Economy & Finance

The Government’s call to ‘level up’ Britain is justifiably popular. We agree that our country’s poorest communities need to be lifted up to the level of wealthier ones. But slogans don’t always translate neatly into policy. That’s why we need an open and honest national conversation about what levelling up means in practice, how success will be measured and how we make it happen. As Boris Johnson acknowledged in his July speech, we need national measures, alongside place-based strategies, if we are to level up successfully. This must include measures to level up at work.

Labour shortages that have become so evident in key sectors from HGV drivers to adult social care workers show that we need significant pay rises and improvements in working conditions to recruit and retain the skilled workers we need. And employment rights matter too. We must make sure that we provide dignity, security and a strong voice for working people to end the casualisation, fragmentation and insecurity that characterises a large part of our labour market.

For too many working people, the link between work, security and opportunity is long broken. Over half of those living in poverty are in working households – and this rises to a shocking three quarters of children living in poverty. For far too many people, work is a trap rather than a route out of poverty. And this is a national, rather than a regional problem, as shown by the table below:

Rates of in-work poverty by region and nation (data is a 3-year average)

IPPR Analysis of DWP (2020a) Households Below Average Income (HBAI) 2017/18 – 2019/20 (data refers to the number of people in working families who are in relative household poverty)

In-work poverty is fuelled by low pay and insecure contracts, which are endemic across every region of the UK. Over one in seven jobs in every region and nation is paid less than the Real Living Wage. This reflects the fact that low paying sectors are large employers across all regions and nations, with retail and social care among the top sectors of employment in every region and nation. Similarly, insecure work is common across all areas of the UK, ranging from nine per cent of jobs in Yorkshire and Humberside to 13% in the East of England. 

Place-based strategies, such as infrastructure and transport improvements, are important, but will not on their own address the root cause of the problem. The story of London is that the prevalence of high paid jobs does not automatically pull up incomes for others in the local community. High-income residents will create additional local economic demand –  but as long as so many service sector jobs remain low paid, this will expand the low-paid local economy, rather than fostering rising incomes across the board.

So we need a coherent plan to level up at work. That must include a just transition to meet the challenge of climate change,  creating good green jobs in the parts of the country that needs them most. But we need to make all sectors better too. We need to strengthen the floor for all workers, with stronger employment rights and a higher minimum wage for all. This must include banning zero hours contracts, bogus self-employment and the scandal of ‘fire and rehire’ and tackling the injustice that still sees too many black, disabled and women workers stuck on lower pay, with worse promotion prospects, and an expectation of ‘last in, first out’. Mandatory gender pay gap reporting helped spur action to tackle sex discrimination. Why not do the same to tackle race and disability discrimination too? The Government must bring forward the ambitious Employment Bill that we have long been promised.

Critically, just as President Joe Biden has advocated, we need to make it easier for workers to come together in unions to bargain with employers on their pay and conditions, to address the imbalance of power in the workplace. Much better to secure justice through negotiation than resort to the courts. The new union agreement with Uber is a case in point. 

Higher skills and education will be key to unlocking higher productivity and  good quality jobs. This must include a new national lifelong learning and skills strategy, corporate governance reform to prioritise long term investment over short term shareholder gain and sectoral strategies including fair pay agreements to address the prevalence of low pay and insecurity in our low-paying sectors. 

The Government must lead by example, showcasing the importance of good quality work through its role as an employer. We need an immediate end to the pay freeze and outsourcing of public sector jobs. 

We can harness the power of government spending to boost decent work, with job creation and job quality standards built into public investment decision-making and procurement policies. We saw with the London Olympics how a framework agreement tied to a large-scale infrastructure project can bring together contractors, unions, local authorities and community groups to boost local job and apprenticeship opportunities. This should be mandatory for all significant infrastructure projects going forward.

We know there are times in our lives when people cannot work or earn enough to live on – and a decent society must be measured by how we look after the most vulnerable. Fixing our safety net, including universal credit, sick pay and the state pension, is vital to give everyone the right to dignity and security. And what better way to help more people get back into work, so we can grow our economy faster, than top class childcare services too.

Levelling up the country is an ambition that the trade union movement can support. But it must be more than a slogan and make a real improvement to everyday working lives. Let’s work together on a plan to level up at work to make levelling up a reality.

