Our health: is it the economy, stupid? – with Torsten Bell and Diane Coyle

Jennifer Dixon:

Those of us interested in health have got to be interested in the state of the UK economy. If you look at a map of ill health, early mortality, chronic disease, and a map of economic deprivation in the country, they look very similar. So what are we going to do to get more economic growth that might be health enhancing and not just in London and the Southeast, but also in other parts like the northeast of England? 

To discuss all this, I'm delighted to welcome Professor Dame Diane Coyle, who is professor at the University of Cambridge and Co-Director of the Bennett Institute. Diane has written widely on productivity and last November she gave the annual Health Foundation REAL Challenge lecture on productivity, and we'll put a link in the show notes.

And Torsten Bell, Chief Executive of the Resolution Foundation, who before that worked in the Treasury. Torsten has written widely as well, and he's currently completing a book called Great Britain: How to get our future back, all about how to have more economic growth in the future. Welcome both. 

Let's just kick off with I suppose an obvious question, which is the economy seems to be in the doldrums, it's limping along. How did we get there and what's happened to Britain really?

Diane Coyle:

Well, a lot of developed economies have been growing more slowly since around 2008, the financial crisis than they did before. And there are many parts of Europe and the United States where people's incomes haven't been going up, but the UK economy is limping worse than most, and Torsten will have chapter and verse on this. But living standards just haven't been going up in many parts of the UK. And for me, it boils down to two big reasons that we might dig into. One is that we just haven't invested enough in our future. This covers investment by businesses in capital equipment, investment by the government in infrastructure and in education and health.

So that means that the capacity of the economy to grow has been collapsing inwards over time. You just can't have a healthy growing economy if you haven't invested in the human capital as we poetically call it, and the physical capital that's needed. And the other issue is that the government changes policies all the time. There's a great deal of policy churn and that means that individuals and businesses planning for the future just have no confidence. So there's risk premium caused by the politics and the churn in any investment decisions that people are making.

Jennifer Dixon:

Torsten, what would you add to that?

Torsten Bell:

I think understanding that lots of advanced economies have done worse since the financial crisis. It turns out the banking crises aren't just bad for bankers. If anyone needed a reminder that we should try and avoid them, then the growth slowdown we've seen across advanced economies should be enough. But Britain has done a lot worse. As Diane says, we've been limping more than most. We've seen half the productivity growth that most large advanced economies have seen over the course of the last 15 years. Europe in general has grown more slowly than America and we, as I say, are at the slower end of that market. So that is the problem we should be trying to address. 

I think that can all sound a bit abstract in terms of, well, we've seen a bit slower growth, but some people don't want growth anyway. They say we should be degrowing. So I think it is important to put it in human terms, the slowdown in wage growth since 2008, since that financial crisis is worth about 14,000 pounds a year to the average worker, there's a huge sum of money. That is the reason the defining feature of our economy actually of our politics, is that we all feel very squeezed. It's why people are working more than they used to, particularly women. And as I say, it's why wages today are basically stuck back where they were in 2008. And if you'd asked me then if that was even possible, let alone likely, I'd have said basically, no. So I think it is we shouldn't forget how bad the situation has become because it's now gone on for so long. The danger is we start thinking, well actually this is just what life looks like.

Jennifer Dixon:

And you talked there about £14,000 for the average worker. Can you say a little bit more about those at the bottom end of the income brackets?

Torsten Bell:

On low wages, there are areas where policy has made a big difference. And the biggest one in lots of ways over the last, particularly the last 15 years, but actually over the last 25 years is the minimum wage. The pay of the lowest earners in hourly pay terms has been rising faster than the rest of the population for all of the last two decades. In fact, if we look at inequality on that basis, ie how much people earned for each hour worked we're probably back to levels that we've not seen since the 1970s. All of the rise in inequality between the middle and the bottom has actually gone away. So that's the good news. The bad news is if we turn to household incomes, total income of everybody working or not working in that household. And there what we see is a coming together of two very dangerous forces.

One is the higher inequality that Britain has the highest inequality of any large European economy, and we've been in that place since the 1980s. It's not kept getting worse as I sometimes hear, it's just stayed very high. And then secondly, this stagnation that Diane is talking about. And if you put those two things together, low growth and high inequality, it means we have a smaller pie to share out than most of the advanced world instead of rich country, but a smaller pie relatively than what we were used to. And it means that poorer households get a smaller share of our pie. That means that a low income household in Britain is now 27% poorer than a low income household in France or in Germany. It's not 2%, it's not 5%, 27%. And that is why when the cost of living crisis comes along and strains the ability of all countries in Europe to cope, we suffer worse because our households, particularly those on low incomes, just don't have enough spare capacity to cope with that shock.

