Today, I just want to say a brief word about the uncritical interpretation of these statistics in the media, using the BBC’s article on the new figures as an example. The headline is “wages accelerate to fastest pace since 2008”, and the introduction reads:

“Wages are continuing to rise at their highest level for nearly a decade, the latest official Office for National Statistics figures show.

Compared with a year earlier, wages excluding bonuses, were up by 3.3% for the three months to October, the biggest rise since November 2008. Average weekly wages are £495 – the highest since 2011, when adjusted for inflation.

The number of people in work rose by 79,000 to 32.48 million, a record high. That is the highest figure since records began in 1971.

Unemployment increased by 20,000 to 1.38 million, although the margin of error is 70,000 and the total is still lower than a year ago. The number of unemployed men increased by 27,000, while the number of unemployed women fell by 8,000.

The reason both employment and unemployment have increased is a result of the UK’s rising population and more people joining the labour force, such as students and older people.”

First, it is nominal wages that are growing at their fastest rate for nearly a decade. But real wages – wages after inflation – are what really matter, as they tell us far more about workers’ living standards.[1] Here, the picture is much more dismal. Real wages grew by just over 1% in the past year – slower than in most of 2015/16, and well below 1945-2007 average of 2.5%.[2]

Indeed, this meek growth has not been enough to compensate for the falls in real wages during and following the recession, conferring onto the UK the dubious honour of being one of the only OECD countries (along with Greece) to have experienced negative wage growth since the Global Financial Crisis (GFC). So yes, weekly wages are at their “highest” since 2011, but this is not cause for celebration. If wage growth had kept up with the WW2-GFC trend, wages would be approximately ~28% higher than their current levels.

Instead of explaining this broader context in their introduction to the piece, the BBC decided to note that the number of people in work is at its highest since records began in 1971: unsurprising, given that the population of the UK has steadily risen by 11m people over this time period. Choosing to devote space to such a facile observation is questionable at the very least.

Though the BBC did add critical commentary from Margaret Greenwood, Frances O’Grady and others over the course of the day (though without timestamping these contributions/noting that the article had been edited ex post, I might add), the fact that the earliest, and likely the most-read version of the BBC article contained no such counterpoint is serious cause for concern.

The overarching issue is that wage and productivity performance has been so dismal over the past decade that it allows the Government to pass off news that would be considered miserable by any reasonable standards as fantastic. Employment Minister Alok Sharma, for example, cited “wages outpacing inflation for the ninth month in a row” as a sign of “the enduring strength of our jobs market”.

The fact that avoiding real wage falls for a grand total of nine months – outside of recession time, no less – is touted as a mark of enduring strength highlights that something is seriously wrong with the UK labour market. This is why continuing to draw attention to the wider context is so important.

[1] One commentator pointed out that higher nominal wage growth does benefit indebted households; this is true, but it is stagnant real wage growth that is driving the increase in consumer debt in the first place.

[2] Using the ‘real consumption earnings’ time series from the Bank of England’s A Millennium of Macroeconomic Data.

Photo credit from previous page: Flickr / Ali Craigmile

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Earlier this month, Professor Philip Alston embarked on a two-week tour of the UK – not to give lectures or to present at conferences, as one might expect of a visiting academic, but rather to investigate the UK in his official capacity as the UN Special Rapporteur on extreme poverty and human rights.

Over the course of his inquiry, Alston spoke to politicians of all stripes; met with civil society groups, community organisations and front line workers; and most notably, listened first-hand to the testimonies of people living in poverty. On Friday 16 November, the UN published a statement summarising his findings – one which can only be described as an excoriation of austerity.

Before moving on to these findings, it is worth noting that this isn’t the first time British austerity has been the object of such UN scrutiny. In 2015-6, the UK had the honour of being the first country investigated by the UN over “grave and systemic violations of the Convention on the Rights of Persons with Disabilities”. The investigating committee found that welfare ‘reforms’ – e.g. changes to Housing Benefit entitlement, the closure of the Independent Living Fund – enacted by the Conservatives in the name of austerity had indeed led to grave and systemic violations of disabled people’s rights.

But of course, the Government rejected all the recommendations made by the committee to rectify the situation.

Findings of the UN inquiry

Professor Alston’s statement – well worth reading in full – is nothing short of damning. It lays bare the extent of misery and poverty that the Government has visited on the most vulnerable people in our society. He has dutifully collated individual testimonies from the victims of austerity, and has interwoven these with statistical evidence showing that these stories are far from anecdotal or anomalous – they are representative.

“I needed full time care, and my husband had to leave his job. Suddenly we were living on disability. Then our landlord gave us eight weeks to vacate the apartment. We discovered that no one will let you view a house when you’re on disability benefits…. I do not know where I’ll be putting my child to bed soon. Should he be made homeless?” 

Erin, Jaywick

“14 million people, a fifth of the population, live in poverty. Four million of these are more than 50% below the poverty line, and 1.5 million are destitute, unable to afford basic essentials. The… Institute for Fiscal Studies predicts a 7% rise in child poverty between 2015 and 2022, and various sources predict child poverty rates of as high as 40%. For almost one in every two children to be poor in twenty-first century Britain is not just a disgrace, but a social calamity and an economic disaster, all rolled into one.”

