Frenzied cost-cutting will not fix our economic crisis

Andrew Simms is nef’s Policy Director and head of nef’s Climate Change programme.

Cuts, cuts, cuts… The word is chanted in politics until we work ourselves into a frenzy. We’re transfixed by a large and growing public debt brought on by banking failure. But does it make sense, now, to cut public spending? Can we even afford to? History suggests not.

For three years after Roosevelt announced his New Deal in 1933, regulating the banks and launching a bold programme of public spending, things went well. But then he blinked. Afraid of rising debt, he cut spending – and made the depression worse. It was only later, when there was a surge of production for the war effort, that things turned around again.

Public spending creates jobs and has a positive, “multiplier” effect in the economy. There are more economically active people to pay taxes, in turn reducing the public debt. It is a false economy and counterproductive to cut in a downturn.

It’s also a schoolboy error to think that a national economy should be managed just like a personal budget. Governments can issue and manage money for a wide range of purposes, individuals can’t.

But, of course, that doesn’t just mean the government should go ahead and spend on just anything. On the contrary, some spending can do more harm than good.

It’s hard to be precise, but it’s very likely that most of the benefits from the blanket cut in VAT and the bung given to the car industry through the scrappage scheme leaked out of the UK – not to mention encouraged environmentally wasteful consumption.

Targeted spending, however, in the face of climate change and rising energy insecurity, could do an awful lot of good, creating jobs, cutting carbon and fuel poverty and helping to reduce the public debt.

A new report The Cuts Won’t Work by the Green New Deal group (of which I am a member) shows that earmarking just £10bn in “green quantitative easing” (that is, releasing more money into the economy on the condition it is spent on low-carbon initiatives) could create 60,000 long-term jobs in the energy efficiency sector (a total of 300,000 years worth of employment). The same amount could multiply by five the contribution to the UK’s electricity supply of onshore wind power.

Spending on some things creates more jobs than spending on others. Spend on public transport, housing and energy efficiency and you will create far more jobs, pound for pound, than you would if you opted for unproductive military expenditure. Cancelling the Trident replacement and spending instead on the great low-carbon transition would create 105,000 jobs according to a York University study.

So, should the chancellor implement cuts when he announces the pre-Budget report on Wednesday?

Medieval doctors used to think that the best way to cure patients of a wide range of ailments was to drain their blood. More often than not it killed them.

The government and the opposition parties all need to understand that economic bloodletting will not work. It’s far more likely to kill the ailing, carbon-addicted economy.

Why investing now in children’s services will bring benefits to us all

Jody Aked is a researcher at nef’s centre for well-being.

We can save money and put a stop to persistent social problems by investing now in a preventative system of public services for children and young people.

Gordon Brown succumbed to mounting pressure from the somewhat unrelenting Tory line on public spending cuts and used the “c-word” in his speech at the TUC conference yesterday. The message was that cuts under a Labour government may be necessary to restore public finances, but they won’t be as bad as under the Conservatives.

Of course, the devil is in the detail and neither party has shed much light on where these cuts will take place. Brown has assured us that “vital” frontline services will be saved from any future belt-tightening, because the cuts will happen in “low priority budgets”. What he didn’t say was how we decide which services are high priority and which are low. In the scramble for votes before the General Election, there’s a risk that all parties will try and score points simply by promising bigger savings and this will narrow the focus of the debate.

Quick fixes will be seen as cheap and attractive. Those services that generate significant social value by way of bringing wider benefits to society but which will not deliver an immediate return to the State may be brushed aside, in favour of those designed to provide a short, but temporary, solutions for our most critical social problems. Already professionals working in children’s services have expressed concern that preventative services – which typically work ‘behind the scenes’ to keep families together, keep children in school, and promote mental and physical health – will be some of the first to go. Yet, the work of these services, particularly in early childhood, has far reaching implications for generations to come, beyond the next term of office starting after the Election.

Consider, for example, nef’s analysis of the social and economic benefits of preventative and early intervention services, released today in Backing the Future: why investing in children is good for us all. Our reseach shows that if we invest upfront to rebalance our system of service delivery towards one that is more preventative than our current model, we can expect to save £486 billion over the next 20 years – even when the transaction costs of making the transition to a new system are taken into account. When compared to conservative estimates which show the UK’s preventable social problems – crime, mental ill health, family breakdown, drug use, and obesity – look set to cost the UK economy £4 trillion over the next 20 years, the case for investment is overwhelming.

