How changes to government spending could promote inclusive growth

8 January 2020

By Rosie Fogden

3 minute read

Yesterday the government announced the date of their first budget – 11 March – when Sajid Javid has promised to invest billions of pounds ‘across the country’. As Chris Giles in the FT reports, this commitment may signal a significant shift in Treasury policy from pursuing country wide growth to focussing on ‘levelling up’ the rest of the UK with the South East. It could also involve changing the revered Green Book on policy appraisal and evaluation. Keen to turn the ‘borrowed’ votes of Workington Man into a lasting alliance, the Conservative party has clear motivations for pursuing such changes, but will they promote inclusive growth across the UK?

Regional inequality in the UK is certainly high, particularly when comparing other regions and cities to London and the home counties. CPP’s Inclusive Growth Index demonstrates the breadth and impact of this inequality; in Nottingham a person can expect to live 13 years less of a healthy life than in Surrey. Reducing these geographical inequalities should rightly be a priority.

Yet, as economists Diane Coyle and Marianne Sensier argue, regions outside the South East are losing out under the current system. This is because the utility maximising philosophy that underpins government cost-benefit analysis considers overall gains rather than outcomes for particular areas. As a result, more is invested in places that are already productive. This is not a particular issue with the Green Book - which provides clear and comprehensive guidance on policy appraisal - but is a feature of modern microeconomics. As Paul Collier posits, utility maximisation does not necessarily reflect peoples’ actual values – we value fairness and care about regional and structural inequalities. Arguably, it is time that government spending reflects that.

But how can we ensure that any changes to policy appraisals work to promote growth across the UK that is shared by all? CPP has consistently put the case for investment in social, as well as physical infrastructure, particularly to help address regional imbalances. This means an updated framework should facilitate consideration of the returns to spending on a wider range of capital; both physical and social. In the coming months, CPP will be assessing what such a framework might look like, to help prioritise spending which has the greatest impact on people’s lives

In terms of how to go about changing the assessment framework, there are a number of ways the Chancellor can ensure a successful implementation. It will be important for the government to engage leaders in combined and local authorities who will have a more holistic view of the requirements for investment in their areas. Changes will also need to be credible in the longer term and able to survive political change. Finally, the new framework will need to be well understood by officials to ensure that policy analysis remains robust and public spending does not go unchecked.

Reforming the Treasury’s approach to public spending has the potential to be an exciting vehicle for change and many of the government’s revised policy objectives. The impact of any changes on inclusive growth will depend on their sustainability and credibility as well as their ability to ensure investment in the right sorts of capital.