Professor Alston’s headline summary of the impacts of austerity

Austerity was a political choice

Most importantly, Alston does not accept the logic that such hardship was necessary. He puts it plainly in the conclusion of his statement:

“The experience of the United Kingdom, especially since 2010, underscores the conclusion that poverty is a political choice. Austerity could easily have spared the poor, if the political will had existed to do so. Resources were available to the Treasury at the last budget that could have transformed the situation of millions of people living in poverty, but the political choice was made to fund tax cuts for the wealthy instead.”

Earlier on in his report, Alston warns that discussing post-2010 policy under the rubric of ‘austerity’ risks implying that there was some underlying economic driving force that necessitated the cuts – the need to ‘eliminate the deficit’, for instance. Rather, the motivation for the cuts was “a commitment to achieving radical social reengineering”. He describes this social re-engineering as follows:

“great misery has… been inflicted unnecessarily, especially on the working poor, on single mothers struggling against mighty odds, on people with disabilities who are already marginalized, and on millions of children who are being locked into a cycle of poverty from which most will have great difficulty escaping”.

The Government’s response has been cold. The new work and pensions secretary Amber Rudd chose to respond to the statement by expressing her disappointment – not at the rapporteur’s findings on the extent of deprivation in the UK, but rather at the “political nature of his language”.

100 Policies to End Austerity

Theresa May and Philip Hammond may have flirted with the idea of “an end to austerity”, but there are more cuts to come. Until the government acts decisively to repair the unnecessary damage inflicted in its name, austerity will continue, regardless of rhetoric.

The UN report makes it clear that austerity is unnecessary, that to continue with it would be an explicit political choice. There are many routes from economic crisis to lasting recovery; austerity is not one of them, not least because of its high human cost.

This may be vehemently denied by conservatives, indicating a broader trend (noted by John Lanchester) for conservatives to depend less on moral justifications for their brand of capitalism and more on the insistence that there is no other option. Such obstinacy often translates into a refusal to see the hardships caused by austerity – see Conservative MP Kwasi Kwarteng’s response to the case of Emily Lyndon on The Andrew Marr Show for an example.

The Progressive Economy Forum seeks to present an alternative vision for economic leadership. By curating 100 Policies to End Austerity – a series of succinct, concrete and accessible proposals for elements of a renewed economic programme – we hope to paint a picture of what a better future could look like.

Together, these proposals will show us how we can end austerity for good and redress the harms it has inflicted – more broadly, how we can change the way our economy is run. You can see the first few entries in the series on our blog, and find out more about the series in our launch post here. If you would like to contribute to the series, please see our call for submissions.

Photo credit from previous page: Flickr / UN Geneva

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The Chancellor of the Exchequer, Philip Hammond, has decided to move this year’s Budget a month forward to October 29 in order to avoid clashes with the final stage of Brexit negotiations. He will be also making his announcement on a Monday, rather than the traditional Wednesday, most likely because Wednesday 31 October is Halloween. Fair enough; the comparisons write themselves.

Given the severe uncertainty around the form – if any – that Brexit will take, there is concern that the Chancellor’s announcements risk being made out of date by the outcome of next month’s talks. The perfunctory economic forecasts, at any rate, are likely to be even less accurate than they have been in budgets past.[1] Brexit uncertainty should not be used an excuse for more austerity, as argued elsewhere on this blog by John Weeks; if anything, the opposite approach should be taken. Still, Brexit may necessitate an emergency budget to replace this one before the year is out.

Still, the Chancellor will be making one announcement of lasting importance. He will tell Parliament the size of the spending envelope – roughly speaking, the total amount the Government plans to spend in future years. This is the first step in a longer process through which the Treasury exerts control over the rest of government, and the Chancellor’s decision will have a profound impact on the UK economy.

The long arm of the Treasury: how does it work?

The department Hammond runs, HM Treasury, is arguably the most powerful across government: it controls how much money the others have at their disposal. It does this in part by setting budgets for departments at semi-regular intervals through Spending Reviews.

More specifically, government spending falls under two categories. The first, Annually Managed Expenditure (AME), covers spending that has to be managed on a year-by-year basis because of its unpredictable nature – social security payments, for instance. Spending that can be effectively planned years in advance falls under Departmental Expenditure Limits (DELs), and these are intended as hard limits on expenditure. Together, these two categories make up Total Managed Expenditure (TME). Spending Reviews focus on setting DELs.

Resource versus capital spending: a feminist issue

Departmental Expenditure Limits themselves are split up into Resource DELs and Capital DELs. These roughly correspond to current or day-to-day spending (RDELs) and investment (CDELs) respectively. Notably, money can be reallocated from resource to capital budgets once these limits have been set, but not vice versa, suggesting a sort of hierarchy between the different kinds of spending.^[2]

The prioritisation of investment is understandable. The issue is that the government definition of investment covers physical infrastructure, but not social infrastructure – the health, care and education systems that our economy needs to function, just as much as it does bridges and roads.