Frances O’Grady is the General Secretary of the British Trades Union Congress. Views expressed in this article are those of the author, not necessarily those of Bright Blue. You can watch Bright Blue’s Conservative Party Conference 2021 event, in partnership with the TUC, here.

Modern Monetary Theory (MMT) attempts to offer an alternative economic rationale for government spending. Fiscal austerity after the Great Recession was a painful process, for people’s material wellbeing and even for social cohesion, with analysis revealing that countries with expansive fiscal stimulus packages actually recovered faster. However, MMT’s alternative is far from risk-free and should not tempt policymakers into complacency, especially in light of the uncomfortable weight Covid-19 spending has placed on public finances. 

What makes MMT different? The essence of the theory is that the size of the national debt in itself does not matter. Instead, government spending should be moderated in line with the inflationary pressures it creates. In this system, the role of taxation would flip, functioning to remove money from an overheating economy rather than being a tool to finance spending. The academic doyen of MMT, Stephanie Kelton, outlines the parameters within which this reorientation of fiscal and monetary policy is possible in her New York Times bestseller The Deficit Myth. 

Firstly, MMT only applies to countries that borrow in their own currency. Unlike people or businesses, these governments cannot technically go bankrupt, as it would amount to defaulting on your own ‘IOU’ note. Secondly, MMT demands that interest rates should always be set to 0%, so as to ensure debt repayments do not become too burdensome. Again, the burden here is not the size of the debt itself, but the inflationary pressure payments may cause. By extension, this also requires government control of the central bank, so that monetary and fiscal policy are aligned. 

Most mainstream economists maintain that MMT is unworkable, as expressed by 50 of the most respected academic economists during the 2019 Chicago Booth IGM Forum. At the event, not one agreed with MMT’s key tenets, including left-wing Keynesian economists such as Nobel Prize-winner Paul Krugman, who dismissed the theory as “obviously indefensible”. 

One concern lies in giving politicians the keys to the printing press, with studies linking central bank independence to consistently lower inflation rates. MMT presupposes that governments would not use expansionary fiscal policy to engineer short-term growth for electoral gains, as occurred during the 1972 ‘Barber Boom’ and its painful inflationary bust. Even if politicians maintained an impressive degree of self-constraint, it would be unclear how the electorate would react to MMT when the economy reaches full capacity: re-elect the party imposing painful taxes to cool down money supply, or choose a populist politician promising to magic away inflation? 

Furthermore, a level of debt that appears manageable in one economic environment may be problematic in another, as Greece discovered last decade. Given that inflation is notoriously difficult to tame, the tax hikes and spending cuts in an MMT regime required to control an inflationary spiral – where wages and prices rise on the expectation of future costs – could make George Osborne’s austerity look generous. While the US Federal Reserve was able to change behaviour by hiking interest rates to an unprecedented 20% in 1980, MMT has been said to recommend “policymakers press hard on the accelerator without knowing where the brake is”. Whereas raising interest rates incentivises saving and cools down the economy, this system may rely on sudden and severe tax hikes, directly hitting individuals’ pockets at the time goods and services become less affordable. 

Nevertheless, the Overton window of debt-financed government spending seems to be shifting, with policymakers urged to employ a more ‘MMT approach’ to establish a greener, more equal post-Covid-19 recovery. This is reflected in America’s vast Green New Deal, shaped by Stephanie Kelton herself as Bernie Sanders’ economic advisor. Back across the pond Conservatives have looked to MMT for fulfilling electoral promises, particularly in terms of the levelling up agenda. 

Compared to the Great Recession, the economy now lies in a very different position. Already, warning signs show that the reopening economy will be reaching full capacity. Andy Haldane, former Chief Economist at the Bank of England, urged caution towards the risks that may come if the Bank did not tighten its monetary belt, predicting a 4% inflation rate by Christmas – double the UK target. Growing out of a supply-side shock of this scale would be highly problematic for an MMT economy, since the theory relies on tax cuts to remove money from an overheating economy: this would do little to alleviate inflation induced by constricted supply, and would instead harm the economy. 

