Lord Eatwell
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Lord Eatwell
That this House takes note of (1) the increasing cost of living, (2) the level of economic resilience in the social capital of the United Kingdom, and (3) the case for Her Majesty’s Government to take further steps to address these issues.
Lord Eatwell (Lab)
My Lords, consider this family holiday in Britain today. Setting off for their luxury staycation in their brand new electric BMW, our family spends wearisome hours sitting in noxious traffic jams. They pass through pretty towns rendered ugly by dilapidated high streets and persistent potholes. At lunchtime, they enjoy an exquisite picnic hamper, complete with champagne, sat beside a handsome river—polluted with raw sewage. Unfortunately, their teenage son sustains a nasty cut from some broken glass and they spend hours that evening waiting in a crowded, understaffed A&E rather than enjoying their 5-star hotel. The car is vandalised overnight.
Noble Lords familiar with John Kenneth Galbraith’s book The Affluent Society will recognise that I have borrowed from his famous description of the coexistence of private affluence and public squalor. Galbraith also wrote:
“There is no blight on contemporary life so great as the enduring poverty in our great cities and of the still unseen poor in the rural regions.”
We are all aware that the British economy performed poorly after 2010, with the decade resulting in the lowest per capita growth rate since the war, and the second lowest rate of productivity growth in the G7. Then came the triumvirate of shocks of the past five years. Brexit, according to the OBR, has reduced long-run GDP by 4% per year—for ever. In the pandemic, the UK suffered the highest number of deaths and the poorest economic performance in Europe. Now we have the cost of living shock, derived from the toxic combination of Brexit, the pandemic and Russia’s invasion of Ukraine.
The UK has the highest rate of inflation in the G7. In these rankings, Britain fares worst—every time. The Minister may argue, quite rightly, that the pandemic and the war in Ukraine are global crises. However, she must explain why the UK is now battling it out with Russia for the title of the worst-performing economy of the G20. Why is Britain proving to be so lacking in resilience, compared with everyone else?
The Government must face up to the fact that the greatest damage to the UK economy—the damage that eroded our capability to stand up to these shocks and undermined national resilience—was inflicted by the austerity policies of the Conservative-led Administration since 2010. These are the very policies, by the way, that Mr Sunak declares are his desire to reinstate in his quest for a small state. This Conservative conventional wisdom attributes the national lack of resilience to limitations imposed on the so-called wealth-producing part of the economy—the private sector. We are told that it is the private sector that generates the wealth that provides the resources for the public sector; the dominant flow of wealth creation is one-way. It is the Chancellor’s oft-repeated belief that a successful private sector needs a low-tax, deregulated economy—just as he raises taxes, by the way.
In the wake of the Prime Minister’s recent humiliation, Cabinet Ministers have rushed to display their Conservative credentials by urging tax cuts. When the Minister sums up, will she tell us how tax cuts are to be paid for? This conventional wisdom is seriously flawed. For example, it is simply not the case that cutting corporation taxes increases investment; investment depends predominantly on the confident expectation of positive returns, not on marginal tax rates. More seriously, the conventional wisdom neglects the vital role of social capital in the determination of economic performance—flawed analysis has generated flawed policies.
The term “social capital” refers to our investment in society: education, health, the legal system, the police, social security and defence. These are all vital components of the glue that binds our country together. It is social capital that provides an indispensable foundation of economic activity. Without investment in social capital, the economy loses resilience. This lack of resilience has resulted in the low-growth, high-inflation and high-taxation Britain of today. Yet social capital was the target of Conservative austerity: from 2010 to 2019, real-terms public service spending was cut by 20%. Britain was ill prepared for the shocks to come, and this is the road to Mr Sunak’s small state.
Let us consider this: how resilient could the NHS be in the face of Covid, and what were the consequences for the economy? From 2010 to 2019, government health spending grew at an average real-terms rate of 1.6% per year—lower than in any previous decade in NHS history. The NHS entered the pandemic with 40,000 nursing vacancies in England, and fewer doctors, hospital beds and CT scanners per person than in many similar countries. It was underequipped and understaffed. No wonder the Government called on the nation to “protect the NHS”.