Excluding spending on these systems from the implicitly more ‘worthwhile’ category of capital expenditure leads to neglect of social infrastructure, especially during a recession. Furthermore, since women are over-represented in social infrastructure industries and men in e.g. construction, this division reinforces a gender bias in economic policy-making.

How long a period will the Spending Review cover?

The last Spending Review was in 2015 and set DELs for the fiscal years up to 2019/2020, but nothing has been finalised for 2020/21 onward.^[3] These will be set in next year’s Spending Review, as announced by the Chancellor at the Spring Statement earlier this year. The spending envelope announced later this month sets the funding boundaries within which 2019’s review will take place.^[4]

In the run-up to the Spending Review, ministers will compete with each other and negotiate with the Treasury to secure funding for their respective departments. From their perspective, the envelope represents the total amount of money up for grabs, and marks the start of a ministerial race for prominence.

Spending Reviews are meant to be an exercise in planning for the future. But the uncertainty around Brexit means that the Chancellor might opt for only finalising departmental budgets for 2020/21, and then undertake another review when more information comes to light.

There is precedent for this in 2013’s ‘mini-Spending Review’, which only set spending for the 2015/16 fiscal year – the Liberal Democrats and the Conservatives, then in coalition with each other, knew they wouldn’t agree on plans extending far beyond the 2015 General Election.

Of course, the Conservatives may no longer be in power by this point. If a Labour government were elected during the period covered by the 2019 Spending Review, one would expect they would carry out their own review to radically change the path of government spending.

Why does this matter?

The size of the spending envelope tells us how much funding the Chancellor plans to make available for public spending, possibly for up to 2023/24. As such, it will give us some indication of whether austerity is really over, as the Prime Minister claimed in her conference speech, or whether this was all just hot air. The New Economics Foundation have published an excellent report on the different paths the Chancellor could take with his upcoming Review.

Furthermore, departments are not allowed to overspend the expenditure limits (DELs) set in the Review. Though DELs are occasionally revised, often the government will announce a new programme or new area of spending without making any changes to the limits already imposed on departments by the Spending Review. As such, the money for these announced changes must be taken from existing programmes.

For example, in a report I worked on for the Centre for Labour and Social Studies (CLASS) and the Public and Commercial Services union (PCS), we showed how the government’s grand announcements to lift the public sector pay gap could only come at the expense of public services or reduced public sector employment. This is a prime example of how Spending Reviews constrain departments years down the line. Progressives should thus pay close attention to the size of the Chancellor’s envelope when he unveils it in a week’s time.

[1] (That being said, it will be hard to beat the Office for Budget Responsibility’s 2010 forecasts on this front, in which they massively underestimated the damage austerity would inflict on the UK economy – see p. 18 of their Oct 2016 Forecast Evaluation Report.)

[2] HM Treasury, Consolidated Budget Guidance 2016 to 2017, p. 9

[3] Except for 2020-21 RDEL budgets for the NHS, Ministry of Defence and the Security Intelligence Agencies – these were set by the 2015 Spending Review. Source: OBR March 2018 Economic and Fiscal Outlook, p. 129.

[4] The Spending Review itself will focus on setting Departmental Expenditure Limits (DELs) but the envelope is sometimes framed in terms of Total Managed Expenditure (TME).

Photo credit from previous page: Anthony Easton / Flickr

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This morning (14 August 2018) the ONS released their latest data on UK labour markets. Unemployment is down, as expected, from 4.2% in Jan-Mar 2018 to 4% in Apr-Jun 2018.

Initially this might seem like good news, but low unemployment hasn’t translated into wage growth. Average weekly earnings in real terms still haven’t recovered to their pre-crisis levels, making this the worst period of wage stagnation in the past 200 years. Before the crisis in 2008, workers earned an average weekly wage of over £500. Now, they earn on average £489 per week.

The more recent deceleration in wage growth is particularly worrying. Nominal wage growth has slowed (see Figure 8 below), and so average weekly earnings have fallen slightly since March in real terms. In the past, low unemployment has led to growth in wages. The idea is that when there is little ‘slack’ in the labour market, firms have to compete more for workers and wages rise as a result.  

Bank of England’s misjudgement

The Bank of England’s Monetary Policy Committee (MPC) used the supposed ‘tightness’ of labour markets to justify their recent hike in interest rates; at any moment now, wage inflation is supposed to rise thanks to the UK’s low levels of unemployment. A rise in interest rates is necessary, the MPC argues, to constrain any resulting inflation.

Unfortunately for the Bank, they’ve made many a similar prediction in the past and have been proven wrong. Today’s figures contradict the Bank’s predictions in this year’s February Inflation Report that wage growth would pick up to 3%. Indeed, former MPC member David Blanchflower notes that the Bank have wrongly forecast that wage growth was going to return to its pre-recession levels the last 18 forecasts in a row.  (This calls into question the Bank’s decision to raise interest rates this month: see PEF Council member Ann Pettifor’s critique here.)

The issue is that “the unemployment rate no longer predicts… wage pressure. It seems to severely overestimate it.” In his research with David Bell, Blanchflower proposes underemployment as an alternative measure of slack in labour markets. Someone is underemployed if they are currently in employment but would like to work more hours at their set wage.

