By Josh Ryan-Collins

After a decade of austerity and the trauma of a two-year long pandemic, the UK’s public sector workers deserved some respite come 2022. Instead, they are now enduring the largest real wage cuts in recent history.

Average settlements on offer to public sector workers are currently around 3% with inflation at 10%. This 7% cut in real wages amounts to almost a month’s salary not being paid. Furthermore, the private sector is enjoying wage deals more than twice as high at around 7% as shown in Figure 1.

Under such conditions, the withdrawing of labour is an entirely rational response. It is even more understandable when you consider the wider macroeconomic policy regime that appears rigged against the public sector.

The argument being repeatedly made by both the government and the independent Bank of England is that paying public sector workers close to or above the current rate of inflation would be self-defeating because it would lead to higher prices. This is due to the so called ‘wage-price spiral’ where higher prices lead to calls for higher wages which then feed through to higher prices and so on.

There are four reasons this argument is flawed.

Firstly, in capitalist market economies the public sector does not set prices, firms do. So the wage-price spiral can only apply to the private sector in as far as it is a direct relationship between wages and consumer prices.

The only way the government could finance additional wages for the public sector would be raise taxes or borrow more. Taxing directly removes money from the economy so it is difficult to see how this could be inflationary.

Borrowing involves investors spending money buying government debt instead of other assets. Bank of England governor Andrew Bailey has stated this would affect “overall demand in the economy” and force the Bank to raise interest rates, further adding to the cost-of-living crisis facing low paid workers.

There is evidence that bond financed fiscal deficits are associated with higher inflation. But this relationship is almost exclusively found in developing countries with weaker institutions and tax raising powers, not in high income economies like Britain.

Second, current inflation in the UK is mainly driven by supply-side factors, in particular rising energy prices caused by the Ukraine war feeding through to other sectors. There is evidence that rising energy costs have led firms to raise their prices and evidence that other firms have exploited the situation of rising prices to use their market power to raise prices above inflation, generating excess profits. If anything, there is more evidence of a ‘profit-price spiral’. None of this has anything to do with what public sector workers are paid.

Thirdly, public sector workers make up only around 17% of the workforce. Thus inflation-linked wages to help public sector workers catch up with years of real wage cuts would have much less impact on total demand in the economy than they would in the private sector.

Finally, the public sector is suffering from a serious shortage of labour caused by the COVID pandemic and difficulty recruiting workers from the EU post-Brexit. In particular the healthcare sector is in crisis, making up 13% of all jobs advertised in the UK last month.

Keeping wages well below those available in the private sector — which they have been over most of the past eight years (Figure 1) — will make the situation worse as employees are more tempted to leave. In turn, this will require even larger pay increases down the line to bring workers back.

Given flatlining growth, fears about excess demand and entrenched inflation have to be tempered with the risk of rising unemployment and even more individuals leaving the workforce, worsening an already extremely weak macroeconomic environment.

Striking public sector workers have the support of the majority of the public. They seem to recognise, better than the politicians and policy makers in charge of our economy, that a strong public sector is the building block for sustainable economic growth. Let us hope that those taking industrial action succeed in pushing through higher wages for all our sakes.

This blog was first published on 14th February 2023 on the official blog of the UCL Institute for Innovation and Public Purpose | Rethinking how public value is created, nurtured and evaluated | Director @MazzucatoM | https://www.ucl.ac.uk/bartlett/public-purpose/

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This week the UK Chancellor Rishi Sunak delivered the 2021 Autumn Budget in the House of Commons. The Budget confirms that this government has accepted a permanently larger role for the state in the economy. Spending will grow in real terms by 3.8% across government, amounting to a £111bn annual increase by 2024–25. Analysis by the Office of Budget Responsibility (OBR) shows total public spending levelling out around 42% of GDP once the huge rises associated with the pandemic wear off. This is not high by European standards. However given the figure averaged around 37% in the 30 years preceding the Great Financial Crisis it marks a step change, in particular for the Conservative party.

But Rishi Sunak and the Treasury remain fiscal conservatives. The Chancellor has created a new ‘fiscal rule’ (the fifteenth since 1997) which requires balancing day-to-day spending, excluding investment, within three years and keeping public sector investment from averaging more than 3% of GDP. Instead of achieving this through spending cuts, the Chancellor is embarking on major tax rises. Post-budget analysis by the Resolution Foundation finds that by 2026–27, tax revenue as a share of the economy will be at its highest level since 1950 (36.2%), amounting to an increase per household since Boris Johnson became Prime Minister of around £3,000.

