Growing together: towards long-term inclusive growth in the UK

To build an economy that works for everyone, the UK government needs a concrete inclusive growth strategy, says Stephanie Flanders

By Stephanie Flanders, Chair of the RSA Inclusive Growth Commission

Follow Stephanie on Twitter @MyStephanomics

For many people in the advanced economies, capitalism is not delivering what it was supposed to deliver, and neither are mainstream politicians. Even before the global financial crisis, countries were struggling to stay on the path to decent economic growth and rising prosperity that voters had become accustomed to; a path that relied on rising rates of productivity, or output per head. On top of that, the growth that did take place in those economies was not translating reliably enough into higher wages for the average worker.

Now we are seeing some unpleasant political consequences of this longstanding economic failure. It may or may not amount to a ‘crisis of capitalism’, as some suggest. But we can say for sure that the economic and social developments of the past decade or two have strained the popular legitimacy of the status quo in nearly every developed nation. These developments might even show that capitalism and liberal democracy are not as compatible as we thought, as journalist Martin Wolf discussed in his Financial Times column (30 August 2016).

What is to be done? At the G20 summit of world leaders in China in September, Australian Prime Minister Malcolm Turnbull said that policymakers needed to “civilise capitalism”. In the official communiqué from the meeting, leaders agreed on the need for more “inclusive growth”. Everyone from the IMF to the OECD to the US president has been calling for the same thing.

This call for a more inclusive form of capitalism could mark the beginnings of a response to the voter disaffection and discontent that was most recently displayed in European and US elections. But it is only going to change the world if the lofty language of international communiqués comes with serious grassroots thinking about what inclusive growth might look like in real-life towns and communities, and how real-life policymakers at the local and national level could go about delivering it.

This is exactly the focus of the RSA’s Inclusive Growth Commission, which delivered its first Interim Report in late September. There is plenty more work to do, but one early and resounding conclusion is the need for economic and social policy to move more closely together, at all levels of government.

For most of the second half of the 20th century, the UK ran social and economic policy as a kind of tandem. We had a productive economy in the front, and behind that a “social security state”, as Beveridge called it. In theory, the two sides of policy supported one another: the productive economy created the wealth to keep the country moving forward, while the social security state kept things balanced and invested for the long term. In practice, social and economic policies moved further and further apart — the strict separation between skills and welfare policies, for example. This policy division was sustainable as long as there was something close to full employment. But in an era of slower growth and rising concern about the way the fruits of growth are distributed, it does not work well.

Five days after Sheffield voted overwhelmingly in favour of Britain leaving the EU, the Inclusive Growth Commission’s first evidence session was held in the city. It brought home very clearly that this abstract disconnect between social and economic policy was part of a wider failure to connect people, government and place in the UK, to connect not just economic and social policy but inner and outer cities, cities and the surrounding countryside, south and north. This failure is not abstract and it is having serious consequences, as the Brexit vote showed. A model of inclusive growth that will work will be one that starts to bridge those divides in order to build not just a more connected economy but a more connected country.

Policy shortfall

When Theresa May spoke in front of Downing Street as prime minister for the first time in July, she talked about the need for success along these lines. Her promise to develop UK economic policy based on the interests of all is a worthy ambition, but it is scarcely new. For decades, even centuries, public policy has tried to tackle the gap between rich and poor, between the haves and the have-nots.

Most recently, we have seen a mixed bag of policy attempts to solve the same set of underlying, persistent issues. Whether it is the focus on regional inequality and child poverty that we saw under the most recent Labour government or the nascent life chances strategy launched in the final months of David Cameron’s Conservative majority administration.

Yet, despite a plethora of policy interventions over the years, we have built up surprisingly little evidence of concrete interventions that can produce sustained, significant change at a scale that will make a difference.

There is no single explanation for this failure. Sometimes it was a shortage of resources, particularly in more recent times. But more important, even, than a lack of money was a lack of political leadership and basic staying power. The huge, multifaceted nature of the challenge has simply proved too much for our country’s systems of making and delivering policy at all levels of government, national and local alike.

Efforts to revive cities are a good example of how these various shortcomings have played out. Because dilapidation was the most visible, and seemed perhaps the most tractable, sign of the problem, successive governments emphasised the physical regeneration of city centres and transport connectivity. Huge centrally driven programmes, such as the Single Regeneration Budget and New Deal for Communities, channelled much-needed investment into the poorest neighbourhoods. On the surface, the programmes have delivered dramatic change. City centres that had long been in economic decline, such as Liverpool, Manchester and Birmingham, have been transformed, raising property values and attracting new people into the smart-looking redevelopments. However, in general, there has been no such transformation in the lives and opportunities of the people who lived in these inner city areas originally.

