingham Business School
As Wrenn Lewis has consistently argued, from an economic perspective it is not possible to rationalise the (pro-cyclical) austerity2 policies of this period without reference to the small-state evangelists for whom the Global Financial Crisis and Great Recession presented a crisis that was too good to miss. And take full advantage they did.
The consequences of this attack on state capacity became all too clear during the Covid pandemic. An underfunded NHS with degraded local and central government struggled to cope. Those who suffered most in consequence were the poor and the vulnerable – in short those most in need of state support through effective public service delivery.
The insufficiency of these services probably now contributes to perpetuating the post-Covid rise in economic inactivity rates that makes the UK unique amongst comparable G7 countries. Sadly, and tragically, one can draw similar conclusions about the damage inflicted by austerity and small statism from the recent Grenfell enquiry.
How then to fix the mess?
The solution to our poly-crisis of public services, poverty and productivity lies in investment. That much is obvious. The question is how to fund it and in what should we invest?
Much has been made of the size of the public debt. It is historically high by the standards of recent decades – but is not exceptionally so (relative to our GDP) compared to similar countries. It is also considerably lower, in these terms, than it was in the immediate post-war period. A period in which Atlee’s Labour government still proved able to establish the NHS and otherwise mobilise a post-conflict reconstruction effort.
This is not to say that public debt does not matter. It matters greatly – particularly in how it is used. The Truss/Kwarteng ‘fiscal event’ and the financial market reaction that it provoked demonstrated this beyond refute. But there is no law of nature that dictates how much debt is too much debt for a nation state – and particularly one with the productive capability of the sixth largest economy on the planet and no recent history of defaulting on government debt.
We must eschew tired and misleading analogies with household debt and ‘maxed-out credit cards’. Instead, we must think more like businesses and be prepared to invest in national assets/capability creation that will enhance our future productive capability and wellbeing.
Our present poly-crisis demands investment in:
- State capacity – both national and local – essential to re-establish good government and effective public services delivery.
- Investment in productive infrastructure (public and private) and Skills.
- Investment in the reduction poverty and inequality.
Public borrowing will be required to fund this investment – but so too will tax rises be needed to balance everyday public spending. Pre-election promises are a constraint on Reeves’ room for manoeuvre in raising tax revenue. So, we must hope for a ‘Gordon Brownesk’ rabbit or two to be pulled from the Budget hat.
The need to create additional headroom for investment borrowing will also necessitate a rewrite of the Government’s fiscal rules to remove counterproductive constraints on borrowing for public investment. These rules are self-imposed but necessary to inoculate the new Labour government’s fiscal plans against any adverse response from the financial markets. They will need to be redrafted in order to support the wider Labour project of state repair and renewal.
As we approach the autumn budget, we must hope that Rachel Reeves and the new Labour government learn both the economic and political lessons of 2010.
Professor Will Rossiter, head of the Economic Strategy Research Bureau, Nottingham Business School
[1] George Osborne’s 2015 introduction of the two-child benefit limit is one of the more grievous examples.
[2] Mainstream macroeconomic thinking suggests that in a recessionary environment, Government expenditure should be used to provide a counter-cyclical economic stimulus. This is intended to moderate the effects of recession and promote recovery. A pro-cyclical cut in Government expenditure will always risk deepening or prolonging recession – which is in fact exactly what the UK experienced after 2010.