The fiscal rule itself is arbitrary and appears to be more driven by politics than economics. With interest rates on long-dated government debt remaining at record lows, there is no obvious reason to balance the budget over the short-term when the economy faces longer-term ‘scarring’ effects from the pandemic, which the OBR estimates will be around 2% of GDP.

More generally, the Budget lacks any real vision for how to achieve the ‘high skill, high productivity, high wage’ economy that Boris Johnson spoke about in his party conference speech.

On the spending front, the biggest increases will go towards the NHS, social care and pensioners. With an ageing population and technological advances in healthcare, such increases are inevitable. They should arguably be higher, in particular for social care, which ultimately could help reduce costs on the NHS in the long run.

Disappointment

The biggest disappointment, ahead of the UK’s hosting of the COP26 summit next week in Glasgow, is the lack of any new plans to support a green transition. Keeping public sector investment to below 3% suggests the Chancellor is not yet taking seriously the massive transformation of our energy, housing and transport infrastructure required to meet the UK’s net Zero 2050 targets. The Treasury appears unable to see the potential of policies such as a national home insulation program to reduce carbon emissions, create good quality jobs and reduce the cost of living for those many poorer households in leaky homes. The announcement of a tax break on short haul flights — which are already significantly cheaper for equivalent journeys than trains in this country — confirms the Treasury’s myopic views on the net zero transition.

Sunak made much of the announcement of reduction of the rate at which universal credit is taxed for those who are in work. How the remaining four million or so households on universal credit who haven’t found work are supposed to survive the £1,050 per year reduction in their incomes from the reversal of the £20 uplift remains to be seen.

But the broader point here is that if the Treasury was genuinely interested in ‘making work pay’ as Sunak emphasised in his speech, they would be taxing wealth and not wages. A recent analysis found that the Treasury could raise £16bn a year if shares and property were taxed at the same rate as salaries. Currently, the richest 1% of the population take 13% of their income in the form of capital gains.

Given that the bulk of new spending announced in the budget will mainly support older, wealthier people, the case for a gradual shift towards taxing some of the assets they have built up over their lifetimes rather than the income of the wider population seems strong. This should also encourage more private investment into productive activities rather than property. But, just as with climate change, this kind of broader strategic vision seems missing from the Chancellor and the Treasury’s thinking.

Originally published on the UCL Institute for Innovation and Public Policy blog.

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For three hundred years, care work and care labour have been woefully trivialised or ignored by economists. One is inclined to think this is partly due to the domination of the subject by men until recently. But it is also true that the subject is incredibly complex, partly because the very idea of ‘care’ is vague, with a multitude of meanings. Sue Himmelweit’s valuable foray steers clear of the many conceptual issues, but correctly highlights the proper objective of ‘enhancing the capabilities of those with care needs’. To reduce the risk of excessive paternalism, one should extend that to include ‘enhancing freedoms’.

I have no disagreement with Sue’s essay and merely want to comment on two additional aspects. Before doing so, I want to endorse her disgust at the permitted involvement of private equity capital in the British social care structure. The recent example of one foreign fund acquiring a chain of 450 mental care homes, loading the firm with debt while creaming off large profits, declaring ‘bankruptcy’ and then selling out to another foreign private equity body should have been enough to prompt political demands for reform and legislation to ban such action. Instead, it was one of numerous acts of rentier capitalism that have flourished in what has become the Covid era.

It is a disgraceful indictment of the social care system that the three biggest care home ‘chains’ are all owned by private equity – HC-One, Four Seasons and Care UK. As this termite form of privatisation has spread, amidst local council budget cuts during the austerity decade, over 400,000 fewer elderly are receiving social care due to restricted public budgets. Over 60% of people in care residences are ‘self-funded’, and on average they are paying much more than the costs incurred on residents funded by local councils, the latter much more often to be receiving a cut-price, low-quality residence. To declare ‘care residences’ homes is a misnomer.         

The other preliminary point I would like to make is that in a market economy dominated by rentier capitalism, there will always be a care deficit, due to a partially contrived demand for care linked to the constant extension of the commodification of care, the existence of an oligopsony market for most care services, and the resultant suppression of care worker wages.  

The two general issues that prompt this comment are, first, the need for Voice Regulation and second, the need for a radical restructuring of the Care Funding System. Both must respect the objective of enhancing capabilities and freedoms, as well as be an integral part of a progressive economic strategy.