One could make a similar observation about the labour market and how it has developed. When mass unemployment was the public face of poverty, policymakers inevitably saw jobs as the solution, especially in areas of high unemployment and deprivation blighted by the decline of traditional manufacturing. Though unemployment remains a serious problem in some areas, we now have record numbers in work and the unemployment rate has fallen sharply, even in some of Britain’s poorest regions. Yet the social and economic problems of those areas have not fallen in line with the jobless total. Indeed, the problems have often become more entrenched.

Like those shiny new town centres, the jobs have arrived, but not the broader turnaround in these communities that was supposed to come with them. At the national level, for the first time more than 50% of people categorised as living in poverty are in work, according to research by the New Policy Institute. Increasingly, policymakers are being urged to focus not just on the quantity of jobs, but the quality.

If we are going to achieve inclusive growth, a new model is needed. This is the unfinished agenda for Whitehall that Theresa May has inherited. It is also the unfinished business of the devolution agenda, which the RSA’s first City Growth Commission did so much to take forward. The Inclusive Growth Commission aims to provide a glimpse of what that inclusive growth model might look like in the UK today, and some of the practical steps that need to be taken at all levels of government.

Hard work

One of the most obvious conclusions the Commission has reached on why it is so hard for policymakers to achieve inclusive growth is that, locally and nationally, they rarely measure it. More controversially, we are suggesting an approach that asserts that not all growth is equally valuable. Local growth needs to be based on a long-term approach to investment and asset-building, rather than just minimising obstacles to business and pushing down the cost of labour.

This is an area that needs careful judgement. As one senior city leader said to us at an evidence session: “there’s no point having inclusion without growth…and not all growth has to be inclusive”. Inevitably, local economies will end up relying on a range of businesses and sectors. Not every job will be a ‘quality’ job and the quality jobs that are present will not be within reach for everyone. The important point for policymakers is to be conscious of the big picture and focused on providing pathways of opportunity for individuals in all corners of the community. To do this, they need a yardstick for evaluating the merits of different types of economic development that is capable of measuring quality growth, rather than being entirely blind to the way the benefits of growth are spread.

One indication of inclusive growth is when economies are able to provide those taking part with long-term assets, such as sustainable, locally rooted businesses with a strong attachment to their place, creating local jobs, promoting local supply chains and retaining more wealth and opportunity locally. This allows for a virtuous cycle between growth and inclusion. Inclusive growth also happens when prosperity promotes greater quality and inclusiveness in the distribution of skills and employment, standards of living and entrepreneurship and autonomy. If a local economy does these things, then it is an indication of inclusion. The implication is that this inclusive economy is underpinned by values, which include citizenship, the importance of contribution, participation and fairness.

We also believe it may be time to switch the balance of spending back in favour of social as well as economic infrastructure. Because investment in early years, skills training and other human investment in education and enterprise underpin long-term economic success.

The immediate difficulty is that the Treasury tends to be sceptical about the value of human infrastructure, and also about the effectiveness of available methods of transforming it. We understand and sympathise with this scepticism. Innovation in this area is difficult and has a patchy success rate. But that suggests a need for new models and approaches. It should not be an excuse for complete stasis, as it has been in recent years. Any government that wants to make a permanent difference, along the lines that Theresa May suggested, will have to do so at the same time as managing the uncertainty of Brexit negotiations.

But, equally, the new government will be held to Theresa May’s original pledge, and they will find — as the Commission has found — that inequalities are driven partly by distance from public services and government decision-making, partly by failing social infrastructure, and partly by the lack of economic, geographical, social and political connectivity that we set out in the report.

Emerging recommendations

We want the freedom to do things differently in Britain. There were plenty of mixed messages in the result of Britain’s EU referendum, but that one came through loud and clear.

We do not know yet how Theresa May will translate this vote against the status quo into sensible policy, although she has stated that she wants to “make Britain a country that works for everyone”. Taken seriously, this could be a powerful uniting theme for policymakers in this parliament and beyond, and a great way to use this moment of radical uncertainty to start to do things differently. But if we are to take these words seriously, they must be backed by a concrete strategy for delivering inclusive growth.

When we report early next year, we plan to put forward a comprehensive set of proposals for national and local government. However, one of the themes that is already emerging is the importance of investment that builds social infrastructure on the same scale as physical infrastructure. If the government is serious about inclusive growth, it needs to invest (rather than simply accrue cost) in social infrastructure in the same way that it does now in physical infrastructure, assuming similar long-term multiplier effects from that investment in both the nature and amount of economic growth. The government should also think about redefining as investment the work we need to do to bring people and places up to the level where they can take part equally in the economy.

Our hope is that more ambitious devolution deals based on this approach, tailored to the needs and assets of their places, designed with communities, and backed by mutually reinforcing central governance and accountability structures, can create transformational change. Why? Because the economic and social elements of policy only come together locally and we need to integrate them. The divide between economic and social starts in Whitehall and runs throughout government, down to the local level, so that it is hard even locally to integrate investment in both. We need to aim to integrate investment in public services so that, as John Mothersole, chief executive of Sheffield City Council said, we can “see economic and social policy as indivisible”.

