It’s time for a stimulus – not cuts

Posted on

I was one of about 90 signatories to this letter issued last week. As with all these things, I don't agree with every word, but do with enough of the sentiment:

Open Letter to the Prime Minister and Chancellor 

22 October 2021


Dear Prime Minister and Chancellor, 

Your Budget and Spending Review next week give the Government the opportunity to demonstrate that its commitments to “building back better” and ”levelling up” after the pandemic are genuine and not just empty slogans. We urge you to use this opportunity to deliver the major increase in public investment needed to rebuild the economy on a secure and sustainable footing. 

In particular we urge you not to let the misguided economics implied by the rhetoric of “fixing the public finances” determine your choices. Consolidating the public finances before the recovery is well on its way would be highly economically and fiscally irresponsible. 

The UK’s economic recovery from Covid is already slowing down under the impact of supply chain and labour shortages. The latest figures show unemployment at more than one and a half million people, or 4.5% of the labour force.[1] Around a million people were estimated to be still on the furlough scheme when it ended on September 30th, and employment is not expected to recover to pre-Covid levels for years to come.[2]

At the same time your government has made welcome commitments to tackling the climate and environmental crisis, reducing geographic inequalities, and building a proper social care system. 

In the US, President Biden has shown how ambitious public investment, supported by borrowing and taxation, can drive broad-based prosperity and job creation.[3] The UK has one of the lowest rates of overall investment in the developed world.[4] And at just 2.2% of GDP, public investment is also considerably lower than the OECD average of 3.3%.[5] 

As in the US, the UK still has room for public borrowing. The pandemic has raised public debt to around 100% of GDP, but what really matters is how much the government is spending to service the debt, and the value of the spending which the borrowing finances. In fact near-zero interest rates mean that the government’s debt service payments are now at their second-lowest level since 1950, at just 6% of tax receipts.[6] Moreover the Bank of England owns nearly 40% of the debt, and repays any profit on the interest it receives back to the Treasury.[7] It can continue to support borrowing at low interest rates. 

Public investment will repay its financing over time through higher taxes and revenues as fiscal and wider economic multipliers kick in. We know from the experience of austerity that attempting to cut debt by cutting public spending is self-defeating and does not work.[8]

It would therefore be a grave economic error to focus now on “fixing the public finances” by cutting back vital investment and public spending. As we saw during the austerity years, the human cost of doing so would be felt most acutely by those at the sharp end of inequality. 

We urge you therefore to use the Budget and Spending Review to introduce a fiscal stimulus package of around £70-90bn in annual spending over the next three years over and above current plans, equating to 3-4% of GDP. This would be the level which would return the UK economy to its pre-pandemic growth path and stabilise public debt. We believe the stimulus should be focused on a green and care-led recovery, with a major focus on investment in disadvantaged areas. This would meet the Government’s own stated goals and would enable you to start building the critical infrastructure - both physical and social - needed for a thriving modern economy. 

In particular: 

  • Around £30bn a year in green investment would put the UK on track to meet its legal net zero emissions target and its commitment to nature restoration. It would create over half a million jobs, spread throughout the country.[9] 
  • Social care needs much higher investment. With the government’s announced increase in National Insurance contributions earmarked for the NHS not social care, at least £11 billion in additional funding is needed to deliver free personal care for the over-65s, secure a pay rise to the Real Living Wage for social care workers, and improve access to care in people's own homes. To build an adult social care system in which all those eligible get care free at the point of use, both for adults aged 18-64 and those over 65, would require £29bn a year.[10]
  • Around £10bn a year over and above current spending should go to childcare, enabling parents of young children, especially women, to participate fully in the labour market, and thereby to earn incomes and spend them in the economy.[11]

Of the total stimulus package we propose, about half would be in capital spending, and half current. Such a package, including fair pay increases for public sector workers and a restoration of local government funding, would boost and sustain the economic recovery. It would raise demand and private sector investment, improve productivity and, through the fiscal and wider economic multipliers, pay for itself through higher tax receipts. 