There may have been a time for more expansionary fiscal policy during the Great Recession, but contemporary economic difficulties would be exacerbated by an MMT-inspired fiscal splurge. We thankfully have recourse to usual monetary instruments for reining in inflation, but raising interest rates would make debt repayments increasingly expensive. This makes it all the more important for the necessary investments for the future to be well-planned and budgeted – if not, the risk is that the only thing being levelled up is the price of your weekly shopping. 

Ben is currently undertaking work experience at Bright Blue. Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Image: Bank of England]

There is a new economics kid on the block: Modern Monetary Theory (MMT). It has emerged from many years in academia, with papers published, peer-reviewed, attacked, defended, refined. Perhaps the most prominent advocate, if not High Priestess, of MMT is Professor Stephanie Kelton, formerly chief economist on the U.S. Senate Budget Committee and Professor of Economics and Public Policy at Stony Brook University (State University of New York). Her book The Deficit Myth is a New York Times bestseller and plays no small part in informing the $6 trillion budget recently unveiled by President Biden – she in fact advocates going much further. 

The key starting point for MMT is that governments are not like households. MMT posits that for a sovereign issuer of currency (e.g. the US, UK, Japan) the deficit alone is not a legitimate constraint on government spending because such nations have the power of the public purse, i.e. can issue more currency. It argues that desired national outcomes such as improved education, health, and infrastructure should be the driver of government spending decisions and inflation should be the restricting factor, not an obsession with avoiding ‘ballooning’ the deficit. 

Budget decisions should be based on detailed analysis that shows whether inflation would be increased and, if so, what mitigating factors should be employed. MMT further argues that a nation’s debt is merely a record of historic deficits or the input of money into the economy without taxing back. Involuntary bankruptcy is simply impossible for a country with its own currency. Note, however, that this only applies to nations with their own sovereign currency, and so none of the Eurozone countries (Greece, Italy etc.) can avail of it, nor can those who borrow in foreign currency, usually the dollar, such as Venezuela.

The question for Conservatives – centre-right ones in particular – is: does MMT offer solutions that we could usefully employ for delivering beneficial societal outcomes? There is a perhaps stomach-churning fact that Conservatives have to absorb first, that Margaret Thatcher’s 1983 speech was wrong, notwithstanding whether the purpose of that speech was to change behaviours rather than state a fact: 

“The state has no source of money, other than the money people earn themselves. If the state wishes to spend more it can only do so by borrowing your savings, or by taxing you more. And it’s no good thinking that someone else will pay. That someone else is you. There is no such thing as public money. There is only taxpayers’ money.” 

MMT points out that the state does indeed have a source of money and is, in fact, the sole entity that can produce money. This doesn’t apply to local government such as Councils or to corporations or to individuals. Only the nation state, through the agency of the state bank, for us the Bank of England, can produce money. The question is: how is this done without causing inflation beyond an agreed reasonable level, currently accepted as around 2% in most countries?

Let’s look at a practical example. Could the government increase the deficit to fund new infrastructure such as roads, bridges, rail, and ports as part of the levelling up agenda? And could they do it without borrowing or taxing first? MMT says Yes. Instead of Taxing And Borrowing to be able to Spend (TABS), the government creates money by Spending and then Taxes And Borrows (STAB) to control any resulting excessive inflation.

How did we fund the Furlough Scheme? Answer: borrowing, taxes and spending cuts. An MMT approach, however, would first ask: what is the outcome we want to achieve, and how many pounds need to be input to the economy to make that happen? In this case, the answer is avoiding mass unemployment, and £100 billion for all the relief schemes. Then an assessment is made on whether inflation wouldn’t exceed an agreed target. Taxation can be used subsequently to take currency out of circulation if required. 

This is obviously an over-simplification. And there have been detractors such as former US Treasury Secretary Larry Summers and Nobel Prize Economist Paul Krugman. But MMT’s proponents are no pushovers, with Prof. Kelton stoutly defending MMT against put-downs: interestingly the attacks on MMT are often unravelled at a very detailed level, as they refute with surgical precision.

We have big questions on how to fund social care, levelling up different parts of the country, helping young people catch up on missed education during the pandemic, and moving to more sustainable forms of energy. The recent resignation of the schools catch-up tsar was purely because of economics, and it prompted the former Conservative Education Secretary Justine Greening to criticise the Treasury for having models that focus too much on bridges but having little to support long term investments such as in education.