On this measure, the UK is still clearly quite far away from ‘full employment’. Between 2002 and 2008, the average number of extra hours demanded by workers was 25.6 million hours per week. In 2017, by contrast, the average was 37.7m. (N.B. the ONS measure underemployment in the number of people who want more hours, and not in the total number of extra hours demanded. This gives a different picture, and arguably underestimates the extent of underemployment as it fails to take into account changes in intensity.)

But one might also note that the number of people who want to work fewer hours at their current wage rate has also increased. We can add the two figures in the graph above together to find a total measure of workers’ dissatisfaction with their hours. This ‘dissatisfaction index’ increased from 57m hours per week in 2002Q1 – 2008Q1 to 74m per week between 2014Q1 and 2017Q3.

Monopsony – when employers dictate wages

We might expect this increase in dissatisfaction to lead to more people looking for other jobs, which in turn would encourage competition for workers and a much needed rise in wages. But this isn’t happening, and Blanchflower and Bell argue that this because employers are monopsonistic.

Monopsony – a term coined by the Keynesian economist Joan Robinson – describes a situation in which there is a single buyer of a good, and as a result this buyer can exercise complete control over the sellers of the good; it is the counterpart to the concept of monopoly. If employers – the buyers of labour – are monopsonistic, this means they can exercise a monopsony-like power over the sellers of labour: workers.

Recent research from the US suggests an increase in the monopsony power of employers over recent years, as summarised in a fantastic Vox article here. The reasons behind this imbalance of power are plenty. Deunionisation is one factor, as is the fact that employees feel a greater sense of economic insecurity, making them less likely to quit their job for a ‘better match’. The harsh reforms to the UK’s welfare system have disempowered workers in a similar way. Ultimately, increasing worker power is needed to boost wage growth.

Productivity and investment

We also need to look at labour productivity. The Bank of England is pessimistic about the UK’s productivity growth, and thus ultimately about the potential of the UK economy. In Governor Mark Carney’s language, the UK has to adjust to a new ‘speed limit’ and accept slower wage and output growth.

However, we needn’t accept this as a fundamental and insurmountable limit on our economic prospects. Rather, we ought to examine whether our current malaise is a function of current policy – policy that can be changed. PEF Council member Simon Wren-Lewis argues that there currently exists an ‘innovation gap’ in the UK economy, and that higher levels of investment could help us break Carney’s ‘speed limit’. The only roadblock is the present government’s obsession with the ‘deficit’ and unwillingness to use the power of the state to raise finance and expand investment, which will raise wages and productivity.

Photo credit from previous page: Flickr / Rob Albright.

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Fetzer notes the scale of the cuts since 2010 in his work. In real, per capita terms, spending on welfare and social protection has fallen by 16%, education spending by 19%, and healthcare spending has flatlined – essentially cut, given the ageing population and the fact that the health service has had to pick up some of the slack left by cuts to local government and social care.

In this sense, it’s clear how austerity laid the groundwork for the Brexiters’ core strategy. The Leave campaign played on anxieties around public services with talk of Brexit freeing up an extra £350m a week for the NHS, while supporting media spat out overwhelmingly negative coverage of immigration.

In their analysis of thousands of newspaper articles from during the EU Referendum campaign, researchers from King’s College London found: “Migrants were blamed for many of Britain’s economic and social problems – most notably for putting unsustainable pressure on public services.” Little coverage was given to migrants’ tax and labour contributions to public services. This, against a backdrop of anti-migrant billboards reminiscent of Nazi propaganda.

PEF Council member Simon Wren-Lewis has written on public attitudes to immigration in light of this media coverage. He notes that in a 2016 poll, people “on balance think EU immigration is good for the economy and for British culture, and even for themselves personally”. The issue is that they overwhelmingly thought immigration was bad for the NHS.

But, as Wren-Lewis writes:

“…we know, with almost certainty, that the opposite is true: immigration creates net additional resources for public services. This is not complicated: they pay more in taxes than they take out because they tend to be of working age. But the myth that politicians and the media promulgate is that immigrants are somehow the reason access to public services has become more difficult, and they do this in large part to cover up the impact of austerity.”

Worryingly, the driving force behind the new guard of Conservative Brexiters – Liz Truss, Dominic Raab, Kwasi Kwarteng – is a vision of ‘Britannia Unchained’: a hyper-free-market version of the UK with even deeper cuts to public services in the name of neoliberalism. As Professor Tim Bale writes, the disjunction between this vision and the way Brexit has been sold  is so jarring as to be Leninist. In light of such duplicity, Fetzer’s work is a vital step in untangling the confluence of factors that led to the decision to leave the EU.

Respecting the electorate

The title of Fetzer’s paper – Did Austerity Cause Brexit? – might cause discomfort for those who feel it is patronising to link the Leave vote to anything other than voters’ informed exercise of free will.