Let us consider this relevant example: the 2012 Health and Social Care Act abolished local area health bodies. Community control teams and consultants in communicable disease control were cut. We ended up with nine regional hubs serving 343 English local authority areas. This was a recipe for disaster—or, more accurately, a recipe for the waste of billions of pounds on a failed test and trace system that might have worked if there had been sufficient local directors of public health, local field epidemiologists and local environmental health officers to make it work. Yet these were the very people who had been swept away by Conservative austerity.
What of the impact on the economy? As we know, there are currently major labour shortages in many sectors. Around 1.1 million workers are missing from the labour force. Of these, around 500,000 are due to the long-term impact of Covid. If these half a million workers were still in the labour force, then, according to OBR estimates, the GDP would be more than £8 billion greater. The less resilience shown by the NHS in the face of the Covid shock, the worse the short- and medium- term impact on the economy.
Another target of Tory austerity was education. School spending per pupil in England fell by an average of 9% in real terms between 2009 and 2019, with, most disgracefully, the most deprived fifth of secondary schools experiencing the worst fall of all: 14%. According to the Institute for Fiscal Studies, this squeeze on educational resources is
“without precedent in post-war UK history.”
The result? England is today one of only a few OECD countries where the young have worse literacy and numeracy skills than 55 to 65 year-olds. Perhaps the Government were trying to balance things up, as they also cut spending on adult education by 49%. Is it any wonder there is a skills shortage? Cutting spending on education was a sure way to reduce productivity growth, making the economy less resilient in the face of the triumvirate of shocks.
The damage done by Conservative policies towards health and education has been amplified by the persistent increase in inequality. The Office for National Statistics has shown that growing inequality has been predominantly the result not of market forces but of government cuts in social security. Here is the bitter irony: there is clear evidence that the main mechanism through which inequality affects growth is by undermining education opportunities for children from poor socioeconomic backgrounds, lowering social mobility and hampering skills development. It is not an issue just for those in dire poverty. The impact of inequality on growth stems from the gap between the bottom 40% and the rest of society, not just the poorest 10%. When combined with deteriorating healthcare and underfunded education, growing inequality has helped diminish resilience yet further, limiting our ability to respond to shocks and endangering our economic future.
Recognising the crucial role of social capital suggests that improved economic resilience and growth require not Mr Sunak’s longed for small state but the reversal of the Tories’ destructive policies—not just the current desperate short-term approach of throwing money at problems but an unrelenting commitment to rebuild social capital, plus an ambitious plan for sustained investment at higher levels than in the past.
But there is a problem. It is far easier to destroy social capital than to build it. It is as if you do not bother to service your car for years until it suffers a catastrophic breakdown. The cost of repair is then far greater than the earlier “savings”—or, to take an analogy beloved of Conservative commentators, you do not “fix the roof”. It will cost more to restore our social capital than the spurious “efficiency savings” of Tory Chancellors. Fixing the roof will require well-crafted, long-term policies—policies notably absent from the record of this Conservative Government.
However, recent government decisions do embody an approach that may be part of a political solution to the long-term challenge. The social care levy, due to take over from the increase in national insurance contributions, was, when introduced, characterised by the Government as a hypothecated levy, with the funds from the levy committed to social care and the health service.
The impact of this approach was somewhat undermined by the recent increase in the NICs threshold, which automatically cut the levy funding available for social care. But, none the less, an interesting point was made. All research suggests that people are more willing to fund social capital if they can see where their money goes and if it goes to create opportunities, expertise, production and jobs in Britain.
A long-term plan for the reconstruction of social capital that includes a regular audit linking payment of taxes or levies to expenditure in specific, if broadly defined, areas is what Britain needs. It would also allow a far better-informed public debate about the scale and content of public expenditure. The Government would and should be accountable to the people for their use of taxpayers’ money.
Of course, the Treasury hates hypothecation because it limits its discretion. However, careful examination of the Treasury’s record over the past dozen years suggests that limiting Treasury discretion would be no bad thing, as it has a clear propensity to cut long-term investment programmes in the face of short-term pressures. That is not a good way to build a resilient economy.