MMT is making a strong case for rethinking how we deliver on key commitments. Do Conservatives simply dismiss it, or would this be a missed opportunity?

Jeet Bains is a member of Bright Blue and a councillor in the London Borough of Croydon and was a parliamentary candidate in the 2019 general election. Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Image: Images George Rex]

As we emerge from a year of crisis, now is the time for the UK to double down on our competitive advantage in education and research as a means of levelling up at home, while leading the world in home grown skills and innovation.

The 24 globally outstanding Russell Group universities are based in every region and nation of the country, delivering high-value education and graduates, groundbreaking research, and thousands of quality local jobs. This unique combination makes them a crucial component in unlocking potential across Britain.

Our national response to the pandemic has been backed by the firepower of the UK’s world-leading research universities to develop new, innovative treatments to aid recovery and vaccines to combat the pandemic. Russell Group universities have been at the forefront of the fight against Covid-19. Now they stand ready to turn that firepower towards supporting a recovery that spreads to all communities. 

Investing in place-based economic growth, in fundamental research, in key strategic science-based missions, and in the talent pipeline for future high-level skills will create more jobs, help realise the levelling up ambition, and boost our knowledge economy as we work to overcome the scars left by Covid-19 and the existing inequalities exacerbated by the crisis. 

Russell Group universities support over 260,000 full-time equivalent jobs – more than the entire population of cities like Aberdeen or Plymouth. More than 200,000 of these jobs, supported through direct employment and the expenditure of universities, staff and international students, were based in towns and cities outside of London.

The overall economic impact of spending by the 24 universities in 2015-16, together with the spending of their staff, their suppliers, and their international students in the wider economy, was £27.2 billion, with £21.3 billion of this impact boosting communities outside of London.

As we look to the recovery, these hubs of employment are ideal launchpads for regional economic renewal: driving innovation nationally while delivering jobs, education, employment, and cultural bases in their surrounding areas. The opportunity of new trade deals also has the potential to link the international with the local – driving inward investment, student mobility, and trade with new markets.

Closing the productivity gaps between London and regions such as the North East, Midlands, Wales, and Northern Ireland will be crucial to delivering an economic recovery that works for communities right across the UK and secures long term growth and wage increases. 

Doing this requires a genuine levelling up: building on the best and getting all areas up to that same level, not undermining our existing strengths. The ambition must be to achieve global competitiveness in every region and nation of the UK.

The 2020 Spending Review showed how tough the decisions are for the Government, so it was telling that the Chancellor earmarked further funding for research, knowing, as we do, the pay-off for such investment. Our economic impact report shows for every £1 of publicly funded research income, Russell Group universities deliver an average return of £9 to the UK economy. 

Creating a workforce to support an economic recovery and longer term success will require big increases in the number of people with the kind of high-level skills a quality university education provides. In the UK, Russell Group universities already teach a quarter of all undergraduates and a third of all postgraduates, including four out of five doctors. The number of disadvantaged and under-represented students going to university is rising but our 2020 report, Pathways for Potential, sets out an ambitious plan to ensure that the only factor affecting whether or not someone goes to university is their drive and determination to do so.

There are also other routes to success beyond traditional higher education. Over half of our members offer degree apprenticeships, and, as employers, all offer apprenticeship schemes. Our members collaborate locally with further education colleges and we have long said that Britain must be ambitious for both higher education and further education. 

The Russell Group shares the assessment of the Prime Minister that “talent, skill and genius are distributed uniformly across the UK, but opportunity is not”. There is a moral case for levelling up but also a hard-headed economic one that makes the most of untapped potential in people and communities.

Our universities are already key regional hubs so the existing processes, research infrastructure, and local links they support are an efficient way to level up without starting from scratch. We recommend two immediate steps that could be taken to support levelling up:

First, boost capital investment to ensure shovel-ready projects that have been paused due to the pandemic can restart as soon as it is safe to do so. As part of their efforts to protect education and jobs from the economic challenges created by Covid-19, Russell Group universities have had to put over £2 billion of projects on hold, which could potentially support around 28,000 jobs. 

Second, channel a portion of the additional R&D investment into a major scale-up of schemes with a proven track record of fostering university-business partnerships and extending local innovation capacity and training. These include the Higher Education Innovation Fund, Strength in Places Fund, Knowledge Transfer Partnerships, and the Connecting Capability Fund.

