Current UK stagnation may have many causes, but one we know about is the UK media. Plus why the UK definition of a recession is no longer fit for purpose.

 

In the UK the definition of recession used by most people is two successive quarters of falling GDP. This definition always involved a knife edge problem. If GDP fell by 0.1% in two successive quarters we were officially in recession, but if output fell by 1% in one quarter and grew by 0.1% in the next there was no official recession. If a recession is meant to indicate periods in which output growth is particularly poor, then in this example it fails. The knife edge problems also means that mild recessions can easily disappear after data revisions.

A second problem has only become significant since immigration flows have been large and variable. The UK’s definition of a recession refers to GDP rather than GDP per capita (total output per head of population). GDP per head is much the more relevant number for most people, because it is a better indication of average personal prosperity. So the definition of recession should really relate to GDP per head. As the chart below shows, on that basis we have had two recessions since the end of the pandemic recovery.

A much more relevant way of putting it is that GDP per capita has still not recovered its pre-pandemic position.

The third and most important reason why our current definition of recession is not fit for purpose is that it only makes sense when underlying growth is significantly positive. Since WWII but before the financial crisis, when UK GDP per capita grew on average by over 2%, a recession indicated a lack of demand in the economy. The way to get out of recession (inflation permitting) was to boost demand by cutting interest rates or with a fiscal stimulus (tax cuts or increases in government spending). The pandemic was different of course, but it was so different there was little risk of confusion.

In contrast, the recessions since 2022 have had nothing to do with deficient demand in the economy. We know that because the Bank of England started raising interest rates over that period to stop a rise in domestically generated inflation. The labour market remained tight over this period, with unemployment at historic lows by recent standards. The economy wasn’t growing because of a lack of demand, but because the supply of goods was not increasing.

The reason for this can be seen in the following chart.

Labour productivity (here measured by output per hour) has remained close to the level achieved just before the pandemic, so GDP per head has failed to rise above pre-pandemic levels. [1] For more detail on this and some of the measurement issues involved, see Chris Giles here.

This ‘supply side’ stagnation is very different from the recessions of the early 80s, early 90s or late 2010s. Because of the latter, most people think of a recession as a short-lived demand side problem, whereas what we are seeing today is supply stagnation that has lasted nearly five years. The problems and their solutions are very different. Either we need to start referring to what used to be the normal type of recession as ‘demand deficient recessions’, or we need an alternative definition of a recession. [2]

Why has UK productivity growth been so poor since the pandemic? As we don’t have a good handle on the causes of productivity growth at the best of times, any answer is speculative. However, looking at other countries may be helpful. The UK is not alone in seeing stagnant productivity over this period. The situation in Japan, France and Germany is just as bad or worse. The major economy that seems to have done best by far over this period is the US.

US policy during the pandemic stands out from major European countries in two ways. First, the US did not have a furlough scheme financed by the government. As a result, unemployment rose much more during the pandemic, but that might have allowed efficiency gains that otherwise would have been more difficult. Second, the US gave a substantial boost to the economic recovery from the pandemic through a large fiscal stimulus.

In all countries investment fell substantially in 2020 as the pandemic hit. This lost investment would have depleted the capital stock, and also reduced the scope for innovations to be embodied in new equipment. It would be surprising if this large drop in investment didn’t have negative consequences for future productivity growth. It is also true that investment in the US during the pandemic stood up better than elsewhere, but the correlation between investment growth over the pandemic period and subsequent productivity growth is not perfect: investment in Sweden and France remained strong but their productivity growth has been weaker than in the US. It could also be the case that poor performance in some European countries is due to domestic issues rather than any common cause.

We know with some degree of certainty that this is true for the UK. Brexit reduces output permanently (eventually by a total of 4% according to the OBR) by reducing labour productivity. So part of the current stagnation in UK output and productivity is highly likely to be a consequence of Brexit. The chart below, of UK business investment compared to other major economies, comes from the FT here. 

Yet a decline in output of the order of magnitude estimated by the OBR was predicted by all the independent economists in this field who looked at this before the referendum, so it is hardly a surprise that it has come to pass. Did voters just ignore these warnings?

Not really. Most of the print media effectively ignored them, and pushed Brexit with as much propaganda as they could. The broadcast media ‘balanced’ the expert advice with counter claims from the tiny number of economists that wanted to push Brexit, giving the impression to all but the most savvy voters that expert opinion was divided. I have little doubt that with a media more committed to telling the truth Brexit would never have happened.

As I have said before, politicians find it hard to increase growth but can quite easily reduce it, and Brexit is a clear example of that. That is particularly true if the media actively promotes politicians likely to damage growth. That happened with Brexit, but the media environment has not significantly changed since then. If anything, right wing newspapers have become even more extreme, and the BBC still promotes ‘balance’ over knowledge.

Opinion polls today show the consequences of that. Reform, the party led and entirely controlled by Nigel Farage, is often ahead of the Conservatives and sometimes ahead of Labour. Farage made his name leading another party whose chief purpose was to advocate for Brexit. With Johnson out of the picture, Farage is effectively Mr. Brexit in the UK right now. So why is a politician who advocated for such a disastrous policy doing so well?