But engagement with the deeper reasons for Brexit is a necessary demonstration of respect for the electorate – and democracy more generally – absent from much of the pro-Brexit lobby. The attempt to undermine these efforts on grounds of being ‘patronising’ is a classic neoliberal tactic, with origins in (neoclassical) economics.

Economics and individual choice

For the most part, economists see their task as not to dictate or criticise people’s preferences, as revealed by their choices. Instead, they mainly take preferences as given, and focus on the most efficient way to satisfy them. This strain of thought has an understandable, democratic appeal. We don’t want our economists to moralise!

The problem is that economics is fundamentally a ‘moral science’ – it’s about who gets what. In reality, focussing on ‘efficiency’ above other goals is not a morally neutral commitment. Another issue is that our preferences are not formed in a vacuum; they are shaped by institutions, policies, politics. If economists are forced to take preferences as given, it leaves them unable to criticise structural forces.

Economists’ focus on GDP growth, for example, might be justified by the majority of people’s desire to be richer. But this desire is not wholly innate – it is partially caused by our economic system (capitalism), the focus of government policy, and so on. If economics as a discipline is to be able to engage with these issues, it cannot rely on preferences as its sole normative input.

Neoliberalism and Brexit

Neoliberals go a step further. Markets are posited as the only institutions which can effectively aggregate people’s preferences, and thus the only morally just way to decide economic outcomes. Save for a few select cases of ‘market failure’, government intervention (be it direct or through e.g. regulation) is seen to infringe on the sanctity of individual preferences. (See Philip Mirowski’s Never Let a Serious Crisis go to Waste.)

Compare this to the portrayal of judges as ‘enemies of the people’ in the aftermath of the vote to leave the EU, and it becomes clear that Brexiters are trying to apply the same logic to referenda.

This leaves the Right an open door to manipulate people’s ‘preferences’ through, say, lying about the existence of a ‘Brexit dividend’ or conducting smear campaigns against immigrants. They can then feign an innocent commitment to enacting the ‘will of the people’, as if mass misinformation were any less a subversion of democracy.

Given this and what else we know about the Leave campaign (not least their ties to organisations engaging in voter manipulation), looking for structural forces behind the referendum result need not be patronising. Rather, it is necessary if we are to understand both our own political economy and the biggest setback to the European integration project since its inception.

Photo credit: Flickr / Giles Turnbull

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Today (1 August 2018) the ONS released their early indicator estimates from the Wealth and Assets Survey (WAS) – preliminary estimates about people’s attitudes towards their financial situation during the period from July 2016 to December 2017.

We need to remember that these results are based on survey data. As such, there might be some tension between the picture given by individuals’ reported answers and, say, quantitative data on household income and expenditure.

For instance, the WAS survey found that 12% of respondents frequently (“always” or “most of the time”) ran out of money by the end of the week/month. Though the figure is still worryingly high, this is a fall from the ONS’ findings in July 2010-June 2012, when 16% of respondents chose these options. Even if the level of financial precariousness is worrying, we might be optimistic about the direction of the trend.

However, data from the ONS released last week tell a different story. For the first time in thirty years, households are spending more than they earn in income – the average household is a net borrower, which wasn’t the case even in the credit boom before the Global Financial Crisis (GFC). As a result, consumer credit – including credit card debt and pay day loans – is at record levels.

These data present a starkly different picture than the WAS results. At this stage, then, it would be reckless to take the latter as a reason for optimism about UK households’ financial health.

Moreover, the data on young people and the North East are cause for concern, especially in light of the UK’s persistent and stark regional and intergenerational inequalities.

1. Young people are in a particularly precarious situation

Unsurprisingly, young people reported much higher levels of financial precariousness than the average respondent. One way of measuring financial precariousness might be how well someone can deal with an unexpected loss of income. When surveyed, 44% of respondents said that they would not be able to make ends meet for longer than three months if they lost the main source of income coming into their household.

But if we zoom in on 16 to 24 year olds, this figure rises to 68% of respondents – 71% if we look at 16 to 24 year olds not living with family. Perhaps even more worryingly, 50% of 16 to 24 year olds living independently wouldn’t be able to make ends meet for more than a month if they lost their main source of income.

Though our employment levels are high, the UK has seen a rise in ‘insecure work’ and young people are disproportionately likely to be in these insecure jobs. As a result, we should be particularly concerned by what the WAS survey says about their vulnerability to income shocks.

2. The North East has fared particularly badly

Accordingly to the WAS results, most regions have seen a decline in the percentage of people frequently running out of money at the end of the week/month since 2010. This has not been true for the North East; 20% of respondents from this region reported that they were in this situation, up from 19% in June 2010 – June 2012 and, alarmingly, from 15% in July 2014 – June 2016.

The North East fared similarly when it came to respondents’ ability to deal with a loss of their household’s main source of income. While 74% of respondents as a whole could make ends meet for longer than a month in this situation, only 61% of respondents in the North East could say the same.

Photo credit on previous page: Flickr / Low Jianwei

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Background

The Prime Minister set the scene by claiming the government had to make difficult decisions about public spending cuts in light of the deficit that Labour left. This is bogus; invoking the ‘austerity delusion’ over and over again isn’t enough to make it true. Implicitly blaming the Labour government of 2010 for the current pressures on the NHS isn’t totally unexpected, but it is intellectually dishonest.