Voice Regulation

All types of care recipients and care providers are vulnerable to several forms of oppression and exploitation, in most cases including ‘self-exploitation’. It would be naïve to suppose that care is simply a ‘gift relationship’ motivated by altruism, and it would be wrong to depict care as only involving two parties. Significant third parties are typically overlooked, and yet in certain non-rare cases they can be the most exploited and oppressed of all.

Because of the emotional nature of care, the complex character of care work and labour, and the intangible trade-offs between quantity, quality and costs of care, a good social care system cannot rely on statutory regulation alone or market forces. Rather, a progressive care system requires respect for a fundamental principle of guild socialism: There should be as many forms of representation as there are interests to represent.

A properly progressive government would make sure that adequate financial and institutional resources be made available to ensure that care recipients, their representatives, care providers and social workers and agencies linking providers and recipients all had equally strong Voice bodies to bargain and to defend the interests of those involved in care relationships. This is manifestly not the case today. Given the vulnerabilities of all those in the provision and receipt of care, one cannot overemphasise the need for Voice regulation.

Care Funding

What structure of funding for care would be optimal? The problems with answering this question are legion, and most have been well-rehearsed in the literature on care. Among the difficulties are determining the ‘need’ for care and determining what type and intensity of care is needed. After all, need for care is partly subjective, a matter of character and a matter of manipulated attitudes. Contrary to popular imagery, about half of the public budget on social care goes on working-age adults, not children or the frail elderly.

The choice of funding mechanism depends partly on the type of care one is considering. Take the starting point in life, infant care. Breastfeeding is the most important form of care that can be given to anybody in their infancy. Human milk is more important for an infant’s development than other milk, and breastfeeding protects women from later cancer problems. Yet enabling mothers to breastfeed is rarely regarded as a matter of care policy, even though credible estimates indicate that the social cost of premature weaning is huge. And it turns out that the amount of breastfeeding care varies enormously according to the welfare system.

In the USA, with its residual welfare system, in a baby’s first month only 77% of mothers breastfeed, compared with 99% in Norway; by the sixth month, only 47% of American mothers are breastfeeding, compared with 80% in Norway. This difference largely reflects the existence of statutory maternity leave in one country and its absence in the other combined with pressure to return to labour market activity.

This is a special type of care. More generally, a primary objective should be a financial system that maximises the opportunity for ‘self-care’, that is, to enable as many of us as possible to care for ourselves as much as possible in a way that we would like. In this regard, successive British governments have failed dramatically, even though the move to Direct Payments in the 1990s and the Care Act of 2014 were touted as moving in that direction. The latest round of reform announced in September does not confront this issue. A new means-tested scheme is to be introduced, to be funded by a lurch to hypothecated taxation, which should alarm progressives, since it ratchets up the utilitarian nature of social policy.

One problem with state aid for care is that most forms of care are fraught with moral hazards and immoral hazards. If desirable care is that which enhances capabilities and freedoms, how do the potential forms of financing rank? The options (not necessarily alternatives) seem to be subsidised institutional care (homes, etc), subsidised care workers, direct payments to non-wage unpaid carers (e.g., ‘wages for housework’), care vouchers (permitting the recipient or a surrogate to buy pre-specified commodities or services), care budgets (as in ‘personal healthcare budgets’ introduced in 2014), and care grants based on estimated needs and the costs of meeting them.

A problem with most of those options is that, while they automatically discriminate against other options, they raise moral hazards. For instance, if residential care is subsidised, to the extent that the price is lowered, that will give an incentive to place frail relatives ‘out of the way’ in an environment they would probably wish to avoid. It would also implicitly penalise families who continue to provide care themselves or who pay for some other form of care.

The last-mentioned of the policy options, care grants, has the virtue of trying to give all those in need of care an equal resource base from which to make ‘free’ choices. But it would still be paternalistic and would penalise those who provide unpaid care, typically women, and could leave in place one moral hazard that is a disgraceful feature of the current benefit system – that of determining ‘ability to work’ as a test of eligibility for the benefit or service, as in being able to walk unaided for 30 metres, which penalises anybody who makes the effort to be able to do so.

Most forms of care support provided by the British government are means-tested, and most are consequently made conditional on behavioural tests. As such, they generate poverty traps and have high exclusion errors. More problems lie ahead. Under the government’s announced reforms, people will be required to approach their local council to request a need assessment, which will lead to a lot of discretionary judgements. It can be predicted that financial pressure on councils in areas of fewer resources will limit eligibility. There will be no levelling up in care.     

