Coming out of COVID: Building back better economics

4 June 2021

By Professor  Jonathan Portes FAcSS (Professor of Economics and Public Policy, Kings College University London)

Photo by Dan Burton on Unsplash

The National Audit Office remit is to examine how public money is spent by government, not whether the government is spending too much or too little; the latter is about policy, not value for money.  So its innocuously titled new report “Initial Learning from the government’s response to the COVID-19 pandemic” (itself a summary of themes emerging from previous reports) stepped rather close to the line when it concluded that the pandemic “laid bare existing fault lines within society, such as the risk of widening inequalities, and within public service delivery and government itself.”

Put bluntly, underfunding of health and social care, and of local authorities – especially those in the most deprived areas – left us fundamentally unprepared for the pandemic, meaning that its impacts were vastly unequal, both in health and economic terms.   The poor, people from ethnic minority backgrounds, and disabled people have been hit far harder than the rest of us– not because of the genetic makeup of either the virus or its victims, but because, as Michael Marmot’s report found, these were already the groups most vulnerable to existing health inequalities, which have worsened considerably  in the last decade.

What the NAO report highlights, then, is the extent to which austerity was a false economy.  A narrow focus on the public finances may have meant the fiscal position didn’t look so bad in the short run – but growing inequality and hollowed out public services made us less, rather than more, resilient.  Ultimately, then, the cuts didn’t even necessarily save money.  Cutting NHS spending as proportion of GDP, when elementary economics says that a country that is growing older and richer will want to spend more, was never going to be sustainable over the long term; the pandemic has just highlighted this.

That said, from a macroeconomic perspective, the headline statistics for the UK economy are likely to be very positive for the next few months.  I predicted in December that the success of the vaccination programme means that the UK economy will regain its pre-pandemic level of output by the end of 2021; the latest Bank of England forecast agrees. That in turn means that, even after the furlough scheme ends, unemployment is unlikely to rise much. Indeed, inflation and supply bottlenecks may be a greater problem in the short term.

But this is likely to be a “K-shaped recovery”, that will further expose and widen the structural inequalities.  For those of us who have been able to work from home, in relatively secure jobs, and who have accumulated extra savings, reopening and the “feel-good factor” will mean we can go out and spend again; this is likely to lead to something of a consumer-led boom.    But finances will not be so rosy for many others: those in insecure or precarious employment or self-employment, those who have lost their jobs or been on furlough, and those who had to dip into savings to get by.  It is perfectly plausible that the next year will see both strong economic growth overall, and rising poverty for some.  If the government pursues its misguided plans to cut back on Universal Credit, things will get considerably worse for those on low incomes.

In any case, this will be a bounce-back, not a boom. More important, while recovering the ground lost during the pandemic is welcome, that in itself doesn’t address the structural problems of the UK economy, some of which go back much further than the last decade. But the crisis, and its aftermath, do open up a window of opportunity to address them.

So what would a genuinely transformative economic agenda for the post-COVID era look like?  To get a scale of the ambition required, it is worth looking across the Atlantic. The Biden Administration’s “American Rescue Plan Act”, passed in early March, is, despite its branding,  far more than a response to the pandemic. It doesn’t just provide for a $1,400 check for most adult Americans – it also expands tax credits, child care subsidies, unemployment benefits, food stamps, and housing benefits, all overwhelmingly targeted on lower and middle income families. The total cost is about $1.9 trillion, 9% of US GDP, which would be £180 billion or so here; but the impacts will be commensurately large. Some estimates suggest that it could halve child poverty in a single year.

Not content with this, Biden has followed this up with an “American Jobs Plan”, of similar magnitude. Again, the branding – it’s generally referred to as the “infrastructure plan” deliberately understates the magnitude of these proposals, which also cover childcare and social care. Unlike the “rescue plan”, this spending is to be financed by tax increases, mostly on corporations and the better off.

Of course we cannot  and should not simply copy the US. But both the objectives and the scale of the ambition could provide a model.  A similar programme here would mean a major reshaping of the benefit system, with a substantial increase in the generosity of Universal Credit, combined with massive investment in decarbonising the economy and in funding public services, particularly local authorities and social care.  This would go a long way towards both repairing the damage of the last decade and enabling us to feel more confident about the next one.

However, it is not simply about spending more. There are other, more deep-rooted challenges.   The UK’s growth model has been built on the service sector – inevitably and unsurprisingly, given that the service sector makes up close to four-fifths not just of our economy but those of our competitors.  Future growth will also come mostly from services. But just talking about the “service sector” obscures the divisions within it, both sectoral and regional.

The UK does well at high productivity, globally competitive sectors in the “knowledge economy”: financial services, legal service, advertising, journalism, design, and higher education. These sectors – concentrated in London and the south-east, although present elsewhere in the UK – benefit from both agglomeration and globalisation. But these sectors are symbiotic with lower productivity, labour-intensive non-tradeable services that also benefit from agglomeration, but in a different way. They thrive because there are lots of people living and working in a densely populated area: restaurants, transport, delivery services, and so on.

The net result is a bifurcated economy, both between regions (with London and its periphery much more productive the rest) and within them (indeed, median incomes in London, after housing costs, are no higher than elsewhere, and child poverty is considerably higher).  And it has led to an increasingly dualised labour market, which has performed extremely well in creating jobs, but with many of those jobs being precarious or insecure, with the abuse of zero-hours contracts and self-employment in some sectors, growth of freelancing rather than employee jobs in others, and in a decline in training and development across the spectrum.

Combining flexibility – which many workers want, and new business models require – with security will necessitate a greater role for government, for example in providing earnings-related unemployment and sickness benefits. We should be looking to reshape the labour market and welfare system so that instead of forcing people to take any job, no matter how insecure or precarious, risk and reward is shared between employers, workers and the state so as to expand choice and opportunity.  Done right, this could boost growth and productivity while reducing pervasive inequalities of race, gender and geography.

There’s lots more that could go into a radical programme for reform of the British economy: for example, genuinely devolving economic power to regional and local levels. Taken together, all this could reduce inequalities between the rich and the poor, between deprived areas and more prosperous ones, and of gender and race.  But it will take more than simply ambition, or slogans about “levelling up” and “building back better”: it will require sustained and maintained political and policy commitment.

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Professor Jonathan Portes is Professor of Economics and Public Policy, King’s College London. He is also a Senior Fellow of the Economic and Social Research Council’s ‘UK in a Changing Europe’ initiative. He was the Director of the National Institute of Economic and Social Research, as well as Chief Economist to the Department for Work and Pensions and the Cabinet Office.

The perspectives expressed in these commentary pieces represent the independent views of the authors, and as such they do not represent the views of the Academy or its Campaign for Social Science.

This article may be republished provided you place the following statement and link at the top of the article: This article was originally commissioned and published by the Campaign for Social Science as part of its COVID-19 programme.