The PM then claimed that health spending had been “protected and prioritised” in the process of these cuts. While no cuts to health spending were made per se, the average increase in health spending since 2010 of 1.4% per year (0.1% if adjusted for population growth and ageing) has been lower than at any point in the NHS’s history.

May recognised that these historically low increases in health spending were at odds with the increasing pressures on the NHS. Besides population growth and ageing, she highlighted that as we become wealthier, live longer and make more medical advancements, it makes sense to spend more on health spending, and so growth in this should outstrip overall economic growth.

This is all very well and good, but she did fail to mention her own party’s austerity experiment as a key driver of pressures on the NHS. It is well documented that the cuts of around 10% to social care since 2010, for example, have increased the burden on our health service.

Similarly, the Prime Minister argued that certain aspects of modernity – the  increased encroachment of the Internet in our everyday lives, for example – might have negative implications for our mental health and levels of loneliness in our society. Fair enough. But you would also expect a 169% rise in homelessness over 8 years to show up in mental health statistics. Aggressive cuts to local council budgets have led to the closure of many community service programmes, including up to 1,000 Sure Start centres. The Internet is not entirely to blame.

Meanwhile, the recent slowdown in the UK’s life expectancy growth rates has marked it out as an anomaly in Western Europe, with public health researchers fearing that inadequate health and social care spending is the cause. Other researchers writing for the British Medical Journal have linked 120,000 excess deaths to the squeeze on public finances since 2010.

May’s plans

The government plans to increase NHS England funding by an average of 3.4%  in real terms each year between 2019-20 and 2023-24, with an additional £1.25bn allocated to ease pressure on pensions. This means that by 2023-24, NHS England’s budget will be £20.5bn higher in real terms, or £394m a week.

Note that these increases would only apply to the NHS England budget, and represent a smaller 2.9% annual increase in the Department for Health budget for England as a whole. Spending that falls outside of the NHS England budget includes training medical staff, buying hospital equipment and preventative services.

Under May’s plans, annual spending growth would still be lower than the historical average and insufficient to meet health service targets. The Institute for Fiscal Studies, writing with the Health Foundation and NHS Confederation, has calculated that we would need average spending increases of around 4% each year  in health spending to see improvements, with 5% annual increases in the short term to address immediate funding gaps. This would have to be in addition to increased social care spending, which isn’t forthcoming on the scale necessary. In short, May’s proposals simply do not go far enough.

Funding

Astonishingly, the Prime Minister still made reference to a ‘Brexit dividend’ when it came to the question of funding these increases. This lie is nothing more than a pathetic attempt to pander to her party’s arch-Brexiters.  It is as if the hoo-ha around the Brexit bus – which the head of the UK Statistics Authority called a ‘clear misuse of official statistics’ – never happened.

In the event that Brexit does not deliver manna unto us, the PM said that the increase would be funded by a ‘fair and balanced’ rise in taxes. PEF Council member Richard Murphy has argued that either creating money or letting more people save with the government (by issuing more government bonds) represent superior funding strategies.

This account leaves out possibly the worst possible option – the government could draw money from other areas of public spending. May’s government have done it before; the £400m it promised to replace combustible cladding after the Grenfell fire was, incredibly, taken from the Affordable Homes Programme’s budget. We ought to be wary of similar tactics in the future.

We should also question the government’s understanding of “fair”. In 2010, then Chancellor George Osborne insisted that those with the “broadest shoulders should bear the greatest burden”, a commitment also adopted by his successor Philip Hammond. Yet austerity has disproportionately hurt the poorest households, while disabled people, women and ethnic minorities have borne an unfair share of the burden.

Any tax increases to fund the NHS should be paid by those who can truly afford to. A tax on wealth might be the fairest option, and it’s a proposal gaining support from across the political spectrum. Hopefully this support will translate into policy soon enough.

Conclusion

The funding increases announced by Theresa May are a welcome step in the right direction, but without a bolder strategy our health service will continue to struggle. We must also make sure that the necessary funding isn’t drawn either from other areas of public spending or from the budgets of poorer households.

Photo credit from previous page: Flickr /  Christopher Paul

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Later today the Chancellor will no doubt take great pleasure in announcing a surplus on the government’s budget for current spending. Indeed, the celebrations began last week, as David Cameron and George Osborne rejoiced in the “achievement” of a target that eluded them for so long in government.

Their jovial tone lies in stark contrast to the realities of life under austerity. Workers are set to go 15 years without a pay rise, the worst wage growth in over 200 years. The National Audit Office have issued a scathing report on the ‘unsustainable’ financial situation of local authorities, as funding cuts of almost 50% force councils to slash frontline services. Worse still, a study published by the British Medical Journal has linked cuts in health and social care spending to 120,000 excess deaths in England alone. As Hammond et al. pat themselves on the back, the disconnect between austerity’s architects and its victims becomes ever more jarring.

Dissecting the social costs of austerity is vital work, and there is much more to say on the subject. Today, however, I want to focus on the issue of investment. The government divides its expenditure into current spending – spending on day-to-day services to keep the country running – and capital spending, or investment.