One response is to say voters are stupid, but that is not my view. The print media that gave us Brexit still fill their pages with propaganda designed to promote Farage and like-minded politicians, and will of course never admit how they lied to achieve Brexit. In the broadcast media, every interview with Farage should start and end by asking him why he made such a huge mistake in championing Brexit, and how can voters trust someone with such poor judgement. [3] After all, if any other politician had cost the average voter 4% of their income this would be the media’s approach. But it hardly ever happens with Farage.

Explaining the continuing popularity of Farage as ‘just about immigration’ hardly absolves the UK media. They as much as politicians are ultimately responsible for concealing basic truths about immigration from voters. The right wing press remorselessly pushes anti-immigration propaganda, and the broadcast media hardly ever asks about the cost of reducing immigration, or why refugees are forced to cross the channel in small boats. It never asks why most voters want lower immigration but at the same time want more overseas workers for most occupations.

Which is why I think it is possible for Farage to top some opinion polls despite being responsible for a large part of current UK stagnation and poor UK living standards.

[1] There are two stories behind why GDP per capita has fared slightly worse than productivity. The first reflects a decline in the measured level participation in the workforce since the pandemic, an issue I and others have talked about before [ref]. The second is that the measure of the workforce is too low because people have stopped answering the labour force survey since the pandemic, so the productivity series is too high (see here, section 3, for an alternative series.)

[2] An alternative would be to measure GDP per capita relative to some trend. That makes more sense to me for demand deficient recessions anyway, because then recessions would only be over once GDP per capita had regained its trend level. We would avoid the nonsense of journalists describing 0.1% growth after a large fall in output as the economy coming ‘out of recession’.

[3] Farage’s claim that the ‘opportunity of Brexit has been mismanaged by the Conservatives’ should be torn apart. The Brexit he campaigned for has set up barriers to trading with the EU, which is the ultimate reason why output is lower.

A New World Order

 

I don’t write about international power politics because normally I just don’t know enough about the countries and actors involved, even though it often seems as if this is also true of many of those who do talk about such things. If there was ever going to be an exception to this self-imposed rule, it would have to be now. But in reality this post is about the same battle between right wing populists and those supporting pluralist democracy that I have been writing about for some time. It is also inspired by this excellent discussion between Paul Krugman and Phillips O’Brien.

When I was a teenager I used to fantasise about a future where the world was divided into three main tyrannical blocks, with islands of social democratic resistance within Europe and the Far East. That the US was one of these blocs (Russia and China being the other two) was probably due to a combination of the Cold War and McCarthyism being recent history at the time. Luckily for all of us that future took rather a long while to emerge. I mention this only to address the first issue any discussion of a New World Order has to address. Is this all an over reaction to one individual, Donald Trump, and after he has gone we will return to the Old World Order.

Unfortunately, there are good reasons for not trusting this outcome. First, there is a strong chance that Trump will defy the US Constitution and stay as President for more than his second four year term, and that he will ensure that he is elected when he does so. He does, after all, have form on this, and he also knows that once he stops being POTUS there is a significant risk he may spend the rest of his life trying to avoid going to jail. Second, while the Republican party is now almost completely under the thumb of Trump, the MAGA movement will outlast him and may easily find another figure that can take his place. The structural factors that allowed a majority of voters to make a known fascist the President are not going away. Even if they did, it is not clear whether it is wise or possible for Europe to continue to rely on the US for its military defense.

The same question applies to Europe except in reverse. All European countries have right wing populist political parties, a few of which are already in power and some with a reasonable chance of achieving power. Most are either aligned with or sympathetic towards Trump and in some cases Russia. It is conceivable that what has happened in the US may also happen in a sufficient number of other European states, so that the ‘West’ effectively reforms as a collection of right wing populist plutocratic nations.

There is no doubt that Russia has been doing what it can to achieve this outcome for some time, and now Trump will do much the same. However, Trump’s election may also make this outcome less likely for two main reasons. The first is Ukraine, and the second is a demonstration effect that we have already seen with Brexit.

It seems likely that European countries will try to do what they can to fill the gap left by Trump’s withdrawal of support for Ukraine. Voters in Europe generally believe Russian is mainly responsible for the war, and either want Ukraine to win or achieve a peace that includes Nato membership. Exceptions tend to be in countries closer to Russia and/or with populist governments. That support may falter when taxes have to rise to pay for additional defence spending across Europe, but if politicians frame that as not just being for Ukraine in the short term but also to secure Europe’s defence in the longer term that effect may be small. The danger of Trump’s indifference or antagonism towards Nato combined with an aggressive Russia is pretty clear.

In most cases it should be higher taxes paying for additional defence spending. Deficit spending might be justified if the additional expenditure was temporary, but as I have already noted, hoping that the Old World Order quickly returns may be wishful thinking. Paying for additional defence spending by cutting public spending would be politically dumb, given the clear positive correlation between austerity and rising support for right wing populists that I note here. (Cutting foreign aid onlly works at the margin, and is counterproductive because it reduces Europe's influence overseas.)

In this respect the UK is better placed than other major European countries, for two reasons. First, dislike of Trump and support for Ukraine are particularly strong in the UK. Second, taxes are relatively low in the UK compared to France or Germany for example. Surely even those advising Starmer and Reeves will see that recent developments provide a solid case for breaking existing commitments on tax, and in particular taxes on higher incomes. In contrast Germany will find it much harder to adapt, because of its crumbling public sector infrastructure (see Adam Tooze on German railways) and its obsessive aversion to public sector borrowing, of which the debt brake is just an example.

