<p>The current cost of living crisis lays bare the faults of our economy – vast inequalities, irreversible environmental damage, and an economic policy unable to achieve prosperity for all.</p>
<p>It may then seem surprising that given these challenges, the top economic priority of recent administrations has been public finances, that is, maintaining public sector spending roughly equal to its revenues and ensuring that government debt does not exceed a certain proportion relative to the size of the UK economy.</p>
<p><a href="https://www.bbc.co.uk/news/uk-politics-63335671">Liz Truss’ failed economic agenda</a> brought a major shake-up precisely because it departed from this commitment. By not outlining how the revenues lost in the proposed tax cuts would be compensated for to prevent government spending and debt from ballooning relative to government finances, Truss broke one of the key principles of modern economics adopted by the Conservative governments since 2010 – that of a balanced budget.</p>
<p>As the decades of austerity implemented in the UK and around the world have shown, prioritising balanced budget has not improved wellbeing; instead, it has raised poverty and inequality and constrained economic growth by limiting resources people have to spend. Why do politicians still cling to the idea of balanced public finances and what else is needed to achieve a more inclusive and sustainable economy?</p>
<h5><strong>Economic policy is shaped by politics and ideology </strong></h5>
<p>The economic model at the heart of today’s policies dates to the Reagan-Thatcher era in the 1980s – prioritising economic growth above other aspects of societal wellbeing and boosting economic resources of the rich and deregulating with a belief that income and wealth would then eventually “trickle down” to the rest of society. This has been justified by economic theories based on simplistic assumptions. But our understanding of the economy is not subject to universal laws predicted by such abstract mathematical models. Economics is inherently political and ideological, because it examines human behaviours and power structures that relate to how money and goods are created and distributed in society. Economic research that underpins policy is inseparable from economists’ own biases and convictions.</p>


<h5><strong>The fantasy of growth under economic neoliberalism</strong></h5>
<p>The obsession with balanced public finances is grounded in ideas of economic neoliberalism. For over four decades, it has defined national economic policy under both right and centre-left governments, and internationally, by organisations such as the World Bank and the International Monetary Fund (IMF). It argues for the withdrawal of the public sector from the production and distribution of goods and services, in favour of private markets in which people are free to pursue their own interest and try to out-compete others to capture as much economic resources as possible.</p>
<p>Economic policy range has therefore become narrow. Its objectives have been limited to promoting economic growth, neglecting broader goals such as nurturing an equitable and sustainable economic life. The actions of central banks have been restricted to changing interest rates and trading financial assets, while the government machinery has been focused on regulation intending to help markets work better, using taxes and social transfers to redistribute unequal economic resources. Public spending exceeding government revenues has been labelled as “irresponsible” towards future generations, who would need to contribute to the repayment of government debt, and a hindrance to economic growth. Many public services have become privatised in the name of improving performance and relieving the pressure on public budgets.</p>
<h5><strong>When economics misses the bigger picture</strong></h5>
<p>The above has been fuelled by the dominant practice of economics that glorifies quantitative data and methods as “rigorous” and objective. Overarching issues that shape the production and exchange of economic resources such as colonialism and post-colonial relations, racism, patriarchy, class-based inequalities and planetary boundaries have been largely excluded from economic modelling and thus from the design and evaluation of economic policy. So it is not surprising that economic neoliberalism has been linked to numerous local and global crises since the 1980s. It has increased inequalities in income, wealth, health and housing across social classes, gender, race/ethnicity, and generations, as well as irreversible degree of environmental degradation that will erode the quality of life in the foreseeable future.</p>