Initially, Osborne aimed to eliminate the deficit on current spending alone; he only changed his target to a surplus on all spending in 2015, and this has remained Hammond’s ultimate goal. The relatively minor change in terminology disguises a major shift in approach. To achieve this new target, the government would no longer be able to borrow to invest. But why does this matter?

Borrowing to invest, or “why we have a financial system”

Borrowing to invest is an essential part of economic life. The idea is simple; if you expect your investment to bear returns in the future, you should be able to fund your investment through borrowing without cutting your current spending. Otherwise, students would be forced to pay their tuition fees out of their grocery money. Businesses wouldn’t be able to invest in new tech without docking workers’ wages, while prospective house buyers wouldn’t be allowed to take out a mortgage. In essence, borrowing enables us to invest in our future without bringing everything else to a grinding halt.

This holds for governments too. Investment in physical infrastructure, social infrastructure (e.g. education, childcare), and research and development ought to improve the productive potential of the economy. The state then recoups these gains either through direct charges, e.g. bus fares, or through higher future tax receipts. Issuing debt to fund capital spending means that the state can invest in our future without sacrificing frontline public services. So why do the Tories want to rule it out? From an economics perspective, they have two possible lines of argument.

Bad economics, part 1: the state is wasteful

The first, which has an established lineage in right-wing economic thought, is the assumption that the state cannot reliably be expected to add value to the economy. In the absence of a profit motive, the state cannot be expected to productively invest – instead it will spend frivolously to please the electorate in the short-term or simply displace private spending.

The work of economist Mariana Mazzucato shows us that, in fact, government investment adds enormous value to our economy. To take one example, all the technologies that make a smartphone ‘smart’ – touchscreens, microprocessors, GPS, the Internet etc. – are the result of public investment. In the private sector, by contrast, banking deregulation and ‘shareholder capitalism’ have encouraged short-term financial speculation at the expense of productive investment. If we want to secure a ‘strong and stable’ economic future, then bolstering state investment will be vital.

These considerations apply especially to the UK. Since 1980, Britain has chronically underinvested in its economy compared to its G7 counterparts (see graph below), leaving us with a yawning productivity gap. Meanwhile, Brexit-related uncertainty will subdue private sector investment even further.

Though this argument is implicit in much of the right’s economic rhetoric, the Tories have at least paid lip service to the importance of capital investment. Instead, they cling to their old favourite – that public spending cuts writ large are necessary to reduce the debt.

Bad economics, part 2: we need to reduce the debt

From the very beginning, the Tories have framed austerity as a difficult choice, but one necessary to reduce the public debt. Just this week, Hammond had the following to say on the Andrew Marr Show:

“We have a debt of 1.8 trillion pounds, 86.5% of our GDP. All the international organisations recognise that that is higher than a safe level and this isn’t some ideological issue, Andrew.”

This is nothing short of a bare-faced lie. The idea of a ‘safe level’ of debt is based on a 2009 paper which was riddled with errors and has been debunked time and time again – though not before Osborne used it as an excuse to slash the state. In 2016, the OECD called for countries like the UK to end austerity and boost investment. That same year, the IMF published a paper asking “is there really a defensible case for… the United Kingdom… to pay down the public debt?” – and concluded there wasn’t. The ‘international organisations’, and the economics discipline more generally, are categorically not on Hammond’s side. (See John Weeks here for more on the public debt.)

A decade on from the financial crisis, we can see just how much this line of argument has hamstrung our economy. Bogus comparisons with Greece scared the public into austerity. Economist Simon Wren-Lewis estimates that government cuts have cost the UK 15% of its GDP – around £10,000 per household – indicating that the UK could have grown out of its debt with a softer fiscal response. Indeed, there is still room for deficit stimulus. But the government marches on in the same mould.

Austerity is ideological

Neither of these arguments holds water. Hammond’s deficit-reduction framework is an edifice with no grounding in economics. By ruling out borrowing for capital spending, the government will be forced to either underinvest in the UK’s future or wreak further havoc on frontline public services.

We are reminded that austerity has never been a matter of ‘economic necessity’, but rather an explicit political choice – one that has hurt the worst off in our society. And so, as Hammond celebrates tomorrow, we must remember the devastation that his party has inflicted on the country.

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So it was disappointing to see that the IMF framed the challenges facing the global economy around high government debt. This report reinforces narratives around government debt that threaten the long-term health of the UK economy, asking countries to “capitalise on good times” and “save for a rainy day” by paying down government debt.

Where to start?

U-Turn

The IMF report is a significant departure from some of the prominent IMF research of recent years, especially from one of their head researchers Jonathan D. Ostry. In 2015, for example, Ostry and his colleagues published a paper stating that the UK is one of many countries with ample fiscal space, meaning that “the costs [of paying down the debt] will be larger than the resulting benefits”.