As we prepare to move beyond Covid-19 and embrace the possibilities of a post-Brexit Britain, a high-skilled, high-tech approach to levelling up can unleash our potential at home and abroad. Russell Group universities are ready to play their part in making the most of the opportunities ahead and working to ensure they are evenly spread across our country. 

Dr Tim Bradshaw is the Chief Executive of the Russell Group. This article first appeared in our Centre Write magazine The Great Levelling?. Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Image: Arian Kriesch]

In 2019, the Royal Statistical Society declared its ‘statistic of the decade’ to be 0.3%: the average annual increase in UK productivity since the 2008 financial crisis. 

That dubious honour provides an indication of the seriousness of the productivity crisis: 0.3% a year represents the worst decade for productivity since the early 1800s. By comparison, if the pre-crisis trend of 2% growth had continued, overall productivity would be a fifth higher than it is today. As a result of that shortfall, the average worker is estimated to be over £5,000 worse off in terms of their wages. 

Productivity growth is not just fundamental to our prosperity – it is little exaggeration to say it is the basis of our civilisation. Productivity measures how much the average worker can produce in an hour. Increasing productivity represents the process by which one person can come to do the work of ten on a farm or in a factory, freeing the other nine to work in a wider range of jobs and sectors, and driving up the wages they can all command. 

That image should make clear that productivity is fundamentally driven by technological change. It is possible that a burst of innovation could be on the horizon to jolt us from our current malaise – techno-optimists anticipate we are on the cusp of a ‘fourth industrial revolution’, exploiting widespread internet connection and advances in fields such as artificial intelligence, computing, energy capture and storage, robotics, and nanotechnology. On the other hand, pessimists fear that “ideas are getting harder to find” and that the dramatic productivity improvements of the twentieth century may not be repeatable.

There are things that governments can do to nudge along innovation: fund research and development and encourage private firms to do the same, invest in education, and reform the incentives in intellectual property law. However, these can only be expected to have a marginal impact: to a rather frightening extent, technological progress falls like manna from heaven, beyond the control of policymakers.

Telling a country to improve its productivity by increasing innovation is therefore rather like telling a person to solve their financial troubles by earning more. It is basically correct, but hard to put into practice and reliant on factors beyond their control. Helping them to improve their planning and budgeting is not as transformative, but it is likely to be more useful. 

Similarly, the task for businesses and policymakers is as much about how to make the most of the technology and ideas that we currently have, as it is about generating new ones. To a significant extent, that involves stimulating investment in infrastructure like housing, transport, and the internet, which allow people to work more effectively, connecting a wider range of jobs with a wider range of people. 

It also requires upskilling the UK’s workforce. Improvements across the education system, from early years to university, can contribute to this task, but there is a particular need for focus on adult education and training, which have been deeply neglected in recent years. 

The aspect of a productivity agenda I would like to draw attention to here, though, is improving the quality of management. In 2017, the Office for National Statistics carried out the Management and Expectations Survey, in which 25,000 businesses were asked whether they used a range of techniques, including tracking performance and having procedures for employees that fail to meet expectations, setting clear targets, and offering pathways for personal development and promotion. 

They found that organisations with more ‘structured’ management practices were considerably more productive. Accounting for factors like firm size, age, industry and employee education level, moving a business from the bottom quarter of firms for management to just the average is associated with a 19% increase in productivity. 

While some aspects of good management are tied to personality or context, there is evidence that certain general principles and effective behaviours can be taught. However, managers may not appreciate the benefits of such training – an international study found that the typical manager rates their own skills as seven out of ten, well above average. In this context, the Government should continue to support initiatives like ‘Be the Business’, which provides firms with mentorship and helps them benchmark their performance against peers. It should set an example and review management skills and training within the public sector. It should also promote management education as part of a broader investment in lifelong learning. 

When it comes to productivity, there is a lot that we cannot control. Expecting to ‘fix’ the problem is to set ourselves up for disappointment, but through focused attention on the things within our grasp, like improving management, the Government can help us all work a bit smarter.

Aveek Bhattacharya is the Chief Economist at the Social Market Foundation. This article first appeared in our Centre Write magazine The Great Levelling?. Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Image: Microbiz Mag]