<p>Since the 2008 global financial crisis, public attitudes towards the economy and economic policy has shifted to challenge growing inequality and climate change. But a corresponding shift in the theory and practice of economics has been much more gradual. Economic theory and policy have retained many of the fundamental principles of economic neoliberalism, and alternative ideas are not being valued quickly enough. Meanwhile, economic growth has been slow, while cuts to public spending have been unsuccessful in improving production, and they have also increased poverty, as many essential public services such as healthcare and education have been more expensive and chronically underfunded.</p>
<h5><strong>Who wins and who loses in the ever-freer market? </strong></h5>
<p>Sunak believes in making markets as free as possible by reducing government regulation. But this often limits how much can be produced and at what cost, and for how much firms can sell their product, preventing them from earning excessively high profits. What he grossly misses out on is that in the current cost of living crisis more people struggle to afford basic necessities, and are less likely to spend on other, non-essential goods and services. If people don’t spend – on going to restaurants or to the gym, on new gadgets, clothes or vacations – eventually businesses won’t think it’s worth investing and expanding, and economic activity can collapse.</p>
<p>Without support to a typical household, growth is unlikely to take off. Instead, it is by strengthening the demand side, and supporting people’s incomes through public spending aimed at improving universal services, and prioritising the wellbeing of those on middle and low incomes that policy could create space for firms to innovate and produce more.</p>


<h5><strong>The rich won’t save us </strong></h5>
<p>The “trickle down” argument suffers from a similar shortcoming. It assumes that the rich are inherently smarter, more hardworking, and better at making money, and that their resources are used to invest in innovative ventures that create jobs and promote growth, which benefits the rest of the economy. But this view ignores the unearned privilege of wealth coming from one’s class background, race, gender and age. It also neglects the fact that much of the wealth of the rich is invested in personal luxury consumption or financial assets that further enrich the wealthy and have little impact on job creation and innovation.</p>
<h5><strong>We need a radical change in economic thinking</strong></h5>
<p>As the new government’s decisions regarding its finances will come under scrutiny in the coming months, we should be asking the question of <em>how</em> taxation and public spending work. Cutting taxes is not necessarily bad if it targets financially vulnerable individuals. Similarly, abandoning the balanced budget won’t be beneficial if it is used to enrich the wealthy at the expense of further cuts to public services. We need more detailed design and evaluation of economic policy that look at who benefits from the proposed changes in public spending and taxation (as well as interest rates).</p>


<p>The decision to retain Jeremy Hunt as Chancellor signals that, as a prime minister, Sunak is likely to continue with the commitment to balanced public finances that he showed as Chancellor under Boris Johnson. Hunt has declared that he was ready to do “whatever is necessary” to reduce government debt in the name of maintaining strong public finances, which, in his view, are “the foundation of a strong economy”. And it is no longer just a Conservative ideal – Keir Starmer has vowed to turn Labour into the party of “sound finances”.</p>
<p>Yet what the experiences of economic neoliberalism show is that prioritising balanced public finances over equality and sustainability will make the ongoing crisis even worse. The obsession with rolling back the state to “liberate” markets will be a death sentence to some, who won’t be able to feed or heat themselves this winter while large energy companies enjoy record high profits. Economics can no longer be used to disguise those policy <em>choices</em> as inevitable laws of nature. The widespread criticism of <a href="https://www.theguardian.com/uk-news/2022/sep/30/how-kwasi-kwarteng-mini-budget-hit-uk-economy-in-numbers">Kwasi Kwarteng’s mini-budget</a> sparks hope for a shift in the public’s expectations of economic policy. Such transformation requires a broader change in economics that accepts its ideological and political roots – and there are plenty of alternative theories and experts that Number 10 should learn from.</p>
<pre><span style="color: #808080;">Photo Credit: Number 10 via <a href="https://flic.kr/p/2jKRhgk">Flickr</a></span></pre>


Rishi Sunak

<p>UK economics desperately needs to move on from flawed prescriptions into a fresher more agile model that responds to today’s crises.</p>


A new UK prime minister is not enough – the current economic model needs a radical overhaul