Building resilience will also require a complete rethink of the relationship between investment in social capital and industrial policy, recognising their mutual dependence. A lesson from the pandemic was that global supply chains are not just risky but downright dangerous. We must underpin the growth of social capital with production at home, repatriating our supply chains wherever we can. Investment in social capital must help build safe supply chains in Britain.
Fixing the roof will require both well-crafted long-term policies and a covenant with the British people. This covenant will provide the framework for a commitment to better-informed debate around the scale, contents and outcomes of public expenditure—a debate that will embody accountability. Secure social capital provides the bedrock on which the private sector thrives. It is an indispensable component of the resilient economy that the people of Britain deserve: no longer insecure private affluence and public squalor, but secure private affluence and public excellence.
Lord Eatwell (Lab)
My Lords, I am grateful to all participants in this debate, which has been I think both timely and interesting.
There have been two background themes in what people have had to say. One has been concern about the very bad place that Britain is in now, whether we are referring to inflation, as did the noble Lord, Lord Griffiths, and my noble friends Lord Davies and Lord Stansgate; whether we are discussing energy issues and how the crisis is perhaps pushing energy and green issues in the wrong direction, as was suggested by the right reverend Prelate the Bishop of St Albans, the noble Baroness, Lady Jones, and my noble friend Lord Tunnicliffe; or whether we are referring to the issue of trust in society, going back to Robert Putnam’s famous Bowling Alone—and the way in which the glue of trust is being eroded by inflation as the noble Lord, Lord Griffiths, most powerfully argued—about which the right reverend Prelate the Bishop of St Albans, was also concerned, as was the noble Baroness, Lady Kramer, in particular with her reference to young people, and my noble friend Lord Tunnicliffe. There has also been the overall despair at the rise in poverty in this country at this time, expressed very powerfully again by the noble Lord, Lord Griffiths, by my noble friends Lord Sikka, Lord Davies and Lord Stansgate, and by the noble Baroness, Lady Kramer. This is the sort of desperate concern about the position we are in.
But the other theme has been “Well, what are we going to do about it? How do we rebuild?” Do we learn, as the noble Lord, Lord Desai, argued, from when it happened before, with respect to the experience of the 1970s? Are we willing to undertake the sort of radical reconstruction of our economy and our society, of the basic arrangements by which this country operates, to create the resilience so that this does not happen again on the same scale of desperation as we have had now?
My noble friends Lord Howarth, Lord Sikka and Lord Tunnicliffe made reference to issues of taxation, and there has been discussion of basic income as a way of completely reforming the underlying structure of support in society. But looking forward, the noble Baroness, Lady Penn, having acknowledged and discussed the extremely difficult position of the economy, society and particularly the poorer members of our community —by which I mean not the bottom 10% but the bottom 40% or 50% of society, a good half, who are suffering—focused very much on the levelling-up White Paper. This was something of a surprise for me, because I was very struck when the levelling-up White Paper was published that the communities to which it referred regarded it as a complete damp squib. It was very striking that this central theme in government policy seemed to be so amorphous or inadequate.
The noble Baroness is right that we need a Government to provide real economic leadership for change and to provide some credible vision for a better future. We have plenty of romantic and colourful visions coming from the Prime Minister—it is just that none of them is credible. We need a real rethink. This could be part of her levelling-up agenda, and that could be turned into credibility, but it has to be part of a wider concern about economic change. We cannot have a situation where we sit back and allow the largest chip-producing company in the world—a British company—to be sold off to a Saudi-funded hedge fund. We cannot any longer tolerate the position in which Britain is just blown around with the storms of international economic markets.
I hope that what we can take from this debate is both the enormous concern around the House—I am leaning very heavily on the noble Lord, Lord Griffiths, when I say “around the House”—about the situation in which the people of Britain find themselves, and the equally great concern that we have to change. We have to think about a different way of organising our economic and social structure. I thank everyone who has participated in the debate.