Ultimately, the most attractive option for a progressive economy is to move towards an income distribution system in which every individual has a modest basic income with supplements for those deemed to have extra costs of living, such as those associated with disability, frailty or age. If this encouraged more people to care for themselves more, that would reduce pressure on the commodified care system. And if some wished to compensate family members for their care, the care recipient or surrogate would have the means of doing so. Of course, that would no replace the need for a public social care system, but it would help empower people in negotiating their way through the care economy.

It would be the least paternalistic mechanism and would be a barrier to the constant extension in the  commodification of care. That would not remove the need for strong Voice mechanisms, but it would help turn care into the emancipatory form of work that it could and should be.   

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The pandemic has exposed how dependent on care we are not only as individuals, but as a society. But our care system, already struggling well before the outbreak of the coronavirus, has failed to cope. Care work is poorly-paid and insecure, whilst the entire system suffers from chronic underfunding. Government promises to fix the system have concentrated only on funding, which is important, but falls well short of a comprehensive plan for care.

This new essay from PEF Council member Susan Himmelweit puts today’s crisis in its border context. A new approach is needed, recognising the immense importance of care to our economy and society, with care work properly supported in all its forms, effective support from the public sector, and an integration of the care system into our wider social and physical infrastructure.

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Edited by PEF Chair Patrick Allen and council members Suzanne Konzelmann and Jan Toporowski

Publication Date 29th April 2021. Agenda Publishing

40 years of neoliberalism has failed to provide prosperity or stability to the UK economy. Instead it has led to low growth, turbulence, grotesque inequality , poverty and ill health for millions . This is the outcome of damaging economic polices driven by free market dogma, rentier capitalism and ideology. It’s time for a change.

This book contains 18 essays by PEF council members and academics who outline the essential features of a progressive economy dealing with the five massive challenges of our times to the economy – Covid-19, austerity, Brexit , inequality and climate change.

PEF calls for bold public intervention. Shrinking the state and weakening our public institutions has undermined social and community resilience and promoted an out-of-control, value-sapping and high-inequality model of capitalism. 

The authors say the resources of the state must build a fairer and more dynamic post-Covid society, using a mix of regional and industrial policy and investment to revolutionise our public health, housing and social services. A progressive new society should construct a new income floor and new measures to spread wealth and give everyone an equal stake in the economy. 

The financial crash of 2008 proved that only the state can rescue the economy when all else fails including the biggest banks. Covid has shown how only the state can rescue us from death and the collapse of the economy during a devastating pandemic. Only the state can steer the economy and deliver the investment needed to cope with climate change

The 2008 crash showed the breathtaking incompetence of the private financial sector. Now Covid has once again laid bare the myth than private is best – outsourcing to companies the job of track and trace at a cost of £37bn has so far failed to show any discernible benefit say the Public Accounts Committee.

By contrast, the selfless work of millions of NHS workers and volunteers has delivered one of the most outstanding vaccination programmes which has been the envy of the world. This has been done at modest cost and was only possible with a national health service drawing on the vocational drive of its workers for the common good.

The Biden adminstration is today showing the mighty power of the US State with Biden’s Covid and infrastructure bills. The results are expected to cut child poverty in half. The UK government should follow this lead and bring in new models of public intervention to deliver a pandemic-resistant, green economy which works for all citizens.

For an outline , list of chapters and authors and to order a copy go to this webpage

You can obtain a 25% discount on the cover price by entering code AGENDA25 on the Agenda page here

Launch event on Zoom – Wednesday 19th May 2021 at 11am . Joining details to follow.

The launch will be chaired Miatta Fahnbulleh , CEO of NEF and attended by Ed Miliband, Shadow Secretary of State for Business, Energy and Industrial Strategy . Martin Sandbu of the FT will attend as commentator.

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The UK government claims that saving lives and the NHS have been its priorities in this pandemic, but until mid-April when it proposed badges for carers, it seemed to have forgotten about social care. It gave neither care homes nor home care any special attention, putting them low down the queue for its provision of Personal Protective Equipment (PPE), effectively leaving them to fend for themselves. And once enough tests were available for use beyond hospitals, rather than ensuring that care workers had easy access, testing was immediately opened it up to all key workers, so that many care workers still couldn’t get test results when they needed them.  