The green and social infrastructure spending we propose would be spread across the country, with particularly beneficial economic effects in disadvantaged areas where unemployment is highest and incomes lowest. 

To ensure that “levelling up” is real and not just rhetorical, the Treasury should publish a comprehensive Equality Impact Assessment of its spending and budget plans, and should mandate the Office for Budget Responsibility to conduct a subsequent evaluation. This should include the proportion of spending going to the poorest third of local authorities measured by the Index of Multiple Deprivation, and the impact of its measures on women, black and minority ethnic groups, people with disabilities and others.

Higher tax receipts over recent months have given the Chancellor some headroom for higher spending. The bulk of the investment we propose should be funded by borrowing. But there is also a very strong case for making the tax system fairer. As a minimum we would urge you, like your predecessor Nigel Lawson, to bring the tax rates on income from wealth (including capital gains and dividends) in line with those on income from work.[12] There is also a clear opportunity to levy a windfall tax on excessive profits made during the pandemic, particularly by digital companies.[13] Announcing a longer term review of how land and property wealth can be more fairly taxed would also serve the country and the economy well.[14]

We welcome the Government’s commitments to build back better from the pandemic, to level up the economy, to achieve net zero, and to reform social care. In this Budget and Spending Review you can demonstrate that you take these commitments seriously and intend to deliver them. We hope that you will do so. 

Yours sincerely,

Miatta Fahnbulleh, Chief Executive, New Economics Foundation

Carys Roberts, Executive Director, Institute of Public Policy Research

Mary-Ann Stephenson, Director, Womens Budget Group

Sarah Longlands, Chief Executive, Centre for Local Economic Strategies

Robert Palmer, Executive Director, Tax Justice UK

Mathew Lawrence, Director, Common Wealth

Sarah-Jane Clifton, Executive Director, Economic Change Unit

Paul Delaney, Acting Director, Positive Money

Patrick Allen, Chair, Progressive Economy Forum 

Geoff Tily, Senior Economist, Trade Union Congress


Carolina Alves, Research Fellow, Girton College, University of Cambridge        

Shawky Arif, Senior Lecturer in International Development, University of Northampton         

Hannah Bargawi, Co-Head of the Department of Economics, SOAS University of London       

Ha-Joon Chang, Professor, Faculty of Economics, University of Cambridge          

Christine Cooper, Professor of Accounting, University of Edinburgh           

Christopher Cramer, Professor of the Political Economy of Development, SOAS University of London      

Andrew Cumbers, Professor of Political Economy, University of Glasgow          

Yannis Dafermos, Senior Lecturer in Economics, SOAS University of London         

Jerome De Henau, Senior Lecturer in Economics, The Open University          

Kevin Deane, Senior Lecturer in Economics, The Open University          

Andrew Denis, Fellow Emeritus, Economics Department, City, University of London         

Pat Devine, Honorary Research Fellow, University of Manchester           

Danny Dorling, Halford Mackinder Professor of Geography, University of Oxford         

Chandni Dwarkasing, post-doctoral fellow, SOAS, University of London

Diane Elson, Emeritus Professor, University of Essex            

Lucy Findlay MBE, Managing Director, Social Enterprise Mark CIC          

Felix FitzRoy, Emeritus Professor of Economics, University of St. Andrews         

Tobias Franz, Lecturer in Economics, SOAS, University of London          

Giorgos Galanis, Senior Lecturer in Economics, Goldsmiths, University of London         

Armagan Gezici, Senior Lecturer in Economics, University of the West of England       

Ian Gough, Emeritus Professor of Social Policy, London School of Economics        

Stephany Griffith-Jones, Emeritus Professorial Fellow, Institute of Development Studies, Sussex University        

Joe Guinan, Vice President, The Democracy Collaborative

Barbara Harriss-White, Emeritus Fellow and Professor, Wolfson College, Oxford University         

Philip Haynes, Professor of Public Policy, University of Brighton          

Judith Heyer, Emeritus Fellow, Somerville College, University of Oxford          

Susan Himmelweit, Emeritus Professor of Economics, Open University           

Colin Hines, Convenor Green New Deal Group             

Leslie Huckfield, Lecturer, Glasgow Caledonian University             

Sophie van Huellen, Lecturer in Development Economics, GDI University of Manchester