In the short term at least heightened European solidarity towards Ukraine may make life more difficult for populist political parties that support Trump. We are already seeing that in the UK, with Farage suggesting that it is inevitable that Ukraine will join NATO in contradiction to Trump appearing to rule that out. The kind of socially conservative voters that tend to vote for right wing populist parties also tend to be patriotic, so if other political parties are smart they can use this to diminish support for these populist parties. [1]

The demonstration effect is when voters actually observe the consequences of the policies and actions of right wing populist parties. Many right wing populist parties get a lot of support because they can lie a great deal about the benefits they would bring voters. The difficulties that Brexit has caused the UK in economic and political terms seems to have had a notable impact on EU countries, with voters becoming more rather than less supportive of EU membership. Partly as a result, some right wing populist parties that previously were openly antagonistic to EU membership have since Brexit toned down their anti-EU sentiments.

At present voters in European countries are divided in their views about Trump, with again those with right wing populist governments or in Eastern Europe being more supportive than remaining Western European electorates. Antagonism against Trump, and therefore any political parties that support him or emulate his policies, may increase if Trump’s actions create difficulties for European countries (through tariffs, for example). It definitely will if his statements on wanting to take over Greenland turn into actions.

Antagonism towards Trump will also increase as Trump is increasingly seen as a chaotic and destructive leader. Like Brexit, many voters who might otherwise support a populist party may see what the reality of populist government entails and decide that is not to their liking. For all these reasons, Trump’s recent behaviour may be bad news for the right wing populists of Europe. [2]

The other silver lining is that Trump, for the moment at least, prefers to do business with the other two superpowers rather than engage in a new cold war. His primary interest is making money for himself and his plutocratic ruling elite. There is no great ideological divide between Trump and Putin as there once was between Russia and the USA. There is also a much more parochial point that Trump will in all likelihood speed Starmer’s moves to realign the UK with the EU.

The bad news may not just be limited to Ukraine, European defence and the disaster Trump will be for US governance, health and democracy. I have already noted that the last thing you want when the world is worrying about a H5N1 (bird flu) pandemic that has already started infecting US citizens is a US government that is cutting medical research, laying off workers monitoring the spread of H5N1, and which has appointed a Health secretary who has campaigned against vaccines. Equally in a country where the 2008 global Financial Crisis began, the last thing the world needs is for Trump and his appointees to start ripping up regulations put in place after the last financial crisis, or more. As Paul Krugman notes, the new Commerce secretary as well as Trump have close ties to the cryptocurrency world. It really is like putting arsonists in charge of fire prevention. And as Paul might say, Oh wait.

[1] A politically astute leader of the Conservative party would have already grabbed this opportunity to put some distance between themselves and Farage. That Badenoch has instead focused on speaking to the latest far right political jamboree says a lot.

[2] It may also discourage more mainstream right wing parties from following the UK Conservative party in embracing populism. Annette Dittert writes: “Vance may have inadvertently pushed Merz’s CDU away from the AfD – and potentially galvanised Berlin’s political centre into installing a functioning government without excessive delay.”

Is Trump a Populist or a Fascist?

 

Answering questions of this type inevitably involves a discussion of definitions, in this case about what populism and fascism actually mean. It is perfectly reasonable to therefore ask whether the answer matters, if by making reasonable changes in definition we can get a different answer. After all we know what Trump is and what he is doing, so why is an answer to this kind of question interesting? My answer would be that such a discussion can help sort out ideas and help distinguish underlying causes from symptoms.

Your answer may depend on how happy you are with lists. As an economist I’m not so keen on lists. If a politician or party ticked 6 of the 7 (say) listed attributes of being a populist, what does that mean? Do some things in the list matter more than others, and do some items follow pretty automatically from others? My criticism of one definition of populism I discuss here is that the elements of the list seem to be rather disconnected from each other, and appear instead to be drawn up to encompass a group of politicians/parties rather than describe them.

For me, the key characteristic of populists is how they treat those opposed to them. Normal politicians respect the institutions of government, the law and media, and generally those who occupy them, even when those institutions and individuals work against them. Populists do not, describing their own views as ‘the will of the people’ and dismissing opposing views and institutions as the work of an undefined elite. A pluralist democracy, where power lies not with one man but with institutions like a parliament and the law, is anathema to populists. A pluralist democracy is likely to reflect the variety of views and interests among voters, while populists are authoritarians that aim for total power.

Context matters here. It could be the case that, because of the power of money for example, most or all the parts of a pluralistic democracy have in reality been captured by an elite. We used to call this elite the ‘Establishment’ after all. Sometimes this elite could work against the interests of the rest of the country. I wouldn’t call a politician that simply described this reality as a populist. I would if they wanted to turn this pluralist democracy into one where only they had ultimate power.

The authoritarian nature of populists make it more likely that populists within existing democracies will appeal to social conservatives rather than liberals, and in that sense will generally be on the political right. Appealing to social conservatives means right wing populists will attempt to create both division (culture wars) and emphasise threats from minorities or overseas. As these threats are largely imagined, right wing populists will tend to lie far more than normal politicians. For similar reasons, and because they hate the idea that others can have any authority over themselves, they will also reject knowledge coming from experts in favour of instincts and ‘common sense’.