<p>This election is about delivering a major policy overhaul, which will profoundly change the lives of millions of UK residents and citizens for years to come. No, I am not talking about Brexit, but about the rebuilding of social infrastructure through a boost in public spending. All major political parties have promised to raise government expenditure in some form, from targeted pledges for the NHS and social care promised by the <a href="https://www.bbc.com/news/election-2019-50524262" target="_blank" rel="noopener noreferrer">Conservative Party</a> and investment in teachers and free childcare proposed by the <a href="https://www.bbc.com/news/election-2019-50459123" target="_blank" rel="noopener noreferrer">Liberal Democrats</a>, to nationalising of entire industries put forward by <a href="https://www.bbc.co.uk/news/election-2019-50501411" target="_blank" rel="noopener noreferrer">Labour</a>.</p>
<h5><strong>Labour’s economic reform</strong></h5>
<p>Out of these political parties, Labour has promised some of the most far-reaching changes in economic policy. Think-tank <a href="https://www.resolutionfoundation.org/app/uploads/2019/11/Election-2019-what-the-manifestos-reveal.pdf" target="_blank" rel="noopener noreferrer">The Resolution Foundation</a> estimates that under Labour’s public spending plans, over 4% of output produced in the UK (measured by the Gross Domestic Product, or GDP) would be invested in the public sector. This is one percentage point more than the estimated levels of public investment under the Conservative proposals. While these projections are still below the highest observed levels of public investment in the mid-1960s, they are substantially larger than the trends recorded since the early-2010s.</p>
<p>Labour’s economic proposals would effectively double the levels of public spending observed today. Hence, it is not surprising that <a href="https://labour.org.uk/manifesto/">the party’s manifesto</a> has come under close scrutiny from experts and the media – and the verdict is mixed. Analysis of the think-tank <a href="https://www.ifs.org.uk/election/2019/manifestos">The Institute for Fiscal Studies</a> (IFS) states that “Labour would not be able to deliver investment spending increases on the scale they promise”. Many media and business pundits hail Labour’s spending plans as “<a href="https://www.dailymail.co.uk/news/article-7730683/Voters-blast-Labours-unaffordable-83billion-spending-splurge-FIFTH-backing-it.html" target="_blank" rel="noopener noreferrer">unaffordable</a>”, “<a href="https://www.thesun.co.uk/news/10313313/sajid-javid-john-mcdonnell-labour-spending/" target="_blank" rel="noopener noreferrer">reckless</a>” and “<a href="https://www.telegraph.co.uk/politics/2019/11/16/labours-four-day-week-plans-unaffordable-raise-important-point/" target="_blank" rel="noopener noreferrer">impossible</a>”.</p>
<p>Conversely, in a widely shared <a href="https://labour.org.uk/latest/163-economists-back-labour/" target="_blank" rel="noopener noreferrer">letter to the Financial Times</a>, 163 economists, including myself, expressed support for Labour’s manifesto. We argue that Labour’s policies mark a much-needed shift in the economic priorities of the country, tilting the balance of power towards workers and other members of society who have been at a disadvantage under the policies of the past few decades. As experts in this field, we see Labour’s spending plans as the most effective and sustainable way of reducing inequality and promoting economic and social prosperity. As one of the signatories, I believe that Labour’s proposals are the most economically sound towards such reform.</p>
<h5><strong>Towards a green new future</strong></h5>
<p>Given the conflicting outlook on the Labour Party’s manifesto, what exactly are Labour’s plans for the UK economy and how viable are they?</p>
<p>Labour’s economic plans echo the large-scale plan of government investment in public services and infrastructure which was implemented by the US president Franklin D Roosevelt to revive the economy after the Great Depression.</p>
<p>Labour’s Green New Deal would involve raising the minimum wage to £10 per hour and creating a million jobs across the UK in a way that does not exacerbate climate change. Labour also plans to deliver free broadband to all households and bring into public ownership several industries providing vital services to the society, including energy, water, rail and mail. In addition, Labour wants to develop a National Education Service to provide equal and free access to education – with a particular focus on a <a href="https://www.bbc.co.uk/news/election-2019-50551765" target="_blank" rel="noopener noreferrer">progressive curriculum</a> – and to expand funding for the <a href="https://www.bbc.co.uk/news/health-50397847" target="_blank" rel="noopener noreferrer">National Health Service</a>, as well as deliver free personal care for the elderly.</p>