And while it may seem like a strange time to be looking to temporarily increase and reconfigure public  spending on children and young people, the evidence indicates we can ill afford not to. At the moment it looks extremely unlikely that the UK will meet its poverty reduction targets, it is languishing at the bottom of international rankings of child well-being and the UK has the lowest rates of trust and belonging among 16-24 year olds in all of Europe. The current system of services has got things the wrong way round. It spends much more on children and young people when problems have become entrenched, when they are often impossible and certainly expensive to remedy. Despite being one of the richest countries in the developed world, our society is one of the most unequal and one of the least child-friendly. By not proactively tackling the root causes of our social problems, we have for too long allowed them to become a drain on public resources: the price tag of the UK’s social problems is a third more expensive than the next most troubled nation in Europe.

Even in a time of immediate crisis, any politician worth their vote needs to keep one eye on the future. Out of the ruins of the recession, we need to harness the opportunity to build a stronger society, with fewer social problems. To achieve this, we need policies that can improve the life chances of today’s most at-risk children and succeed in preventing the same root causes of social problems, including poverty and inequality, from having an adverse effect on the next generation. As the details of spending plans are unveiled, we should not be won over by easy political sells at the expense of funding decisions that will put the UK on a trajectory to a stronger, fairer and happier future.

Backing the Future: why investing in children is good for us all makes the social and economic case for switching to a preventative model of services for young people and children. This research was carried out by nef in partnership with Action for Children, whose Executive Director Clare Tickell makes the case for change in today’s Society Guardian.

Value, not efficiency, is what public services need

Eilís Lawlor is the acting head of the Valuing What Matters team at nef.

Yesterday saw the launch of the new Social Return on Investment guide, co-authored by nef staff and backed by the Cabinet Office. This is good news for organisations and institutions that wish to account for their performance across the triple bottom line. It is also timely in the current economic environment when the pressure is on to cut costs and make immediate savings. Taking an SROI approach involves thinking about value in a different way – beyond costs and financial savings and over the longer-term. This is in sharp contrast with the recent budget proposals to claw back funds through efficiency savings; these are essentially cuts which will ultimately jeopardise frontline services. Where these services are delivering value, cutting back will lead to poorer outcomes and greater long-term costs.

SROI promotes the idea of ‘social value’, a concept that is gaining increasing currency across the political spectrum. In some ways its legitimacy is indisputable; few people would argue that things that are bought and sold and have an ‘economic value’ are the things that matter most, yet in our daily lives we generally unwittingly accept that to be the case. What people have resisted is the notion that this type of value is measurable and quantifiable. While concerns about this are understandable they are misguided and ultimately unhelpful. Somehow we have convinced ourselves that what we pay for goods and services equates with some intrinsic value. Instead, what the market does – in fact what is effectively for – is to bring together people whose valuations happen to coincide. This ‘coincidence’ is called ‘price discovery’ but it is not uncovering any ‘true’ or ‘fundamental’ value, rather it is matching people who agree on what something is worth. Calculating social value is the same as this in virtually every way. The difference is that goods are not traded in the market and so there is no process of ‘price discovery’. This does not mean, however, that these social goods do not have a value to people.

Why does this matter? It matters because it is about more than the logic of an abstract philosophical debate. By ignoring value that is created and destroyed outside the market we have given far greater significance to things that are bought and sold than they perhaps merit. This has grave, practical implications that have helped to lead us down the shaky and unsustainable path we are now on.

The debate that has raged about the efficiency of the Post Office network encapsulates this well – people feel that there was a value to it beyond what can be measured financially, and yet decisions about its future are made largely on a financial basis. Measuring and quantifying social value will never be an exact science; the subjectivity of value makes that impossible. This did not prevent us creating markets and developing accounting practices to enable us to carry on the business of everyday life. Neither should it prevent us seeking to reduce inequalities and improve the health of the planet by bringing onto the balance sheet the real and costs and benefits of the decisions and trades that we make. SROI is the most developed and robust methodology available for doing this. It is now being mainstreamed in the third sector, which has led the way on innovative measurement but its potential is much greater than that. We need to get to a stage where our actions and behaviours are judged and rewarded by the extent to which we create or destroy value in its broadest sense, if we are to find an equitable and sustainable way through the many problems we currently face.