Trump’s actions since regaining power have been typically populist. By issuing declarations over issues that normally are the prerogative of Congress to decide, and allowing Musk to effectively close down parts of government which only Congress has the legal power to do, he is showing a contempt for pluralist democracy and contempt for the law. The crunch will come when courts find against him and if he ignores those courts. Will those required to enforce a court's judgements obey the court or Trump? Will enough Republicans in Congress reject what Trump is doing or will they change the laws to make what Trump is doing retrospectively legal, or worse still give him absolute power in law? Will the Republican dominated Supreme Court side with Trump or the rule of law? Will the law operate with enough speed to mean that any of these questions matter at all?

Equally Boris Johnson was being a typical populist when he suspended parliament. The right wing newspapers that were so important in achieving the small majority for leaving the EU were being populist when they attacked judges for going ‘against the will of the people’. [1]

Federico Finchelstein, who has written a great deal about populism and fascism (most recently here) suggests four key pillars of fascism: violence for political ends, lying, xenophobia/racism, and a rejection of democracy. According to my description above the middle two are shared with all right wing populists, but violence and a rejection of democracy are not. Finchelstein defines three waves of populism. The first is the fascism of the 1930s, the second is the populism of Latin America (e.g. Peronism) and the third current populism which can amount to what he calls Wannabe Fascism.

These four pillars are of course a list, albeit short. I have already described why right wing populists encourage xenophobia and are chronic liars. Their authoritarianism puts respecting democracy at risk, but both this and the use of violence are barriers that they may or may not chose to cross. Whether they do will of course depend on the historical context, including how entrenched democracy has previously been [2].  

The second wave of populism in Latin America suggests that populism, unlike fascism, can live with democracy in the sense that populists can be ejected from power. That remains true today: Boris Johnson is no longer UK Prime Minister, and more significantly Poland is no longer run by populists. However my description of populism suggests why the relationship between democracy and populism is ambiguous. Populists are authoritarian, yet they proclaim to represent the will of the people so should respect the results of general elections.

A result of this ambiguity is that populists will tend to favour the appearance of democracy over its reality. An extreme case is where elections are rigged, but the same result can be achieved by ensuring the media is controlled by those acting in the populist’s interest (as in Hungary, for example). Trump is currently threatening to take away mainstream broadcaster’s operating licenses because he doesn’t like them reporting reality rather than the fantasy Trump proclaims.

In today’s mature democracies populists cannot gain power by using violence or paramilitary groups, so they will achieve power via the ballot box. As more recent examples of post-war populist governments show, once they obtain power they do not need to use the degree of violence displayed under fascism to maintain it, although they may be happy to use threats of violence from outside government as useful intimidation of their opponents (as well as using violence against minorities). I therefore think Finchelstein is right to see fascism as a form of populism, but not its only form.

Using the key tests of violence and respect for election results, is Trump a fascist or just a populist? Trump did not respect the result of the 2020 election, and did everything in his power to ignore it and stay in office. That included inciting a mob that included paramilitaries (“Stand down and stand by”) to invade Congress. It was this event in particular that has led Finchelstein to suggest that Trump was crossing a line from populism towards fascism. During his first period of office Trump showed no sign of displaying the hunger for conquest and expansionist violence characteristic of 1930s fascism, but his recent comments refusing to rule out using the military in making Greenland part of the US suggests rejecting the fascist label on those grounds is problematic.

If Trump is a fascist does that mean Trump is as bad as Hitler? Of course not. Hitler was unique, as is Trump. There were other fascists in the 1930s, like Mussolini and Franco, with Franco surviving WWII and relaxing some of his initially totalitarian policies. In addition, none of the analysis above suggests fascists need to be smart, and they can equally sow the seeds of their own downfall. Indeed, as Noah Berlatsky points out, what makes someone a populist or fascist also makes them prone to overreach and sometimes self-destruction. Equally it is often their incompetence that does so much harm. Nor are fascists necessarily all powerful at all times, although because they are populists they will gain power as they dismantle a pluralist democracy and to the extent that they make it impossible to be defeated in elections.

I can understand why some prefer not to call Trump a fascist for tactical reasons. With so much of the political and media world reluctant to give up the old ideas of special relationships and a united West, using such language about the POTUS and his appointees can make you seem extreme and over the top. But the use of the term populist instead is also problematic, because not all populists want to ignore election results and are prepared to use violence to stay in power. Calling Trump a populist alongside people like Johnson or Farage grossly underestimates the threat he represents. Right now we need to be very realistic about the danger Trump’s government poses, and also how we should regard those outside the US who continue to support him. How we describe Trump and his regime may help us do that.

[1] I have described populism in the US and UK as plutocratic, because the populist leaders involved either are very rich or relied on funding from the very rich. This has a big influence on the particular policies they adopt when in power. However, as I have also noted, this is not populism representing domestic capital as a whole. Brexit was certainly not in the interests of capital, and likewise the actions of Trump. Instead they are better seen as regimes that favour some parts of domestic capital over others.  

[2] I can understand why this may lead some historians to want to restrict the term fascism to the particular circumstances of the 1930s. It will also become clear why I prefer not to.  