There may well be areas where devolution has to go further to create the right incentives for place-based, inclusive growth. But another early conclusion of this Commission is that there are limits to devolution and it cannot be our only response to the calls for more inclusive growth. Some powers and policy levers will have to stay in Whitehall; not least defence, foreign policy, monetary policy and aspects of fiscal policy (for example, VAT, corporation tax and national income tax). And, as the RSA City Growth Commission argued, different arrangements should be made with places according to their level of economic and political maturity, including with respect to the devolution arrangements between constituent nations of the UK.

Local government is not always better government, and geography is not the only source of distance between government and citizens. Local government needs to prove its ability to respond to the diversity of its residents’ needs, particularly at a sub-regional level, where the impact of policy needs to be considered across different groups and communities. For example, will investment in a new business park or commercial redevelopment improve the employment prospects and quality of life for the poorest residents? For more inclusive devolution and prosperity, it is now up to local authorities to prove they can make a difference for the most disadvantaged, as well as attract new high-skilled workers and investment.

Even in areas such as health and social care, and skills, where local decision-making should play a larger role, the centre cannot and should not fall out of the equation entirely. Nor can devolution simply transfer power and resources to a handful of big city regions, leaving smaller towns and cities to fall through cracks. The point is that all tiers of government need to work together to shape a vision for long-term inclusive growth.

Three proposals for inclusive growth

To summarise, there are three initial proposals emerging from the Commission’s research. They are not final, nor do they represent the full spread of the Commission’s work, but they are based on the breadth of needs and on the imaginative work that is being undertaken so far in cities around the world.

The first is a roadmap for inclusive devolution. Grown-up devolution is now in the air. There is a political head of steam behind it, but there is a danger that this will only be offered to — and will only benefit — those places that have the narrow characteristics of places that are already succeeding. We need to make sure that these new model devolution deals have inclusive growth at their core. That means the government needs to: set out its devolution framework to give clarity to how devolution can underpin inclusive growth; provide sufficient financial resources to make it successful; include all parts of government in a more growth-oriented fiscal stance; and increase investment in social as well as physical infrastructure.

The second proposal is inclusive, place-based industrial strategies. The change of UK government in the summer of 2016 has led to a rediscovery of the importance of industrial strategies as a way of shoring up the business and economic base of the country, a policy approach about which the previous chancellor of the exchequer was sceptical. Combined with a continued commitment to place and the process of devolution to city regions by the new prime minister, there is potential for the government to drive place-sensitive growth across sectors and their supply chains, especially if it involves strategies that invest in both physical and human infrastructure and build on the successful experiment to develop in grassroots business movement for productivity. This new approach to industrial strategy will learn from the successful Team GB strategy for the Olympics, which not only picked winners but also invested in success across a pre-agreed set of markets. It worked in Rio, and we cannot ignore those lessons when it comes to business competitiveness.

The third proposal is to develop more accurate data and measurement of ‘quality gross value added’ (GVA) in economies. One of the most obvious reasons why the inclusive growth problem remains unsolved is that the ubiquitous GVA measures, before and after investment decisions, do not measure it. This is not a criticism of GVA, but it is a criticism of using this alone as a basis for decisions and investment. The government urgently needs to develop a basket of accurate and effective measures that can be used much more widely to assess, not just GVA, but quality GVA that can pick up changes in wealth inequality and in the spread of economic prosperity. It also needs to help cities, and other places, to develop new frameworks for deciding on investments in inclusive growth.

Starting again

The UK is far from the only country grappling with the challenge of creating a more inclusive economy. But it is the only nation in 2016 with a golden opportunity — in the wake of the Brexit vote — to question old assumptions and recast old relationships in order to put that challenge centre stage. The chancellor has promised to reset fiscal policy. That would be welcome but it needs to be part of a wider reorientation of government to achieve not just more balanced growth, but a more inclusive kind of prosperity.

Not everything needs to be reset. Both the City Growth Commission and the decentralising policies associated with George Osborne’s Northern Powerhouse initiative have offered encouraging, and sometimes inspiring, examples of devolved policymaking that really does work better for everyone, including Whitehall mandarins. But we need to make sure that all parts of the country are included in this agenda for growth, and we need policymakers at all levels of government to do a better job of bringing the economic and social dimensions of policy together.

We do not have all the answers at this interim stage, but I think we do offer some powerful signposts to that more inclusive nation that so many would like to see, and that Britain’s bruised and disrespected establishment needs to start now to deliver.

This article originally appeared in the RSA journal Issue 3 2016

Stephanie Flanders is Chair of the RSA’s Inclusive Growth Commission and Chief Market Strategist for J.P. Morgan Asset Management in Europe