Jennifer Dixon:

Diane, you said we haven't invested enough and there's been policy churn, which we will talk about a bit later. There are some other structural weaknesses aren't there in the economy and also the way we do things here. And I don't know Torsten whether you might expand any more on those. Diane talked about the two central ones, but thinking of long run things like our manufacturing has been run down, become foreign owned; energy, we've become an energy importer rather than energy exporter.

Torsten Bell:

One of the things that we've got bad at is being able to identify and build on the strengths that we do have. So some of the things you just mentioned are definitely real problems, but I think a lot of them actually do come back to the central low investment problems. So why is energy a bit of a disaster right now in Britain? Partly because we've not invested in the generation capacity and in particular in the grid capacity that we're going to need as we move into a net zero transition. And actually, one of the reasons why lots of things are foreign owned in Britain is because we haven't been saving enough domestically to fund our investment or indeed some parts of our consumption. And that's meant that you've needed capital flows from abroad through foreign ownership of British assets or indeed our selling assets that we hold abroad.

In terms of things that I don't think are as big a problem as some people say. So it is true that through the ‘70s and the ‘80s into the ‘90s and actually and in the 2000s in parts, you have seen the continuation of what is really the 20th century trend of deindustrialisation. So the movement away from manufacturing in terms of output towards services and in particular from the British economy towards high value tradable business services, creative services and the rest. Now the speed of some of which that happened in the 1980s in particular was deeply regrettable. And we are dealing with lots of those consequences still today, but actually most of that is now done. If you look at employment share of manufacturing in the economy, it's no longer really shrinking. It's bobbling along at around 9% of total employment. I think most people have realised that it's not a good thing to see a decline of the high value bits of our manufacturing base.

If you look at Cheshire and the chemicals industry or you look at Derby and Rolls Royce, there's no alternative high value activity that's going to take place in those places unless we hold onto those really great manufacturing industries. And Britain generally has other strengths. Our biggest strengths are in high-value service sectors and that's probably going to stay that way because countries don't rapidly change the things they are good at. It takes a huge amount of time to build up the skills and the capital of the firms that make you able to compete at the global frontier. And remember, if we can't compete at the global frontier in some industries, then we're not going to be a rich country. All of our living standards are dependent on that. And if you look at that, we're not actually unusually narrow.

So yes, we have a large financial services sector, but actually it shows the economy has been shrinking quite significantly over the last 15 years because that's what happens after a financial crisis. It's actually that we are good at almost all high-value added services and that is a perfectly plausible way for us to be rich in the 21st century. So our problem is not the nature of the British economy, it's that we're not investing in it. As an example of not investing in it, we haven't invested in our large cities outside of London, which are the natural places for that high-value added service activity to take place. Birmingham and Manchester for example, we haven't invested in making sure that they're able to do that or to allow them the powers and the devolution to do it themselves. It's a mixture of recognise what we're good at and then recognise where we've been going wrong. That's how we get to a place where we can actually move forward.

Diane Coyle:

There are definitely strengths. I would add the creative sector, which is 6% or 7% of GDP growing rapidly exports, areas of manufacturing as Torsten said, and the services around those areas of manufacturing. So Rolls Royce is a great manufacturing company, but it also sells lots of very high-value services around its engines. But the investment point is absolutely key. And because it's really a sign of do you believe in the future of your economy, do you want it to have the capacity to grow? And it's more important than normal at the moment because we're in the middle of two really big structural transformations in the economy. One is the spread of digital technologies. Those ways of technology just keep on coming. There's more AI coming towards us as well as what we've already seen and the others that net zero energy transition. 

Both of those things are going to need government and private sector to do a huge amount of investment. I often think about the Victorians who similarly were living through big structural transformations and they built the fabric that we still living on today. Joseph Bazalgette built 150 years’ worth of sewage capacity for London. We have nothing like that confidence in our own future and without it we are going to be condemned to this doom loop of stow growth and stagnant incomes.

Jennifer Dixon:

So it turns then to health. As far as you see, to what extent or big trends in health that we see at the health foundation influencing our economic performance. Not just early chronic disease in some parts of the country, particularly those that are some of the left behind areas, if we can call it that, but also in earlier life, mental health and things like that that are hampering productivity in the workforce. No doubt.