In many European countries almost half of all Covid related deaths have been in care homes, but there is good reason why those figures may end up being particularly bad in the UK. The 1990 National Health Service and Community Care Act mandated that that 85% of local authority funding for social care should be for the purchase of care services from the private sector.

More than 400,000 residents are now looked after in 15,517 homes run by more than 5,000 different providers, at least 80% of which are private for-profit companies, generally using debt laden business models.   Many of the 26 big care home providers use complex company structures to maximise leakage and hide profit extraction going to owners, investors, and related companies some of which are offshore tax avoiders. Many are effectively property speculation companies. Home care is also privatised with around 9,000 regulated providers trying to support more than 600,000 people in their own homes.

Funding to Local Authorities has been reduced by over £7bn since 2010, despite an aging population. Thresholds for assistance have shot up so the numbers receiving support fell by 26% between 2010 and 2016, leaving one and a quarter million people with unmet care needs even before the current pandemic.

Care provision is particularly unsuited to privatisation. Providers facing local authority cutbacks in payments per recipient can cut costs in care only by employing fewer people, or by employing less well-qualified staff who can be paid less – inevitably leading to lower quality care. Difficulties associated with doing either of these in the public sector was one of the main drivers for privatisation. Privatisation was supposed to harness consumer choice and competition to improve quality but, given the impossibility of achieving the intended cost reductions in any other way, has in practice both lowered care quality and workers’ working conditions and pay. This has meant care workers on zero-hours contracts, insufficiently trained and badly paid, moving from one vulnerable person to another, often working in many different care homes. Although austerity intensified it, this process of squeezing profit out of worsening working conditions was going on well before the financial crash and continues to this day.   

Competition between private providers also produces its own inefficiencies, so that in domiciliary care, for example, services may be provided by many different providers within the same street, while care workers may have long journeys between their clients. Although reducing the number of clients visited by each care worker would have helped reduce the infection rate of Covid-19, a care system built on competition rather than co-operation was not able to provide that rationalisation. Indeed, one reason why the infection rate in care homes in the UK has been so high is that care workers without appropriate PPE work across different care homes.

Private sector providers would in normal circumstances be expected to provide protection for their own workers, including their own PPE. But with profit in mind why would they prepare for a pandemic? In emergencies the state is expected to step in to rescue the private sector, but a state that has run itself down to the bare minimum cannot respond well to emergencies. With austerity ensuring that stockpiles were reduced, the easily predictable worldwide shortage in PPE seemed to catch the government unaware.

The government says that its priorities have been to save lives and protect the NHS. Sensibly there have been few claims of success in the first of these, but the government does say it has succeeded in its second priority. The NHS, it claims, has not been overwhelmed. But how has it achieved that? By encouraging the virus to spread to the most vulnerable by discharging potentially infected untested patients to care homes and, until recently, not even counting the deaths that occurred there? By discouraging patients from contacting the NHS, potentially thereby causing thousands of excess deaths – and then claiming this was the public’s fault for not realising that the NHS would still treat them? By failing to recognise that the number of hospital admissions whose decrease it claims as a success is a policy variable and that more lives might have been saved if that number had been higher?

Has the NHS been saved? Not if this  means that  its principles have been protected, nor if it means that the population as a whole has been shielded as well as it could have been, nor if it means that that  the  health and social care workforce have been protected in the ways they have a right to expect.

A different approach is that adopted in British Columbia where the provincial government effectively nationalised its care home staffing system to improve workers’ pay and hours and provide PPE. But a privatised care system, especially with many staff on contracts that deny them a living wage from a single job, cannot hope to remove poor contracts and multiple employers as a source of infection.

The social care sector in the UK has been so badly hit by Covid-19 because it was in crisis already. Emergency measures are needed now to protect care recipients, care workers and unpaid carers. But at the same time thought must be given as to how we can build a new care system that does not leave people so vulnerable another time, provides good quality care, well integrated with health services at every level, and treats workers and carers with respect and dignity. This would not be a private sector care service. Instead we need a public sector led National Care Service nationally funded, but locally delivered, operating with decent working conditions alongside the NHS providing support for all who need it free at the point of use.

Image credit: Flickr – Don Barrett

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What should concern objective commentators and voters is that under the Coalition Government of Conservatives and Liberal Democrats and under the Conservatives since 2015, there has been extensive privatisation – real evidence of intentions, as documented in my recent book, Plunder of the Commons. Although it began under New Labour, privatisation was substantially accelerated by the Health and Social Care Act of 2012, which in all but name abolished the government’s obligation to provide a comprehensive health service beyond emergency care and ambulances and which opened up NHS contracts to unlimited privatisation.

