This post introduces a major new programme of work from CPP: funding fair growth. It will consider the options that an incoming government serious about delivering progressive change will have for funding the policies needed to enable fair growth across the UK.
The UK is in a dismal state. It is hard to avoid the sense that Britain is broken, with industrial action on a scale not seen since the 1980s, stagnant productivity and wage growth and public services on the brink. The economic slowdown has affected all advanced economies, albeit the UK is amongst the worst hit. But it’s not just the UK that’s gripped by economic malaise, with populist parties and movements gaining momentum across developed democracies, due to the inability of mainstream political parties to react and find solutions.
In response, progressive parties on both sides of the Atlantic are putting greater emphasis on economic ideas that seek to benefit people and places who have been left behind by globalisation and long neglected by public policy. This is central to the new “fair growth” paradigm put forward by UK Labour, and the Biden administration’s aim to generate growth from the “bottom up and middle out”.
As a thinktank dedicated to inclusive growth, at CPP we welcome these shifts in policy thinking. We have spent the last five years outlining an economic approach whereby public services are essential drivers of growth that everyone is able to contribute to and benefit from. Health, education, skills and childcare are as important as trains and buses in enabling more people to fully participate in the economy while supporting UK productivity. We have long argued that public service and economic renewal cannot be delivered from Whitehall alone – places deserve the powers and resources to tackle the local barriers to fair growth that they know better than anyone.
The Biden administration and Starmer’s Labour are seeking to lead on adapting to climate change through investment in new technologies while facing up to the reality that ageing populations, and the policy challenges they pose, are likely to consume an increasing share of government resources. At the same time, progressive parties must also be ready for new crises that will undoubtedly emerge – with a global financial crisis, pandemic and now a war in Europe all in the space of 15 years. Delivering fair growth while ensuring the sustainability of government finances during such periods of upheaval is a big task.
If we want to make progress on fair growth in a turbulent world, governments will have to take a more active role and spending will have to rise. Higher spending in the UK will be needed whatever the stripes of a future government just to keep public services broadly functioning. But if we want a skills system to bring a million people back into adult education, if we want to end rising child poverty, if we want affordable childcare and sound local public health systems, if we want to encourage more innovative and green UK manufacturing, substantial real investment is required. In the US for instance, the Biden administration passed the Inflation Reduction Act – a $733bn (3% of GDP) piece of legislation committing to investing in domestic production and manufacturing and reducing carbon emissions.
Given the level of investment required to stem the breakdown of public services and ultimately put us on a path to delivering fair growth, it begs the question, how can we pay for it? There are some clear examples where decisions could be reversed to bring in more money for the government to spend on policies that could help. For instance, reversing the decision to freeze fuel duty could raise an additional £4.8bn this year and £2.6bn a year thereafter. Fuel duty has been frozen since 2011, and at great cost to the exchequer, with one estimate putting it at around £100bn in forgone tax revenue which has primarily benefitted higher income households. Similarly, reversing changes to pensions tax allowances which will only benefit the very wealthy could save the government over £1bn per annum. This programme of work will explore which tax and spending policies could be most easily overturned and what revenue this might generate. But we must be realistic that the prospect for relatively low hanging fruit is limited and even more politically challenging forms of revenue raising will be required.
No party wants to talk openly about it yet, but there is no getting away from the fact that taxation will have to do significant heavy lifting to pay for the investment in public services required. That begs the question, what forms of taxation could be used? This is another question that CPP’s new programme will explore. There is a growing realisation that wealth, including land, should play a greater role in the nation’s tax base. Continuing to rely so heavily on the proceeds of labour will become increasingly unsustainable as population ageing erodes the working age tax base relative to old age spending. But taxing wealth is far from straightforward and can be distortionary, with mixed evidence of success internationally. Our programme of work will explore what wealth tax options might be possible, and what role they could play in delivering fair growth.
The pandemic and cost of living crises have revealed how markets do not always work well for consumers. This has led the UK government (and other countries) to charge fossil fuel producing companies windfall taxes since their profits are driven by the war in the Ukraine rather than innovation in production that might, for example, drive sustainable energy. But energy companies are not the only businesses to have made excess profits due to war and Covid-19. For instance, there is some evidence that supermarkets have been making substantial profits both during the pandemic and now – charging far higher prices than the costs of production for basic goods. We will explore the possibility of an excess profits tax with reference to international experience about whether such taxes have been effective in raising revenues and preventing profiteering.
While taxes are likely to be part of the solution, fiscal rules – which put limits around government spending – are another important part of the puzzle. ‘Fiscal rules’ are intended to constrain government borrowing in normal times to ensure long term debt sustainability, while providing enough flexibility to meet the need for public spending during economic crises. But since their inception in 1997, multiple fiscal rules have come and gone – perpetually abandoned as they prove unfit for purpose – usually in the midst of a crisis. Chancellors routinely seek to game fiscal rules, whereby impossibly large spending cuts or tax rises are deferred until future parliaments to balance the books during Budgets. For instance, the current targets for net debt and borrowing do not need to be met for 5 years which gives a big incentive to spend now and promise unrealistic spending cuts later.  Such an environment leads to regular and arbitrary revisions to government spending plans creating protracted uncertainty for businesses and consumers.
Often fiscal rules – though not the current ones - include treating capital spending – i.e. hard infrastructure like roads and railways – as different from current spending. This is intended to ensure governments prioritise investments that drive growth, but in truth many projects that sit within current spending can also drive growth – such as public health and childcare. Indeed, Jeremy Hunt’s recent commitment to childcare spending was justified on economic grounds. The problem however of treating capital and current spending equally is that capital spending often gets neglected – experience over the past decade shows that without a clear demarcation, money earmarked for capital projects has often been used to plug gaps in current spending. This programme of work will therefore explore options for developing fiscal rules that ensure government spending plans are sustainable in the long run while not artificially constraining growth or being too inflexible in a crisis.
Funding fair growth is not just about tax and spend policy at the national level but also about ensuring places have the financial resources and powers to drive growth from the bottom up. This is the final area that our programme will explore. The UK is one of the most centralised and economically unequal developed countries, and despite changes to the devolved landscape of England with the introduction of Mayoral Combined Authorities, the pace of change remains gradual. Greater devolution of powers over tax and spend is viewed by many as the logical next step to strengthen the connection between people and places. But mixed successes with fiscal devolution from abroad suggest that there are valid concerns, particularly over the types of taxation that are devolved, and what the possible impacts could be for spatial inequalities. CPP will consider what a progressive framework of fiscal devolution could look like – and how it could empower places to achieve ambitious social and economic objectives, contributing to fair growth.
How to fund a policy platform for fair growth is a big and multifaceted question. We’re keen to hear from anyone – civil servants, think tankers, academics and beyond – who is working in this area, so please do get in touch with us if you are interested in contributing thoughts and ideas to the programme.
 The current debt target is for debt to be falling, as a % of GDP, by the fifth year of the OBR’s forecast. The target focuses on public sector net debt excluding the Bank of England. The borrowing target is for government borrowing to not exceed 3% of GDP by the fifth year of the forecast period.