More recently, an IMF working paper from this month notes that for countries like the UK, growth rates are very likely to outstrip the interest paid on government debt in the long term. The author concludes: “if true… [this means that] unless governments can commit to infinitely large deficits, they can issue as much debt as they like without becoming insolvent”.*

Governments can issue too many bonds – they run up against real resource constraints, meaning roughly that they can’t spend more than the structure of their economies allow. (Of course, the government can itself change the structure of the economy through its investment programmes – the point is that opportunities for productive expenditure are finite). But the ‘solvency’ of governments like the UK’s is not an issue. Government spending limits should be discussed with reference to the state of the economy, not ‘debt thresholds’ pulled from thin air.

It’s the economy, stupid!

Indeed, banging on about debt-GDP ratios and ignoring everything else going on in the economy is a recipe for disaster. The UK’s economic experience over the past decade bears witness to this.

In my last blog, I wrote about the importance of borrowing to invest. The problem with the IMF and others’ rhetoric around high debt ratios is that it unnecessarily suppresses the government’s ability to invest in the country’s future, scaring electorates and financial markets.

This week, I attended a conference between Labour and the finance sector, where Shadow Chancellor John McDonnell outlined the three major challenges facing the British economy: Brexit, technological revolution, and climate change. The UK is simply not prepared for these.

The sensible thing to do would be to borrow to meet these challenges while interest rates are low. The UK can actually borrow at interest rates under 2% at the moment, below the current and target inflation rate. In real terms, then, it is likely that the government will end up paying back less than it borrowed on debt taken out now. Any sensible organisation would use this window to invest in their futures. But no – the debt must be paid down!

We also have to remember that much of this debt will be owned by UK households. In the US, for example, the Roosevelt administration mobilised resources for World War II by asking households to lend them money through their purchase “War Bonds”. These bonds provided a home for US household savings, and were widely use as down-payments for buying a house. (Credit to John Weeks’ Economics of the 1% for this point.)

Government debt needn’t a burden on the country’s economy; instead, it can be a way of sharing resources over time to the benefit of both government and households. Bonds provide a safe haven for savings, while governments can prepare for the biggest challenges facing our society.

Ironically, one of the lead authors of the IMF report declared that “successful governments are those that prepare ahead for storms looming on the horizon”. I agree – but this involves a bold programme of investment, not obsessing over government debt.

PFI madness

The use of Private Finance Initiatives (PFI) – government outsourcing to the private sector à la Carillion – provides another instructive example. The National Audit Office’s report into PFI points out that the interest rates on borrowing for PFI have been between 2-5% higher than the interest on straightforward government borrowing.

This adds up. On a 30-year loan for £100m, the difference between interest rates of 3% and 8% is the difference between paying back £153m and £266m. What with all the other problems with PFI, why on earth does the government use it?

The NAO answer that question too. Thanks to the (strange) way we run our National Accounts, “most private finance debt is off-balance sheet” – it doesn’t show up in government debt to GDP figures, even though this is debt the government owes. For departments under pressure, this results in “incentives, unrelated to VfM [value for money], which have driven the use of private finance”.

The Cameron-Osborne government opted not to remove these incentives in its reform of PFI, despite a “lack of data available on the benefits of private finance procurement”. It’s almost as if austerity wasn’t motivated by a sincere commitment to prudence, but by a desire to shrink the state.

It’s still raining

And then there’s austerity itself. In the UK, the obsession with cutting the deficit and paying down the debt came at the expense of a proper recovery.

Wages have not yet reached their pre-crash levels, and the realities of the labour market beyond narratives of ‘record employment’ are further cause for concern – the rise in economic insecurity, for example. The IMF asks us to save for a rainy day, but the weather for workers in the UK isn’t quite sunny yet.

Crucially, these pressures are driving the rise in household borrowing, bringing the UK to the brink of a private debt crisis.

This link between austerity and private debt is important. Asking both the government and households to pay down their debts at the same time is a recipe for disaster; as Johnna Montgomerie writes, austerity “shift[s] the costs of economic recovery on the household sector using private debt”.

And so it is extremely irritating that the IMF starts its report by commenting on the high level of public and private debt, but then fails to analyse the latter and its link to government actions. In essence, it uses high private debt to motivate cuts to public spending.

Worse still, it claims that “high government debt levels make it difficult to conduct countercyclical fiscal policy”. It is as if the financial crisis never happened. Has the IMF learnt nothing?

Conclusion

To be fair to the IMF, the Fiscal Monitor is a bit of a blunt instrument – you have to try and address the fiscal situation of 195 countries at once in a finite space.

We should welcome, too, its advice to the UK government that “fiscal consolidation… should have greater reliance of revenue measures, as earlier adjustment fell heavily on expenditure”, and its (perhaps tokenistic) request for countries to avoid “excessive inequality”. If you must carry on with paying down the deficit, do it through progressive taxation, not through a programme of cuts set to exacerbate inequality.

Still, the IMF’s report perpetuates a number of pernicious narratives about how economies work. These can seem complex and abstract, but we must be able to understand and challenge these if we are to change the way our economies are run. * Under a set of extremely conservative modelling assumptions, the author estimates a ‘debt limit’ for the UK of 140% of GDP – but this is far below levels of debt that the UK managed just fine with, e.g. after WWII.

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