Even excluding the partial privatisation of GP work, dentistry and community pharmacy, the NHS now contracts out over £9 billion a year (8% of the NHS budget) – a figure rising steadily – to private companies, much to US multinationals and their subsidiaries, the most conspicuous being Optum, which now provides services and medication management inside the NHS. Since 2015, Optum’s owner company, United Health (the biggest healthcare company in the USA and world), has been on the NHS Committee overseeing the award of contracts to private firms. The chief of NHS England, appointed by David Cameron, was previously Vice President of United Health. All of this is legal, but surely does not look good.

Under the Conservatives, Aspen Healthcare, acquired by US Tenet Healthcare in 2015, has been bidding successfully for NHS contracts. US insurance company, Kaiser Permanente, has been given lavish contracts to provide management services to the NHS. And Health Corporation America is running private medical services from NHS hospitals. These are just examples.

Boris Johnson has consistently voted for the policies that has produced this privatisation. As a journalist, he was dismissed for making up stories. Perhaps we should start looking out for the Loch Ness monster.   

Photo credit: Flickr/Paolo Margari.

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Rethinking Britain is not only for the many – it’s also written by the many. As a result, it doesn’t set out the vision of one or two people, but instead offers the assessment of a wide range of experts, who are working in or studying the areas we cover. We not only set out the problems and suggest policy solutions to address them. Our aim is to help improve life for people living in today’s Britain. Between each set of policy ideas, you’ll also find interludes.  These draw upon real-life stories of people in Britain who are experiencing unresolved difficulties that should be considered unacceptable in any developed economy or civilised society – and we suggest how these problems could be solved, too.

Although some depressing situations are described, our overall approach is extremely positive. Instead of denying that there are problems – or ignoring them, as many politicians have done – we take a much more “can do” approach to building the society that most of us would want to live in. That leads to another significant point: Whilst Attlee’s 1945 government put people and society at the centre of its policy ideas, less than forty years later, Thatcher’s administration reversed this, focusing on the individual, privatization and the wealthy. This raises the question: “In whose interests should the economy be run”?

The shift to individualism, private profit maximization and an obsession with “free” markets resulted in serious wealth for the few – and runaway inequality and poverty for the many. It’s therefore not hard to guess where those contributing to Rethinking Britain are coming from!  We strongly believe that a society that produces healthy, well educated, strongly motivated people – who have, or can realistically hope for, a good standard of living – will also help to generate a powerful and dynamic economy.

The post-1979 dogma – that the British government should play as small a part in the economy as possible – is also misguided. Far too much capital is being used for short-term, speculative purposes, whilst not enough is finding its way into the development of sustainable businesses that provide long term employment and pay decent wages – not the hand to mouth existence of a zero hours contract. In other words, the economy should work for the many, not just the few.

Another theme that runs through Rethinking Britain is the concept of citizenship – where sets of rights and obligations mean that you are indeed part of something bigger than yourself. This is the polar opposite of Thatcher’s point of view, that there is “no such thing as society”. Many of her policy ideas were developed in the context of the Cold War – which came to an end thirty years ago; and it’s time for her policy ideas to do the same.

By investing in Britain’s people, we can build a stronger, more cohesive society – which will underpin a more vibrant economy. Rethinking Britain shows how.

Photo credit: Flickr/Christian Reimer.

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Labour’s policy for buses is a key part of reversing the impact of neoliberalism on transport since the 1980s. It is redistributive: it helps those who cannot afford to drive to work. Nearly half of all bus journeys are taken by those who have no car, and two-thirds of those who travel on buses have an annual income below £25,000 per annum. But it is also a brave policy. By far the most popular mode of transport is by car (or van), and the policy will be portrayed by opponents as putting road building at risk.

The money recently promised by Labour will mainly go to undoing another impact of austerity. Outside London fares on commercial routes are set by bus operators. Local authorities can provide subsidies for routes that are socially important but not commercially viable. Local authority-supported services outside London have halved in vehicle mileage since 2009 as austerity has squeezed local authority budgets.

But Labour also plan to change the way buses are run outside London. Bus operation was privatised by Mrs Thatcher in 1986. Yet privatisation has in most cases failed to bring the benefits of competition. Largely as a result of a long-term process of consolidation through merger and acquisition, the UK bus industry is highly concentrated with three businesses (Arriva, FirstGroup, and Stagecoach) dominating the sector. Head-to-head competition between operators is uncommon, producing what is effectively a monopoly.

