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Stephen Hughes: Growing national income can fund local services

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Gross domestic product, or what the country produces and consumes, stood in 2018 at around £2.03tn in 2016 prices, compared to £1.01tn in 1986.

At an average annual compound growth rate of just over 2%, the country earns and spends twice as much as it did 32 years ago. That is in real terms, including holidays taken, shoes bought, health care and education received, having adjusted for increases in price and consumer tastes.

While current growth rates are not at that level, governments still assume that trend growth rate is going to be 2% a year. For example, the Treasury’s green book for evaluating all spending projects uses a 2% discount rate for ‘wealth effects’ because of assumed GDP growth. Should that come to pass, by about 2054 GDP at 2016 prices will be well over £4tn. That is an extra £2tn of income a year.

What could we pay for with that kind of income? It puts the £3.5bn adult social care gap into perspective – just 0.2% of the expected growth. Even an extra £20bn or £40bn for the NHS looks eminently affordable.

With this money we could go back to free tuition for higher education, roads free of pot holes, libraries in every village, universal credit taper rates in line with marginal tax rates, fully funded childcare for working parents – and even aeroplanes for aircraft carriers.

It is not all going to come at once, so there are still priority choices to be made. But setting public spending in the context of massive growth over 30 years would transform how we think about the future.

A relevant question is what use we made of the growth since 1986. First, we’ve had a rise in population, from 56.7 million people in 1986 to just over 66 million in 2017. Income per head has thus only increased on average by 73%.

Public spending meanwhile rose in real terms from £420bn to £742bn – an increase of 77%. Most of that went to increasing the real pay of the public sector workforce. While there has been some productivity growth, this constrained the additional social outcomes achieved through public services.

We can point to some other obvious improvements: significant increases in educational attainment as measured by examination results, and an increase in life expectancy at birth by 10% to 79 for men and 7% to 83 for women.

It is also interesting to see how past public priorities have played out in employment numbers. Excluding public corporations, largely privatised in the period, total public sector employment fell by 8% to 5.2 million staff. But not every sector fared the same.

Central government employment rose by 24% to 3.1 million staff, while local government employment fell by 34% to 2.1 million staff. The NHS meanwhile increased its workforce by 21%; other health and social care employment fell by 45%, though much of this is probably explained by increased private provision of domiciliary and residential care replacing direct provision.

Employment in education rose by 11% and within the police it increased by 18%, despite the reduction in the past decade. By contrast employment in the armed forces has shrunk by 54% since 1986 to 153,000 members.

That in mind, where has all this past growth gone? There are those of us who remember the miners’ strike, and the refusal by councils to set budgets in the rate capping rebellion of the 1980s. If we are so much richer now how does that show itself?

There has been a remarkable change in what we spend our money on. In 1986, we spent almost 40% of our income on food, alcohol and tobacco, clothing and footwear and household goods. We now spend more in total – about 11% more – but only 22% of our income goes on those things.

By contrast, we spend more than triple what we used to on things like communication, transport, restaurants and hotels, recreation and tourism and non-household goods. These things now make up 51% of what we spend, compared to 41% in 1986.

The rest of our income goes on housing costs, energy and utilities that have remained stubbornly expensive, making up 27% of what we spend compared to 20% in 1986.

What happened then is we all found more stuff to spend our money on because of increases in real pay, which also drove up the price of paying staff to deliver public services. Thus the benefits of all that increased spending have not made their way proportionately to the public sector. In fact, public spending is now only 36% of GDP, compared to 41.5% in 1986 – a ‘loss’ in 2016 prices of £113bn.

There will be those who argue we only get growth because of the workings of the free market, and that it is inevitable the public sector will struggle to find the resources to meet its social priorities. Is this true? What could we do differently?

One thought might be to freeze the real pay of public sector workers. This would mean as the economy grows the existing 36% of its value would buy more labour for public services. But that’s not going to work: there needs to be broad parity in pay between private and public sectors to attract and motivate workers.

The alternative is to plan for increases in tax, particularly taxes related to pay as real incomes rise. All workers contribute from their increased real pay.

If we plan to allow everyone to be only 50% better off personally in the next 30 years (or only three times better off than in 1986, instead of four times), then we can capture a real extra £1tn to help solve all the pressing social problems we face.

All we need is some long-term planning from our politicians.

Stephen Hughes, freelance consultant and former chief executive, Birmingham City Council

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