<p>These plans are ambitious and go against the economic policy trends of the past four decades. Since the late-1970s, the government has actively reduced its role in the economy, believing that competition among private, profit-oriented firms leads to a better and more cost-effective production and allocation of economic resources. It implemented market-oriented policies according to which many areas of economic activity have been deregulated, while policies supporting wages (such as trade unions laws) have been restricted. After the Great Recession in 2007, the government has also pursued a budget surplus through reducing public spending in hope that such austerity policies would keep public finances in check and help restore economic growth.</p>
<p>Evidence suggests that the deregulation and privatisation policies have been <a href="https://eurodad.org/fiscal-cost-PPPs" target="_blank" rel="noopener noreferrer">costlier than government provision</a>, and made the economy more unstable, <a href="https://www.opendemocracy.net/en/oureconomy/fight-against-climate-change-fight-against-capitalism/" target="_blank" rel="noopener noreferrer">contributing to climate change</a>. Austerity has not boosted the economy as GDP growth has been slow, and the policy has <a href="https://unctad.org/en/PublicationsLibrary/tdr2017_en.pdf" target="_blank" rel="noopener noreferrer">made inequality worse</a>. The broken social infrastructure is a result of ideologically – rather than evidence-driven – economic policies, which were initiated by the Thatcher government and have continued under subsequent governments, both New Labour and the Conservatives. Mainstream economics is also responsible, presenting misleading research as “objective” evidence for what are deeply ideological policy decisions. For instance, reductions in public spending that underpin austerity have been partly motivated by the infamous paper by two Harvard economists, <a href="https://theconversation.com/the-reinhart-rogoff-error-or-how-not-to-excel-at-economics-13646" target="_blank" rel="noopener noreferrer">Carmen Reinhart and Kenneth Rogoff</a>, who manipulated data to argue for a maximum permissible threshold for government debt.</p>
<p>The policies of the <em>status quo</em> have proven to be ineffective in delivering economic prosperity and detrimental to social justice and the natural environment. Hence, both populist politicians, promising a return to the “good old days”, and centrists, who claim that free market solutions are the panacea for the current social and economic ills, are adding insult to injury. Social tensions, so evident in the Brexit debate, highlight the need for a true reform of the UK’s policy priorities.</p>
<h5><strong>Public spending plans </strong></h5>
<p>The large-scale investment in public services proposed by Labour is radical enough to break away from the ineffective market-oriented policies of the past four decades, re-thinking the way in which economic resources are produced and allocated among people. It is backed by a long standing body of evidence produced by economists outside of the profession’s mainstream, which shows that higher government spending <a href="https://www.ituc-csi.org/IMG/pdf/modeling.pdf" target="_blank" rel="noopener noreferrer">raises economic output</a> by more than the amount of the initial investment and <a href="https://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf" target="_blank" rel="noopener noreferrer">reduces income and wealth disparities</a> in society across space and over time, <a href="https://wbg.org.uk/analysis/intersecting-inequalities/" target="_blank" rel="noopener noreferrer">improving the material situation</a> of women and people of colour. Government regulation is also indispensable in <a href="https://islandpress.org/books/ecological-economics-second-edition" target="_blank" rel="noopener noreferrer">reigning in the negative effects of climate change</a>. According to this evidence, Labour’s spending plans are by no means “impossible”.</p>
<p>Neither are Labour’s proposals “unaffordable” or “reckless”. Economist Laurie Macfarlane gives <a href="https://www.opendemocracy.net/en/oureconomy/how-misleading-economic-analysis-corrupting-our-democracy/" target="_blank" rel="noopener noreferrer">an insightful analysis</a> of the misleading nature of cost estimates which headline critical evaluations of Labour’s policy proposals. Economic evidence is never objective because economics is a social, rather than natural, science. The decision on what to analyse, how, and based on what data, is a subjective choice on the part of the given economist. This is crucial because analyses by experts are often presented as objective and unbiased in the media. But in fact, all estimates have a substantial margin of error embedded in them because they cannot measure directly all potential benefits that a progressive policy, such as a public spending increase, may have in the long term. For instance, MacFarlane notes that the existing estimates of the costs of implementing a four-day working week in the UK ignore the potential benefits to the quality of work which may arise if fewer working hours improve employees’ physical and mental health.</p>