The market failure in this case may be the ability of a large bus operator to stifle any competition by temporarily cutting prices or increasing frequency. That makes the routes unprofitable for a time for the large bus company, but it is also unprofitable for the new entrant. As the financial resources available to the big company are much greater, they have the ability to kill off or take over any competition. There is no regulator preventing this kind of unfair competition.

With new entry unlikely to happen because of the possibility of such threats, the large bus companies can do what every unregulated monopoly does: raise fares and reduce services. That is good for profits and dividends, but bad for passengers. The large bus companies make good profits, and the passenger gets a more expensive or less frequent service. Since 2009, for example, the average price of riding a bus has increased in real terms by over 15%, while the cost of using a car in real terms has hardly changed.

There is a vicious circle here. The cost of running a bus is largely independent of how many people use it, so if usage declines firms put prices up, which in turn discourages passengers. But one important area has seen bus use rise rather than decline, and that is London.

The system in London is rather different from the rest of the country. Contrary to common belief, Transport for London does not own its buses. What it can do that local authorities elsewhere cannot is set routes and fares, with private companies bidding to run each route. That avoids the high fares that come from monopoly, and it also makes it easy to establish a common ticketing system which is absent in places like Manchester. The system used in many European countries for their bus services is similar to London. An important advantage London has is that there is effective competition between bus companies to bid for tenders on routes, which helps keep costs down and maintains efficiency that might be lost in a completely nationalised system.

The success of London compared to most other areas of the country suggests the neoliberal ideal of a bus system free from government ‘interference’ does not work, and local control over routes and fares can provide a better service. It is a classic example of where economics, which recognises the social costs of monopoly, beats a neoliberal ideology that is often blind to the dangers of monopoly. This is why Labour also plan to encourage areas outside London to re-regulate bus services, and support the creation of municipal bus companies that are publicly run.

While a comparison between London and elsewhere shows the dangers of private monopolies charging too high a price for services, is there not a danger that if local government can set fares it will tend to set fares too low? I don’t think this is likely to be a major issue because of two other problems (what economists call externalities) with a profit-based bus service. If people use many cars rather than a single bus this increases congestion and pollution.

Anyone familiar with large towns and cities during rush hour will know what a nightmare congestion can be. Buses can reduce congestion by persuading people not to use their cars. Basic economics tells us that the congestion externality justifies subsidising bus travel or taxing cars. Exactly the same point applies to CO2 emissions and pollution. In this respect underpricing bus travel can be advantageous.

Unfortunately, the experience of UK cities suggests that cheap fares alone may not be enough to prevent congestion. In addition congestion outside London may be having a serious impact on the productivity of our cities, as well as increasing pollution and CO2 emissions.

Tom Forth writes about a recent study that starts with a puzzle. In many countries, large cities tend to be more productive than small cities, and economists explain this by talking about agglomeration effects. However, this pattern does not seem to be true for the UK if you exclude London. Another way of putting the same point is that UK cities outside London are not as productive as they should be.

The study then looks at transport times to the centre of Birmingham, where the transport system is mainly based on buses. At peak times, when congestion is high, bus journey times into work can double on bad days, and anyone using a bus route has to plan for bad days. So if we think about the effective size of Birmingham in terms of a reasonable time to get to the centre, the city shrinks substantially.

This study shows that as long as cars are free to come into the centre those travelling on buses also suffer. Birmingham is using this study to target investment in bus lanes, which provides a partial answer. Park and ride schemes can help too. Another approach is to again follow London and introduce a congestion charge, but this will only be politically feasible if alternatives are easy, cheap, frequent and reliable.

If we look at cities in France, the big difference with UK cities is metros. Lyon has 4 lines, while Lille and Marseille have two lines each. Birmingham and Manchester have none. Last week I visited the French city of Rennes, population 215,000, that has one metro and is building another. Manchester has a good tram network similar to Lyon, but Birmingham has just one and Leeds none (compared to three in Marseille and two in Lille).

In short, cities outside London lack the transport infrastructure that can make them work productively, but also in a way that reduces CO2 emissions and other forms of pollution. One difference with France is how money is provided. In France, every city larger than 100,000 people has a ten-year transport plan, with significant national investment in five-year allocations with ten-year strategies. In the UK cities are good at the strategies and visions but cannot secure funding to realise them.