Diane Coyle:

The health is very important. Investing in people's health is part of investing in the future of the economy, and economists have been rather slow to pay attention to people's health as well as their skills and educational attainment. With hindsight, the Treasury's failure to pay generous sickness allowances during COVID, looks like a real false economy. We are seeing the impacts now in long COVID, but also other contributors to people being out of the workforce long term, which has become a really significant problem in terms of the economy's capacity to grow and raise people's incomes, and actually mental health as well. If you think that we're a knowledge economy and as Torsten said, we have all of these professional services that are doing very well, they're one of our strengths. Then what goes on inside people's heads has got to be fundamental to their productivity. So it is important, and I also think economists need to pay more attention to this as a key constraint on the economy and living standards.

Torsten Bell:

We're an organisation that focuses on people's living standards and living standard is broadly defined, obviously does include people's health directly as an input. I mean if you look at studies of what affects our wellbeing, health is the single most important thing. Next comes our family and then comes the economics as we normally think about it. So we can't ignore it. Obviously that also applies in terms of longevity. There's not much bigger boost to our living standards than having more years to live it particularly. Those are obviously living in good health. Directly, I think it's really important. On the more instrumental end of how it impacts on the economy, even if people was Diane said was slow to come to the recognition that it was important. I think people have got there and they've got there because of what we are now seeing, which is record numbers of people who are not working because of ill health or that's the main reported reason.

So we've recently had updated attempts, I wouldn't say they're perfect, but attempts at measuring this with the labour force survey, which is our main measure of what's going on in the labour market. And they've told us that there's actually 2.8 million people who are now not working because of long-term sickness. And it's the only real reason why the only G7 economy that hasn't seen its employment level bounce back to where it was before the pandemic.

Now slightly more worryingly, the actual trend upward began before the pandemic. And I think sometimes people say, ‘Maybe this is all just how people label themselves and the rest,’ but actually there's more underlying worrying signs about people's mental health but also some aspects of physical health. So I think we should be seriously worrying about that even if the treasury wasn't interested in it from a growth perspective, it's got serious fiscal implications. I mean, if we look at the incapacity benefit claim, so this is the part of the benefit system that supports people who are unable to work because of their health, the number of claims being passed, so DWP is agreeing those people are too ill to work is up by 20%, just between 2019, '20 and '22, '23, there are 3.1 million people now on health related incapacity benefits. So this is a real problem from almost any perspective you come at it.

Diane Coyle:

And it does interact with other areas of policy, doesn't it? Because poor quality housing, the stories about mould and the impact that has on people's health, the quality of the atmosphere in large cities. So all of these are going to reinforce the trends that Torsten’s describing.

Jennifer Dixon:

And actually that links back to something that I read in the fantastic report Stagnation nation that Torsten’s organisation put out recently, which was this trend in industry of, I think you called it, Torsten, above and below. So you've got workers in the middle with changing set of owners above, interested in payback and profit. And below very little protection from unions. Is that a fair representation of what you think has happened and could the structure of the labour market be really injuring people's health in that way?

Torsten Bell:

On the last question, you can look at the insecurity that comes with different forms of work in Britain today. Remember, half of shift workers tell us they get less than a week's notice of their shift patterns. And living with that level of insecurity in the end has got to be bad for you. We also know that, remember if you are sick and you are off work for a week and you depend on statutory sick pay, you'll only be living on £44 a week. So you'd have to be very sick to do that. So instead people go to work when they're ill. So yeah, there's definitely direct ways in which some of the insecure parts of our labour market are harming our health.

The wider question about ownership of British companies and the lack of workers voice in the management that is feeding into the low investment problem that Diane and I are both saying is the single biggest problem facing us. So British senior management are unusual not having large shareholders who have a big voice in terms of making sure that they have long-term growth plans. And that's partly because more British firms are owned by foreign shareholders these days. But it's also as we've moved away from defined benefit pension schemes towards defined contribution schemes where shares are held indirectly through tracker funds that basically just hold everything in the FTSE or broader stock markets. And that means that nobody really has a vested interest in making sure firms are well run and obviously management are judged on their short-term performance in terms of quarterly earnings. And they tell us that in that world they won't choose to invest.

Some other countries that also have those situations have compensating pressure from another long-term stakeholder, ie their workers, and lots of Europe that comes in the form of workers having placed on boards or two-tier board structures and people say having workers on boards that will just boost wages and damage productivity. Actually the evidence shows it basically makes no difference to wages. It does make any difference to investment levels and productivity because in the long run, workers will keep up the pressure to say, ‘Have we got a plan to make sure this business is going to be able to keep going and making a profit not just today, but in 10 years’ time?’ Pressure from above, more engaged owners is what we need. Big pension funds is the answer to that, and more pressure from below, that comes from workers who are in powers and a part of the management structure.