Michael Jacobs, Professor of Political Economy, University of Sheffield          

Rhys Jenkins, Professor of Development Economics, School of International Development, University of East Anglia     

Jim Jin, Reader, School of Economics and Finance, University of St Andrews       

Sir Richard Jolly, Emeritus Professor, Institute of Development Studies, Sussex

Sue Konzelmann, Professor of Economics, Birkbeck, University of London          

Neil Lancastle, Senior Lecturer in Accounting and Finance, De Montfort University, Leicester       

Stewart Lansley, Visiting Fellow, University of Bristol            

Jonquil Lowe, Senior Lecturer in Economics and Personal Finance, The Open University       

Su Maddock, Visiting Professor, University of the West of England         

James Meadway, Director, Progressive Economy Forum             

Jo Michell, Associate Professor of Economics, University of the West of England           

Sunil Mitra Kumar, Senior Lecturer in Economics, King’s College London          

Satoshi Miyamura, Senior Lecturer, Department of Economics, SOAS University of London        

Simon Mohun, Emeritus Professor of Political Economy, Queen Mary University of London       

Richard Murphy, Tax Research UK and Sheffield University Management School         

Susan Newman, Professor of Economics, The Open University           

Maria Nikolaidi, Associate Professor in Economics, University of Greenwich          

Ozlem Onaran, Professor of Economics, Co-Director of Institute of Political Economy, Governance, Finance and Accountability, University of Greenwich 

Carlos Oya, Professor of Political Economy of Development, SOAS, University of London       

Cem Oyvat, Senior Lecturer in Economics, University of Greenwich          

Alberto Paloni, Senior Lecturer in Economics, University of Glasgow          

Alison Parken, Honorary Senior Research Fellow, Cardiff Business School          

Ruth Pearson, Emeritus Professor, University of Leeds            

Diane Perrons, Professor Emerita, London School of Economics           

Kate Pickett, Professor of Epidemiology, University of York           

Jeff Powell, Senior Lecturer Economics, University of Greenwich           

Howard Reed, Director, Landman Economics              

Emilie Rutledge, Lecturer in Economics, The Open University           

Josh Ryan-Collins, Head of Finance and Macroeconomics, UCL Institute for Innovation and Public Purpose     

Alfredo Saad Filho, Professor and Head of Department of International Development, King’s College London      

Diego Sánchez-Ancochea, Professor of the Political Economy of Development, University of Oxford

Roger Seifert, Professor of Industrial Relations at Keele and Wolverhampton Universities        

Marianne Sensier, Research Fellow, University of Manchester            

Pritam Singh, Emeritus Professor of Economics, Oxford Brookes University, Oxford         

Guy Standing, Professorial Research Associate, SOAS University of London          

Frances Stewart, Emeritus Professor of Development Economics, University of Oxford         

Holly Sutherland, Emeritus Professor, University of Essex            

Lotta Takala-Greenish, Senior Lecturer in Economics, University of the West of England

Rosemary Thorp, Lecturer in Latin American Economies University of Oxford

Jim Tomlinson, Professor of Economics and Social History, University of Glasgow        

Jan Toporowski, Professor of Economics and Finance, SOAS University of London        

Daniele Tori, Lecturer in Finance, The Open University Business School         

David Tyfield, Professor of Sustainable Transitions & Political Economy, Lancaster University        

Mary V. Wrenn, Senior Lecturer in Economics, University of the West of England       

Elisa Van Waeyenberge, co-Head of Economics Department, SOAS University of London.         

Rick van der Ploeg, Professor of Economics, University of Oxford           

Roberto Veneziani, Professor of Economics, Queen Mary University of London         

Simon Wren-Lewis, Emeritus Professor of Economics, Oxford University          



  7. Michell, J (2021), forthcoming;
  9. For the calculations underlying this figure, see the Briefing Note accompanying this letter
  10. Ditto
  11. Ditto