Budget reaction: Banks are too-big-to-fail and must now be broken up

Dr Stephen Spratt is Director of nef’s Centre for the Future Economy.

Bail-outs have now boosted UK national debt to staggering levels but have done little to stop the rot in our financial sector. By refusing to acknowledge the deep structural failings in the banking system, the Government is storing up debts they’ll probably never have to deal with, and no future government will be able to meet without decimating core public services. Banks that really have become too-big-to-fail leave the UK very vulnerable and must now be broken up. Soon to-be-published plans for banking regulation must go much further than tinkering with corporate governance and transparency. We need to separate investment banking from retail banking. We also need local banks that are in touch with their customers and able to respond to the needs of the dynamic small businesses on the frontline of our economy that will lift us out of recession.

Budget reaction: efficiency savings could derail public services when we need them most

Josh Ryan-Collins is a researcher in the Connected Economies team at nef.

Demanding efficiency savings from our public services now is like asking us to burn our lifeboats in the middle of a storm. The unintended consequence of efficiency savings is that they erode local public services. Ultimately this impacts most on the poorest in the UK who are least responsible for causing the crisis, exacerbating already untenable levels of inequality and storing up more problems for later.

Measures to rebalance the tax burden are welcome, but don’t go far enough. With the worst impacts of the recession still to play out in full, the Government should be using this opportunity to take a progressive approach to taxation so that the companies and individuals who have benefitted most pay their fair share, ensuring that we can invest in the public safety nets we need to protect us from the worst impacts of the recession, and against future shocks. In addition, measures to help local businesses win public procurement contracts would both help to shore up front line services when they are needed most, and keep more money circulating in our local economies for longer.

For more on the real costs of efficiency measures, see nef’s report A Better Return.

A revolutionary moment

Anna Coote is Head of Social Policy at nef.

Britain’s welfare state can’t cope with three great dangers that face us today – deepening social divisions, accelerating climate change and imploding financial systems. William Beveridge said of 1942, when he launched his founding report, that it was a “revolutionary moment in the world’s history, a time for revolutions, not for patching”.  The same is true today, but the challenges are new.  We need a new social settlement to transform the way we live together and look after each other – a modern welfare system that is fit for the 21^st century.

Through 60 years of peace and plenty, Britain has built a welfare state that many see as enviable.  But there are still widening inequalities.  Unemployment is rocketing. Income inequality is at its highest level since records began. The gap in life expectancy between those living in the poorest areas of England and the average is wider than 10 years ago. The UK ranks a pitiful 13^th out of 22 European nations on combined measures of social and personal well-being.

An unequal and divided society can’t take the kind of concerted action that is needed to deal with climate change and the global credit crunch.  And these divisions will deepen unless action is taken to prevent the poorest from suffering most from global warming and economic recession.

We argue for radical change our new paper published last week, Green Well Fair: Three economies for social justice. A future welfare system shouldn’t rely on the market economy to keep on growing to fund more and better services.  Because growth is not inevitable, and unchecked growth damages the environment. Instead it must value and nurture two other economies that have so far been overlooked. These are the abundant human resources that underpin and shape society, and the fragile resources of the planet, on which all life depends.

It must harness all three economies – people, planet and markets – so that they work together to deliver sustainable social justice. By that we mean the fair and equitable distribution of social, environmental and material resources between people, countries and generations.

Green Well Fair sets out six steps towards sustainable social justice:

• promote well-being for all, putting equality at the heart of social policy
• give priority to preventing harm, to concentrate scarce resources on meeting unavoidable needs
• grow the ‘core’ economy by valuing and nurturing human resources that are currently undervalued
• make carbon work for social justice, so that measures to reduce carbon emissions help to narrow inequalities
• make public services sustainable
• measure success by valuing what matters in social, environmental and economic terms, for the medium and long term.