Quantifying the continuing UK public spending squeeze

 

In her October budget the Chancellor raised total government spending by 1.8% of GDP compared to the plans of her predecessors, which means that total public spending as a ratio to GDP stays pretty flat over the 5 year forecast period. (Anyone who calls this the share of government spending in GDP is either being sloppy or deliberately misleading. [1]) As a result, that ratio is planned in 2029/30 to be roughly where it was in 2022/3, the penultimate financial year of the Conservative government.

Just before the budget, I calculated that spending to GDP needed to be about 3% higher than this to ‘end austerity’, by which I meant return public service provision to a level similar to the final years of the last Labour government. However the method I used to get to that figure was based on some unfamiliar data sources, so I thought it might be useful to redo that calculation using more familiar definitions. This post does that.

What you cannot do, but which so many do, is look at the total ratio of government spending to GDP and draw conclusions from that alone. Invariably such exercises equate a constant level of this ratio over time with a constant provision of public services, but this is completely wrong. For example, total government spending includes the interest the government pays on its debt, but it would be silly to suggest that the public services have improved since the pandemic because interest rates on that debt have significantly increased. The ratio of total public spending to GDP was unchanged between 2007/8 and 2016/17, and as a result I still get some people telling me that therefore austerity over this period was a myth. Clearly we need to look at some level of disaggregation.

Before I do so, it is worth noting that it isn’t easy to get hold of historical time series that break down the public spending total into its components, including how much each department has received over time. The ONS do publish a quite detailed breakdown by spending function, but for individual years rather than as a time series. Thankfully the IFS has done much of the legwork here, and I’ll draw on this source extensively. Those who want to avoid my analysis and jump to my conclusions can skip to the text after the final table.

Even if we disaggregate total spending into its major components, it is still true that keeping some part of public spending as a proportion of GDP constant over time is not necessarily keeping the level of public provision constant. This point can perhaps be made most clearly by noting that as GDP grows the share of food purchases in total GDP tends to fall, but it would be daft to report this as implying that as economies grow people are getting hungrier. The two items of UK public spending that have shown the clearest trends in the past are health and defence. Here, from the IFS document referenced above, are those shares over time.

Defence spending is now almost a quarter of what it was in 1955, reflecting both the abandonment of the UK’s imperial role and the end of the cold war. Obviously this does not mean people feel less secure than they used to. Health spending as a share of GDP has been steadily going up over time for a number of reasons. To the extent that this is because the population is getting older and therefore needs more care, it does not imply that we are on average healthier but just that life expectancy has increased. A clear example of this point is that during the decade after 2010 the share of health spending in GDP only fell slightly, but waiting times for treatment increased much more dramatically, correctly suggesting the level of public provision of health services had deteriorated substantially.

The chart below compares the public spending ratio with and without health and defence spending, and they look quite similar. However this is largely a coincidence, and critically the future looks very different, because probably both ratios will need to rise in the future. As a result, since the start of the century when defence spending stopped falling, and for the foreseeable future, we should expect to see the total public spending ratio (and therefore for the share of total taxes in GDP) to rise over time. I apologise for going on about this, but this basic point is hardly ever made in mediamacro commentary.

Total UK public spending as a ratio of GDP including and excluding health and defence

Of course health and defence are not the only areas of public spending where spending as a share of GDP may rise or fall over time even though public provision remains the same. Another example would be the implications of baby booms for education spending. However the upward trend in health spending is so substantial that some analysis is required. We cannot just fit a trend line through the data, because for much of this period health provision has been too low. Health spending is unlikely to be too high very often because raising taxes to finance it is painful, but Conservative governments since 1979 have squeezed spending. For this blog post I’ve tried to get a handle on this by looking at total (public and private) health spending in other countries using OECD data.

In almost every OECD country where data is available from the early 1970s there is a pronounced upward trend in the GDP share. The trend varies across countries as we would expect, but an average across 19 OECD countries implies that health spending to GDP rose by 0.11% each year, with roughly an equal number of countries above and below this figure. (The UK number is 0.145%.) As the pressures leading to this ratio rising are common across most countries, it seems reasonable to use this 0.11% figure as a measure of the underlying trend in the health to GDP share..

All that remains to decide is when UK health spending was sufficient. I have chosen 2010, because waiting times for treatment at this point were tolerably low. This allows us to measure the spending gap in other years, and also to project this trend forward in assessing the adequacy of future plans. Of course this approach is very rough and ready. It may also be possible to reduce this trend in the future by increasing the amount of preventative care (see the discussion here), but that is not going to happen when health is underfunded because treatment will always get prioritised.

Finally I have used data from the IFS to compare GDP shares and ratios across categories of spending between 2007/8 and 2022/3. [2] The earlier year is a useful reference point because it is before the recession that followed the financial crisis (recessions tend to raise spending in some areas) and is not affected by subsequent austerity. As I have already noted, the current planned total spending ratio for 2029/30 is similar to 2022/3.

Components of public spending as a share of GDP

Category	2007/8	2022/3
Health	6.5	8.4
Education	5.0	4.2
Defence	2.2	2.2
Pensioners	6.0	5.6
Other social security	5.3	4.7
Public order & safety	2.0	1.7
Transport	1.3	1.7
Housing and Community	0.8	0.7
Overseas Aid	0.3	0.5
Long Term care	1.2	1.1
Net debt interest	1.8	3.8

The chart above suggests health spending in 2022/3 was around 0.5% of GDP below what it needs to be to replicate 2007/8 levels of provision. Actual provision was undoubtedly worse in 2022/3 because of the hangover from the pandemic. Hopefully that will have dissipated by 2029/30, but equally the underlying upward trend in health spending will mean that spending will need to rise by just over 0.5% between 2022/3 and 2029/30. On this account the total public spending total needs to be 1% higher in 2029/30 to replicate 2007/8 levels of spending on health grounds alone.