Once you have well-functioning cities you need to provide easy connections to nearby towns. Towns flourish when they are well connected to dynamic cities. Many will argue that this kind of local investment is money better spent than HS2, but I don’t think we should think of these as alternatives. Cities that link quickly to other cities are likely to be more productive, and France’s TGV network puts the UK to shame. The UK has underinvested in non-road transport infrastructure outside London for decades, and we need to make up for this quickly to create a more prosperous and greener future.

This piece was cross-posted from Simon Wren-Lewis’ blog MainlyMacro. Photo credit: Flickr / Dun.can.

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The important measures of the impact of austerity lie in the suffering of our fellow citizens caused by the termination and reduction of public services. Complementary to human effects, overall measurement provides a revealing summary of what we have lost. The lack of adequate price deflators for public services sets a serious limitation on accurately measuring overall expenditure and expenditure by the various major categories of public services.

Public spending on pensions and health illustrates the measurement ambiguities. The consumer price index provides a generally accepted measure of the purchasing power of the state pension. In the case of health services, “output” is considerably more difficult to measure. A recent Treasury report avoids rather than solves this problem by adjusting every spending category with the general GDP price index. Table 4.2 (p 48) of the report provides a time series for actual expenditure, followed by Table 4.3 (p 49) that gives expenditure in 2017/8 prices.

While not methodologically ideal, the Treasury report gives a practical estimate of the “real” value of expenditure, shown in the chart below (“real” is the term the Treasury uses). The chart shows the Treasury’s measures of real expenditures by major category. George Osborn’s emergency budget in mid-2010 resulted in immediate and severe cuts to education and local government. The Treasury numbers indicate that this school year teachers will attempt to educate our children with 15% less funds than in 2010.

The local government cuts were even worse, as central government grants dropped by 25%. As a result, local government spending in 2017/8 fell by fifteen percent compared to 2010. The transfer of business rates to local government revenue represented only a fraction of the loss of central government grants.

Austerity in overall social protection spending began a year after the 2010 election, in 2011 when it had risen 5% above the previous year. After 2011 social protection expenditure hardly changed, constant in real terms for seven years. Only health expenditure shows a steady rise, albeit at a very slow rate. During the seven years leading into the global crisis (2002-2009) real health expenditure grew at 6.5% a year. It increased at 1.3% annually after 2010 or 0.6% per capita.

The measure of health expenditure in the chart should be interpreted with greater scepticism than for the other categories. A recent ONS study seeks to measure the real quantity of health output. The methodology suggests that considerable inaccuracy may result from the use of the GDP deflator to estimate real expenditure and, therefore, real health service provision. During the eight years of austerity, health services have probably increased, but at a very slow rate, much slower than before 2010. The simply calculated 0.6% real per capita growth is likely the upper limit of changes properly measured.

It is important to stress the extremely slow growth of health spending because it has long run implications. A progressive government could quickly reverse the stagnation in spending on social protection and re-establish the level and quality of programmes within one parliament. To a lesser degree the same is possible for local government services. These are areas in which pre-austerity can be restored through increased current spending.

For the NHS reversing austerity effects will involve a much more difficult task of training new staff, re-initiating research and development programmes abandoned as a result of funding cuts, and re-setting priorities for modernisation never embarked upon. To take a clear example, supporters of free movement of employees correctly celebrate the international diversity of NHS staff. The diversity has a negative side. The austerity period accelerated the practice of seeking cheap staff from abroad rather than investing in training programmes in Britain. The NHS management was in effect contributing to brain drain from countries desperately short of medical staff, where salaries are considerably lower than the low salaries here.

Similar challenges will arise when reversing the disastrous effects of cuts to education. Hiring more teachers, especially when salaries are raised, can quickly reduce student-teacher ratios and deliver basic teaching materials. Reversing the de-modernization of primary and secondary education due to lack of funds will prove more difficult. At the university level de-commercialization only begins with the abolishing of student fees. The entire culture of “value for money” must be replaced with the de-commodifying of university education.

We do not know the consequences of the British government ceasing to be a member of the European Union, only that they are likely to be negative. We know the consequences of fiscal austerity, human misery, opportunities lost and economic stagnation. No referendum, however close its vote, endorsed fiscal austerity. The current government that prolongs the disastrous effects of austerity rules on the basis of having failed to secure a parliamentary majority in the 2017 General Election.

A general election may prove the vehicle to resolve Brexit. It is certainly the route to end austerity.

Photo credit: Flickr / Conservatives

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