The UK Government talks of an ‘active’ state, but the recent Budget has scrapped the industrial strategy and signalled a return to austerity finances. Has the Treasury reasserted its traditional grip on growth policies – and what does this imply for the ambition of ‘levelling up’?
The UK’s Chancellor Rishi Sunak said he would do ‘whatever it takes’ to support the economy through the pandemic. Treasury figures reveal that pledge has come with a hefty price tag of around £352 billion over this year and next. Despite the scale of this fiscal support, though, last week’s UK budget contains indications that as the country looks forward to recovery in emerging from lockdown, the Chancellor is looking back to the austerity of the past.
The Budget sent the not entirely unexpected message that the Chancellor intends to ‘fix’ the public finances at the earliest opportunity. In the short-term the scale of spending has been accompanied by a significant fiscal stimulus through the so-called ‘super deduction’ to encourage corporate investment. Despite the headline stimulus, perhaps for reasons of ensuring a recovery takes hold, this budget contains a spending squeeze to come. There are expenditure cuts buried in the small print – not to mention a controversially low pay rise of 1% for nurses. The Chancellor has also scrapped the Industrial Strategy he inherited and the responsibility for growth, while the lead role on the Government’s levelling up agenda shifts from the Business, Enterprise and Industrial Strategy Department to the Treasury. Bolstered by the recent reappointment of its Permanent Secretary, Sir Tom Scholar, the Treasury’s dominance in Whitehall is reaffirmed.
The Treasury was nimble and effective in its early response to the pandemic. It was suitably self-critical in its appraisal of its performance in the 2008 crisis and so is more attuned to managing the fallout of ‘once in a generation’ events. But the Treasury has long been criticised for its tendency for short-term thinking and economic reductionism. That, combined with a Conservative Party focused on ‘fiscal resilience’, means alarm bells are ringing for three reasons.
First, the Chancellor’s reliance on economic recovery is contingent on the easing of lockdown running smoothly. This is uncertain. In the short-term, the Office for Budget Responsibility (OBR) forecasts for the UK economy predict growth between 4-7 per cent in 2021 and 2022 respectively. But then growth is forecast to be a sluggish 1.6-1.7 per cent in the three years 2022-2025. Given the OBR’s form for over-optimism and the fact that Brexit will in all likelihood be a more costly hit to the economy over the next ten years, the medium to long-term risk for the public finances is very real.
Second, what economic strategy remains, after the abolition of the Industrial Strategy and the associated Council, is bound up in the government’s notion of an ‘active’ state. But this seems amorphous. The Prime Minister has talked of a state-led relaunch since June, yet the Treasury has not decided to ‘boost it like Biden’ (a reference to the $1.9 trillion fiscal stimulus in the US). Mr Sunak’s additional spending compared to the original plans amount to some 4 per cent of GDP, compared to President Biden’s nearly 9 per cent of GDP stimulus package. While abolishing an industrial strategy, the Budget lacked a ‘grand narrative’ to provide a sense of optimism and with it seek to reinvigorate economic growth.
One interpretation is that the ‘active’ state is about concentrating power at the centre. For example, the Government’s Levelling Up Fund—already bedevilled by accusations of pork barrel politics—reinforces traditional hierarchies. The centre’s policy priorities dominate while large sums will be spent locally in the preparation of competitive bids. The Treasury’s Darlington hub might be regarded as astute politically with the local Tory mayor proclaiming Mr Sunak as the Chancellor of the North willing to take on ‘handwringers in Whitehall’. But with the new UK Infrastructure Bank in Leeds and parts of the Ministry of Housing, Communities and Local Government moving to Wolverhampton, there is no sign the Government is embracing the co-ordination needed for the moves to have a significant economic impact – nor any hint of further devolution of policy powers away from the (marginally relocated) centre.
Third, levelling-up has become a more complex challenge due to the uneven impact of the pandemic. The aim should concern far more than physical infrastructure but the self-proclaimed ‘party of public services’ has not set out a plan for what that might mean. Professor Michael Kenny recently noted that public services are too often seen as costs to contain rather than long-term social infrastructure investments. The OBR highlights that the main fiscal risk going forward is baked-in additional costs for public services caused by the pandemic. On this, Mr Sunak was silent and social care was ignored altogether in his speech.
This strategy risks prioritising short-termism while incurring higher costs further on. A Treasury minister recently said: ‘Austerity? You just can’t do it now’. But the Treasury’s numbers point to the opposite for public services. The further £4 billion deducted from unprotected departmental resource budgets—coming on top of the £12 billion announced at November’s Spending Review—means that by 2024-25, the Resolution Foundation calculates, day to day spending in these departments will be a quarter lower than 2009.
Ultimately, not investing adequately now—in infrastructure (physical and social), communities and public services—will cost the Exchequer far more down the line. The Chancellor passed no comment on the fact that Covid-19 is rapidly becoming a ‘disease of the poor’ but this should set alarm bells ringing. There is every danger of a two-tier recovery. Local authorities have already begun making intolerable decisions in the face of budget cuts and this will further undermine community resilience. The evidence is strong that early intervention to prevent social problems is both necessary and cost effective in the long-term.
Our research is consistently highlighting the short-termism, and the absence of preventative action that could save future billions, associated with Treasury centralised decision-making. Centralisation does not achieve stated public expenditure outcomes. The reasons for this are complex and rooted in its institutional history. This recent Budget suggests (once again) that shaking off this tendency will prove difficult. The levelling up agenda looks harder to deliver now as the government has favoured centralising power over empowering localities, and has ditched the prior economic strategy without providing a coherent alternative. Public health has been neglected as a foundation for productivity and growth for too long. The pandemic has exposed the way in which near constant efficiency drives in the name of reduced costs have instead undermined public sector productivity.
If we are indeed to Build Back Better and ‘level up’ in the UK, the fragility of the foundations for long term, widely shared, prosperity needs to be addressed. The Treasury’s ethos of centralisation – even though local know-how and accountability are essential – and short-term cost efficiency – even when this is ultimately costly – contributes substantially to that fragility.
Our research project Public Expenditure Planning and Control in Complex Times is funded by the Nuffield Foundation.