What could this mean in practice?  Here are some examples.

1. Two for the price of one: invest in ways of preventing illness and reduce carbon at the same time – such as encouraging active travel and producing fresh, local food. Both will help to combat obesity and climate change.
2. Welfare to green work: channel investment in welfare-to-work to boost green industries, to build up skills in home insulation and other ways of cutting carbon emissions, and to support low-carbon living.
3. From patient records to people’s plans for well-being: redesign health services around cradle-to-grave health plans for every individual, focused on keeping people well, not just treating them when they are sick.
4. Carebanks to pool and grow resources for older people: enable older people to join forces to help themselves and each other, using time as a measure of exchange.

Now, as in 1942, it is no time for patching’. Instead of emerging from the trauma of the war, we face the potential catastrophes of climate change and imploding global capitalism. Such crises provide an unparalleled opportunity to think afresh about social justice and to be ambitious in pursuing it. We can’t afford to miss that chance because all of our lives depend on it.

How to save public services

Eilís Lawlor is the acting head of the Valuing What Matters team at nef.

Hardly a week passes without news of looming cuts and fresh evidence of the implications of the recession for public services.

In a recession the temptation to cut back is strong. We have already had some worrying signals from Treasury – the hole in the government’s budget is to be clawed back in part through another £5bn in ‘efficiency savings’. So far these have amounted to stealthy cuts in frontline services under the guise of a leaner state. There is no reason to believe future rounds will be any different.

Yet government’s thin interpretation of efficiency is a false economy. Failing to invest now, when unemployment, crime and poverty are set to rise and an impending environmental crisis requires urgent investment, will only lead to costs of greater magnitude later.

Now more than ever we need to think about public spending less as a ‘carve up’ between competing ends and more as an investment in a better future. This cannot be achieved by penny pinching in the short term but by using the State’s resources to maximise the creation of public value – long-term social, economic and environmental outcomes.

A new approach to investment is needed that puts measuring and valuing what matters most to individuals, communities and societies at the heart of public sector decision-making. Such an approach, targeting positive social, economic and environmental outcomes, will lead to more informed policymaking, help build effective public services and have significant positive implications for the public purse.

nef research across three very different policy areas – economic development, children in care and criminal justice – shows the benefits of this approach. Valuing the improved well-being of children in care – rather than focusing on the unit cost of delivering that care – could help ensure that more appropriate placement decisions are made, improving the life chances of those children and offering a long term social return of £6 for every £1 invested. Savings over 20 years could pay for the entire annual care bill each year.

Women offenders are likely to fare better in life if custodial sentences are eschewed in favour of community penalties that enable mothers to maintain contact with their children. In the short-term money is saved on services for these children. Longer-term there is reduced risk of children becoming offenders and a better chance of the kind of educational attainment and social adjustment that will translate into lower societal costs through the welfare and criminal justice systems. Using Social Return on Investment we found that for every £1 spent on alternatives to prison that reduce reoffending, an additional £14 worth of social value is generated.

Measurement matters because it both reflects and reproduces the priorities of government and institutionalises behaviours. We are about to publish a set of principles for policymakers, that are a distillation of our research findings and can guide policy-makers who want to create better services. The first of these is about measuring outcomes: the positive and negative change in people’s lives, communities or the environment as a result of policy.

Despite rhetoric emphasising the importance of outcomes government still does not adequately measure the effects of its policies on long-term social, economic and environment well-being. Focusing solely on what is timely, tangible and easily quantifiable has not served us well: investment in public services has increased since the foundation of the welfare state, yet the place and circumstances of our birth predict our future health, educational and economic prospects now more than they did then.

Public services face the twin challenge of rising needs and increasingly constrained resources. Experience suggests that direct financial considerations on their own are not very helpful to meeting these challenges. As we lurch from one weak economic indicator to the next, it is easy to miss the opportunities this presents the State. There is too much at stake to get this wrong, not just in terms of social outcomes but also in financial implications for the public purse: ineffective public services cost us all more in the long run. To paraphrase Alistair Darling on banks, the response to the question, can we afford to invest in public services must be can we afford not to?

A version of this article was published in Public Servant Magazine.