<h5><strong>Progressive tax reforms </strong></h5>
<p>Labour’s radical public spending plans are backed by equally radical proposals for a progressive tax reform. Current tax structure in the UK is <a href="https://www.theguardian.com/money/2017/may/27/tax-britons-pay-europe-australia-us" target="_blank" rel="noopener noreferrer">one of the most generous</a> in the world when it comes to high earners. A marginal tax rate on personal income means that tax is only paid on income <a href="https://www.instagram.com/p/B5NzyjfFGNY/" target="_blank" rel="noopener noreferrer">above a certain threshold</a> – those earning more pay a higher amount in taxes on incomes above the tax-free personal allowance. However, other forms of taxes do not take into account the taxpayer’s income level. For example, the size of the national insurance contributions (NI) and the value-added tax (VAT) are the same for all employees and consumers respectively. These types of taxes have been increasing systematically, which, together with rising costs of living and sluggish income growth for the majority of the population, has put a great burden on finances of low- and middle-income people.</p>
<p>A progressive tax structure like the one proposed by Labour could reverse this trend. In addition to higher taxes on corporate profits, Labour proposes to increase marginal tax rates on the richest earners while freezing NI contributions and tax rates on lower incomes. This means that those earning up to £80,000 a year would not pay any more in taxes than they do now, and could even see their tax burden reduce if public services become more affordable and wages increase. At the same time, someone earning £100,000 a year would pay just <a href="https://action.labour.org.uk/page/content/fair-tax-calculator?gclid=Cj0KCQiA_rfvBRCPARIsANlV66PETAh0VA8dZ5M5K6IDxCMhk90fTF4rKytercsnkLhKPwf19hbRpacaAvntEALw_wcB" target="_blank" rel="noopener noreferrer">£19 more a week (or £83 a month)</a> in personal taxes.</p>
<p>It’s no secret that raising taxes on corporations and the highest earners is not easy, because their profits and savings can easily be moved to lower-tax jurisdictions elsewhere in the world. There is a limit on how much individual countries can mitigate tax avoidance, but <a href="https://www.aspen.review/article/2019/hood-recovery-rethinking-state-contemporary-capitalism/" target="_blank" rel="noopener noreferrer">several ideas have been put forward</a> by economists on how to effectively design taxes at the national level. Arguments against raising taxes come from the same ideological conviction as arguments against increasing public spending, namely, that the government’s involvement is bound to “distort” the “efficient” free market outcomes. But there is no clear-cut evidence that higher taxes reduce economic growth, and it has been shown that raising taxes may actually <a href="https://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf" target="_blank" rel="noopener noreferrer">boost economic performance</a>.</p>
<h5><strong>A transformative government </strong></h5>
<p>In sum, Labour’s economic proposals are viable and necessary to reduce some of the social and economic tensions experienced in the UK. The proposals are backed by ample economic evidence and represent a true step towards a fairer and more sustainable economy. In fact, many of Labour’s proposals have already been <a href="https://www.theguardian.com/commentisfree/2019/nov/19/labour-programme-utilities-rail-full-fibre-capitalism" target="_blank" rel="noopener noreferrer">successfully implemented in other countries</a>. For example, free broadband is provided to almost all households in South Korea, while the marginal tax rate on highest earners is nearly 60% in Sweden. Together with its plans for a taxation reform, Labour’s economic policies are a change that the UK society can afford – and deserves.</p>
<pre><span style="color: #808080;">Photo Credit: Jeremy Corbyn via <a href="https://flic.kr/p/2hUVhax" target="_blank" rel="noopener noreferrer">Flickr</a></span></pre>


<p>The UK Labour Party’s large-scale investment in public services is the economically viable transformation we need.</p>


Dr Hanna Szymborska