Turning to education, allowing for changing student numbers still suggests that public provision in 2022/3 was significantly below 2007/8 levels. This assessment seems to roughly correspond with media reports of inadequate provision (see here for example). Turning to other social security, levels of deep poverty in 2022/3 were similar to 2007/8, but spending has fallen, suggesting another significant fall in public provision here. (The two child limit needs to end, for example.) Current problems in the provision of public order and long term care have been well documented. (Here is a very recent IFS report on justice.) If we allow for a public spending gap worth around 0.5% of GDP in each of these four sectors, then adding in health implies we need the total public spending ratio to be 3% higher in 2029/30 than current plans to replicate the level of public spending provision seen in the final years of the last Labour government. [4]

A 3% gap just happens to be the same number I calculated before the Budget using a rather different approach. Any increase in the defence spending share needs to be added to that. This analysis confirms that Labour’s spending plans remain substantially inadequate if the aim is to return public provision to levels seen in the final years of the last Labour government.

Of course current plans only go five years ahead, and Labour may be in power for longer than that. It was only in the second term of the previous Labour government that public spending increased substantially. There are various reasons why the political situation is similar and different to then. My more substantive concern is that the Chancellor shows no sign of having done the kind of analysis shown above, but I am happy to be corrected (in confidence) if I am wrong about this. [5]

My analysis suggests that repeating Labour’s commitments on the main areas of tax going into the next election would be very foolish, but I fear the political pressures to do so will be great, and that this government will succumb to those pressures. There is a nasty feedback loop here. The more public service provision fails to noticeably improve over the next few years the more Labour will feel it needs to make unrealistic pledges on tax to win the next election. One way of avoiding that was to have increased taxes by more in the last Budget.

.

[1] Calling this ratio a share implies that the rest of GDP is the non-government share, but it’s not because total government spending includes transfer payments.

[2] Data for overseas aid is for 2021/2 rather than 2022/3.

[3] There are many areas of public spending not included in this list. For example summing each column gives 32.4% for 2007/8 compared to 40.3% for total public spending. The total public spending ratio in 2022/3 was 44.8%. Compared to 2007/8 debt interest explains about half this increase, but I would really like to know what explains the rest.

[4] The level of debt interest in 2029/30 is expected to be only a little below 2022/3 levels, reflecting an assumption that interest rates will not fall back to levels seen in the 2010s. If this does turn out to be the case, higher debt interest should imply higher taxation rather than lower public spending. There is no reason why higher interest rates should shift voters preferences between publicly and privately provided goods, so saying that other public spending should fall to match higher debt interest is as absurd as saying spending on food should fall by this amount. Higher taxes allows the cost of additional debt interest to be spread across all areas of consumer spending.

[5] Attitudes within the Treasury, and in particular a belief that it is up to departments to make the case for higher spending, do not help here. Such an approach often precludes a common overall framework and leads to outcomes that can have more to do with the character of individual politicians than social needs and preferences.

A government of small change

 

Since the end of the 1970s, when a new party has taken power in the UK they have started with a reasonably loud bang. Thatcher brought monetarism and neoliberalism. With Blair/Brown came an independent Bank of England, a national minimum wage, peace in Northern Ireland, a Scottish Parliament and a Welsh Assembly. With Cameron/Osborne came austerity.

Compared to this, Labour’s first six months have been pretty low key. There have been changes to planning procedures to speed up investment projects, legislation to extend workers rights and protect those renting their accommodation. The nearest Labour can get to an era defining change is a collection of measures to reduce global warming, but it seems notable that Miliband’s influence within Labour has fallen substantially over the last year.

Those on the left will no doubt claim that this reflects the dominance of the Labour right in the new government. I don’t think that is very helpful, because as the start of the Blair/Brown era showed, being on the left is not necessary to enact major new policies. Furthermore this government has not avoided announcing ambitious goals. What is missing so far at least is a similar ambition in the means to achieve those goals.

Take for example the EU, where Labour’s ‘red lines’ have condemned it to only consider very minor improvements in our trading relationship. Brexit has already knocked a few percent points from GDP. To take two specific examples of that, car production in the UK has more than halved since Brexit and business investment has stalled. According to the OBR a significant part of its damage caused by Brexit has yet to come.

With the EU and with so many other areas, Labour is keeping to its policy in opposition of avoiding any big policy initiatives. One reason I have explored in the past for this extreme caution is that Labour wants the votes of social conservatives. In opposition they positioned themselves as reflecting the views of the economically slightly left of centre and moderately socially conservative voter, and that is where they intend to stay. In electoral terms that makes perfect sense, as I argued back in early 2021. [1] There are three main reasons why its very hard for a socially liberal party to win a General Election in the UK: FPTP favours (older) social conservatives because the (younger) socially liberal vote is concentrated in cities (and older voters are more likely to vote), there are other parties going after the socially liberal vote, and the media influenced by the right wing press favours socially conservative politicians (contrast the amount of coverage Farage gets compared to the Liberal Democrats or Greens).

