Hearing 4

Fabian Society Commission on Future Spending Choices

Hearing 4: ‘How can public spending best promote jobs, growth and earnings?’

5th February 2012

Witnesses

  • Stian Westlake (NESTA)
  • Gavin Kelly (Resolution Foundation)
  • Nicola Smith (TUC)

Key questions for this hearing include:

  • How can public spending on investment and education promote future growth and tax revenues?
  • What sort of spending can ‘pay for itself’ over the long term?
  • What sort of spending will maximise employment?
  • What kinds of spending are most effective for boosting the economic prospects of low to middle earners?

 Summary

This hearing began with Gavin Kelly outlining how since the early 2000s economic growth has become detached from ordinary earnings. Presenting evidence to illustrate this, he argued that faltering wage growth throughout this period was accompanied by a growing proportion of household income made up through tax credits. As such, the changing pattern of earnings distribution from the 1990s until 2000s also implies a different politics of public spending.

While previous Labour governments did commendable work in addressing the incidence of extreme poverty among particular social groups, it was suggested that theUKremains a poor performer on a number of fronts when compared to its European counterparts. TheUKis among the worst in the OECD for the incidence of low pay and lags other countries particularly in terms of female employment levels and the participation rate of older men. This has meant that low and middle income households did not benefit during the ‘good times’ prior to the financial crisis. Preventing the further deterioration of living standards for this group should now be a key political priority.

Kelly argued that if taken together, measures to improve low pay, raise the female employment rate and make serious interventions on the UK’s low-skills problem could have significant impact on household living standards. But he issued a note of caution to those who would argue that significant cash savings can be realised through structural reforms to the economy which mitigate the need for redistributive transfers. These measures can slow the upward pressure on budgets, but they do not eliminate the need to make serious decisions about public spending in the future.

This opening intervention was followed by Nicola Smith, who began by underscoring the role public spending has played in promoting growth since the financial crisis and continues to play in the context of recession. This is also true in the case of job sand earnings – outside the South East a number of regions continue to rely on the public sector as the main driver of employment. But this reliance on the public sector to hold up local demand is unsustainable on its own.

Smith pointed to the wide body of evidence demonstrating that capital spending can promote growth. But the political context of investments such as infrastructure presents a tension between short term and long term decision-making horizons. It was suggested that in order to facilitate strategic decisions of this kind in the future institutions which bring together various lobbies will be required. A recent case concerns the HS2 high-speed rail link, where if approached coherently long lead in times present an opportunity for investment in supply chains and apprenticeships.

Another difficulty concerns the role of the state in making large scale investments that will improve the future productive capacity of the economy. Due to the large up-front costs and political uncertainty surrounding many infrastructure projects under investment is problematic in the UK. Other European countries recognise this market failure by leveraging the capacities of the state. In this regard Smith noted that current Labour proposals for a British Investment Bank with the power to issue bonds to finance investments are promising.

The state’s role in creating the environment for growth enhancing investment was also the subject of Stian Westlake’s presentation to the Commission. Pointing to the lack of progress in the standard macro-economic debate between ‘plan A’ and ‘plan B’, Westlake argued that innovation will be essential to a sustainable recovery and productive economic future.

Westlake commented that unlike other European states that have expanded investment in innovation since the recession the UK is experiencing an innovation crisis. This is at odds with the government’s long term economic strategy, but also reflects a long term trend among companies in the private sector to hoard cash.

Transforming this scenario, Westlake suggested, will rely on moving beyond the orthodoxies of liberalising planning and promoting labour market reform, and entails an important role for the state in promoting innovation. Addressing the financing of businesses is central here, and Westlake agreed with previous witnesses on the need for a state-backed business bank. Procurement too holds a wealth of potential for developing and promoting innovation. Finally, he argued that in order to meet the challenges facing the UK over the next three decades, much deeper thought about public and social innovation is required. Recognising and managing the disruption that this could cause should be a key political priority for policy makers in the future.