Brexit was overwhelmingly supported by social conservatives, so this helps explain Labour’s caution on this issue. Much the same is true with immigration. But explanation is different from justification. Whereas opposition positions can be taken without worrying too much about the consequences if those positions are adopted as policy, governments bear the costs of the policy positions they adopt. I’ve talked about the political costs of the government’s immigration rhetoric elsewhere. The costs of largely accepting the Brexit status quo are much more tangible, particularly for a government that has staked so much on better economic growth.

Labour’s stance on Brexit is particularly odd given that significant economic benefits are possible without actually rejoining the EU. The obvious first step is to apply to rejoin the EU’s customs union. The actions of Donald Trump provide the perfect excuse to break Labour’s commitment not to do so. Joining the EU’s custom union modifies but does not reverse Brexit, despite what Brexiteers will claim. (Quite why Labour should allow those that lied their way to Brexit the ability to define what Brexit means is beyond me.) It seems very doubtful that losing the UK’s ability to set its own tariffs and make its own trade deals would cost that many votes, but it would bring economic and (with Trump) political benefits. [2]

The other main area where the record of the Labour government will be judged at the next election is public services. Yet here again, the government has shown an excessive degree of caution. Labour’s pre-election commitments are part of the problem here, although Reeves was given the perfect excuse to reverse the personal national insurance cuts when Labour came into office, but she chose to hit pensioners instead. Even with the possible tax increases still available the Chancellor in her last budget did a lot less than she could have done. The result is that planned current public spending for 2029/30, at 39.7% of GDP, is below its level in 2022/3 (40.7%). [3] With the public services in a dire state at the end of the last government, stasis is rightly not going to appeal to voters.

If the Chancellor has been far too cautious on tax increases, she has not been cautious in alienating voters in other ways. Ending the pensioners’ winter fuel allowance, whatever you might think of the economics, managed to be very unpopular with many voters without saving a great deal of money. Supporting a third runway for Heathrow is bound to lose Labour some votes, with once again having little impact on economic growth.

In both cases it is as if the Chancellor has chosen an unpopular decision as a demonstration of her determination to achieve broader goals: manage the public finances with the cut to pensioners income and economic growth with the third runway. But when you are Chancellor rather than Shadow Chancellor you don’t need such tokens. No one would genuinely have doubted the Chancellor’s determination to stick to her fiscal rules, or Labour’s desire to boost growth and living standards, even if the winter fuel allowance hadn’t been scrapped and Labour hadn’t committed to a third runway for Heathrow. The term ‘political judgement’ is overused, but these actions do look like a failure of political judgement.

Far more serious is that the government appears to have seriously underestimated what is required to stop voters justifiably feeling that ‘nothing works’ in the UK. The idea that once growth returns lots of additional resources will become available is greatly exaggerated, if not simply wrong. After all, the figures I gave earlier (and have looked at in greater detail here) are for spending as a percentage of GDP.

Labour have put a great deal of effort into defining and redefining their goals (with missions etc), but they don’t appear to have done the basic groundwork on what policies and actions it will need to take to achieve those goals. Marginal improvements together with an absence of the chaos we saw under the Conservatives are good to have, but given the disaster in terms of living standards and public services that they bequeathed Labour those things alone might be enough to stop things getting worse, but they are not going to be enough to turn things around.

If I am right about this, it will not only have been a wasted opportunity, but it will also have a serious political cost. As in the US, the main political battle in the UK is between the conventional centre or centre/left and a populist very socially conservative right wing. The less living standards improve, and if improvements in public services are marginal, the more ammunition this gives to the populist right with their entirely bogus claims that these problems are just down to immigration. When the government does nothing to contest these claims but appears to validate them, then (with a media biased towards populism [4]) the only way to resist the appeal of these populist claims is to significantly improve public services and living standards.

[1] What I got wrong in that post was the ability of Boris Johnson (who initially aimed for similar ground through higher public spending in some areas) to self-destruct and the failure of the Conservative party to resist a tax cutting agenda.

[2] Even with the much more contentious issue of the Single Market, there are signs that recent record high immigration levels mean that voters will no longer see free movement as the negative light they once did.

[3] It is true that Reeves in her October budget increased spending relative to the previous government’s plans, but few will remember that.

[4] And with Labour making no attempt so far to change this.

Labour and Growth

 

Is this Labour government right to make achieving growth so central to its missions? Does making higher growth a central priority require Labour has a theory of growth?

I think the answer to the first question is yes and no! Wanting better economic growth is just the same thing as saying you want better living standards for UK citizens in the future. Of course growth is not everything. It matters what that growth involves and how that growth is distributed, In addition stable growth is better than erratic growth, and the wellbeing of citizens depends on many other things besides their standard of living. But given the importance of living standards, it would be rather odd if the government didn’t prioritise better growth

Indeed Labour’s emphasis on growth is quite normal if you look at nearly all post-war governments. Pre-Thatcher, governments were obsessed by the fact that UK economic growth seemed to be lagging behind other major economies. Thatcher and neoliberalism were all about freeing the private sector from what they saw as the impediments of government and trade union interference in markets, and it was claimed that doing this was the way to boost growth. Gordon Brown’s budgets regularly included measures designed to increase UK productivity and growth.

The only potential exception is the Conservative administration that began in 2010 and ended last year. Initially that government deliberately shifted the goal of macroeconomic policy away from growth and living standrads towards balancing the government’s budget. In truth that was a cover for wanting to reduce the size of the state and have lower taxes, which could be (and under Liz Truss was) justified as a means of boosting overall prosperity and growth. That it didn’t feature more strongly after the Osborne period might have been because his tax cuts (in particular cuts in corporation tax) coincided with historically mediocre UK growth. Indeed, given the relative decline in growth that the UK experienced over the last fifteen years, it would be very surprising if the new Labour government did not put growth centre stage.

As talking about growth is much the same as talking about better living standards, debates involve pretty well all the same issues that are familiar from left versus right economic discourse. For example, does the economy perform better if the government gets out of the way, or do we need an active state to spur the private sector. Any sensible government understands that the state can have an important positive role in influencing the economy, so it will naturally be looking at what it can do to increase growth. That is the yes part of the answer to whether Labour are right to make growth a priority.

Does the government need a ‘theory of growth’ before it can successfully encourage it? In looking at different approaches to increasing growth I think the political economy frame is more helpful than looking at different academic theories of economic growth. Ben Ansell makes a heroic attempt to do the latter, but it’s problematic because economic growth theories are not generally alternatives, but rather building blocks to aid understanding. For example what Brown/Ball called post-neoclassical growth theories build on rather than contradict earlier growth models by modelling (endogenising) technical progress. Encouraging investment or technical progress are not really alternatives, as much technical progress is embodied in new investment, and often technical progress needs better human capital to be successful.

Take for example public investment. Labour rightly sees such investment as a way to boost growth, both in itself and often because it facilitates private investment. This isn’t really a ‘theory of growth’, but just common sense backed up by basic economic theory and empirical evidence. Suspicion or hostility to public investment on the political right is ideological rather than coming from any alternative economic theory. Unfortunately, as I noted here, so far Labour has done little more than end the previous government's plans to cut public investment, so it’s incorrect to say so far that higher public investment is a centre-piece of Labour’s growth strategy.

In other respects elements of Labour’s growth strategy seem to borrow from the political right. In October Starmer said

“We will rip up the bureaucracy that blocks investment. We will march through the institutions and make sure that every regulator in this country, especially our economic and competition regulators, take growth as seriously as this room does.”

Of course what you think of this depends on what regulations and institutions are involved. If it’s political regulations blocking building inland wind turbines, then getting rid of those has to be a good thing, but if its regulations designed to avoid another financial meltdown, not so much. If deregulation is aimed at building more homes by giving less power to NIMBYs, then it could be regarded as a clever political move to do something the political right were generally too scared to do. If it’s building additional airport runways that the Climate Change Commission have said should not take place, that doesn’t sound clever at all.

There is a danger here that the current government is giving undue prominence to achieving growth in areas where the growth benefits are relatively small or where the costs are high, which brings us to the negative answer to the prioritising growth question. More specifically, there is a danger Labour are making a number of mistakes.

1. Asking regulators how they can boost growth is asking the wrong question. The right question is whether regulations get trade-offs correct. While it is pretty clear that in many cases planning regulations have become excessive, it should not be presumed that this is true in other cases. Sometimes a clear regulatory framework can help growth. In the past one of the most successful measures to boost UK growth was adopting the set of regulations embodied in the European Single Market.

2. Politicians are nearly always tempted to prioritise near term growth over longer term growth. Growth that involves speeding climate change is not sustainable, and instead involves the current generation taking resources away from future generations.

3. Equally measures that appear to enhance growth at the cost of increasing economic instability may reduce future wellbeing, and may even be counterproductive in terms of long run growth.

4. There is a danger of equating measures favoured by business with measures that enhance growth. For example business often prefers less competition, but competition often increases the incentives for businesses to invest, as well as directly increasing output by reducing the degree of monopoly.

5. It is even more dangerous to assume that measures that favour the wealthy must help growth. It is not at all clear why we should be worried that some of those who became wealthy during a period of economic decline now want to leave.

We can bring the yes and no answers together, and help answer what really matters for growth, by asking what the key lessons are from the growth disaster of the last fifteen years. Here it is not so much about what helps growth, but what holds it back. In understanding why UK growth declined so dramatically during this period, three episodes stand out: the financial crisis, subsequent austerity and Brexit. In all these cases the root cause of the problems were ideological or political.

It was an ideological view that deregulation was always desirable that allowed the financial crisis to happen. It was an ideological desire to shrink the state that led to growth-sapping austerity. It was political antagonism to the EU that led to Brexit. 

We know that changes made to financial regulations after the financial crisis did not go far enough to prevent another crisis, so the last thing we need is political pressure to water down the inadequate changes that were made. Ruling out tax increases and reacting to fiscal pressures by cutting public spending risks perpetuating the austerity regime which destroyed the economic recovery after 2010. Labour’s ‘red lines’ for EU cooperation just bake in the reductions in UK growth that Brexit is bringing about.

Of course Labour may make new political mistakes that impede growth, but it would be foolish indeed for them to make the same mistakes that led to fifteen years of UK economic decline. Perhaps the most important ‘theory’ of economic growth is to learn from rather than repeat past mistakes.