Jennifer Dixon:

These seem like a formidable array of issues facing us here. It sounds like we've come to a particular point that coupled with the amount of public debt, which means that the room for manoeuvre could be quite small, but I was struck by the word used in your report, Torsten. That you said something like we've been deeply unserious about making a diagnosis of what's happened to our economy for us to think about the solutions. And before we get onto the solutions, I just wonder if you both share that analysis that we have been unserious, we haven't joined all the dots on the long-term structural trends and what needs to happen and if so, why have we been so unserious in this?

Diane Coyle:

I do think to some extent we've been fooling ourselves about how badly off we are and understandably, there's a lot of rhetoric about being world beating at this or that, and we're not world beating. So we are still a rich country, but we're at a point of reflection I think, where we're just going to continue and perhaps accelerate relative decline unless we fix this problem about investing in the future across the board. But the thing I would challenge in what you said Jennifer though, was the debt problem and the problem isn't the amount of debt in any absolute sense. It's what is the amount of debt relative to GDP. It's the ratio and how are both the numerator and denominator of that growing.

If you fixate on reducing the numerator, reducing deficits, squeezing public spending, if you want tax cuts or in any case squeezing spending, then you're never going to grow the denominator. In fact, your accelerator its declines, your debt problem will get worse. It's a doom loop in the jargon. So thinking about what fiscal rules enable you to spend on public sector investment and start that growth is the way that I would go about it.

Jennifer Dixon:

And Torsten: unserious.

Torsten Bell:

I mean we're definitely unserious. I mean, why are we unserious? Partly until recently denying the problem. So as Diane said, you had Boris Johnson going around saying, Britain's doing brilliantly, even when, as I say, wages haven't risen since 2008. I think that has mainly gone away. I think most people now, it's so serious what's happened that most people don't try to deny there's a problem. But either we still carry on with the world beating rhetoric and pretend that turns into world beating reality or think that saying doing X will suddenly make it happen. So you see that in terms of people saying, ‘Well look, we've got a levelling up plan,’ announcing a few small pots that councils have to bid for, but not saying, ‘Look, this is a 20-year project. It is going to require concentration in particular places because of the level of investment required.’

Or people saying... I sometimes hear this from parts of the Labour Party saying, ‘The new growth strategy is a reindustrialisation strategy. We're going to turn ourselves into Germany,’ with absolutely no potential for that to happen given what it would require and how many decades of slow consumption it would mean. So remember, not one member of the advanced economy has seen their employment share in manufacturing grow significantly in the last 20 years. So the idea that that's our future growth strategy is for the birds. 

But the underlying problem is that we're country living off our past, not investing in our future. That was already a big problem. If we're going to deliver a net zero transition and we want to get serious about improving the productive capacity of this economy, which in the end is going to mean transforming our largest cities outside of London and their productivity levels, that is an investment exercise. It's not a wishful thinking exercise. We're talking tens of billions of pounds over the next decades. For public investment far more than that in terms of private investment.

I'll give you one really concrete example. I often hear people, particularly those from London who are visiting Manchester, say, ‘Well, actually Manchester is really booming. Maybe the real problem is that Manchester is leaving behind lots of other parts of the northwest of England.’ And they say that because they've walked around the centre of Manchester where there are a lot of cranes and there has been a lot of construction activity in the last 15, 20 years. But if you step back, the level of productivity in greater Manchester is still far below the average, far below average. And where are some of the poorest people in the northwest of England? They live in central Manchester. Manchester is one of the poorest local authorities in the northwest of England with some of the ill health consequences that you write about so eloquently. So I think if we're serious, we have to recognise that it's a long game and being distracted by seeing a few tower blocks go up isn't what serious policymaking looks like.

Jennifer Dixon:

And when you both go around government, do you feel that people find, say your work news or do you feel that people do have a good enough analysis themselves, a diagnosis about what has happened. And also if they do have a reasonable diagnosis as to what's needed, what's stopping action here at national level? Is it because of an ideological reason or is it a will problem based on some assumptions about what makes growth possible?

Diane Coyle:

I'd be interested to hear what Torsten thinks. I think it's quite a complicated diagnosis. The only department where I really see that, if you like ideological perspective, that it's the government's job to pretty much leave it to the market's not play a strategic directing role is the Treasury. It's different in other departments, but in other departments there's a real resistance both to coordinating across government. The structures don't make that at all easy and neither the organisational ones nor the political accountability because ministers are accountable to parliament.

And also a real resistance to devolving power to local authorities where there is much more scope for coordination, much better information, detailed information about what the problems are. So I don't think it's one single issue about how we organise policy decisions or how people diagnose it. And the other thing I'd add is that although I think the diagnosis is probably quite widely shared around Whitehall, I don't think the sense of the scale of the problem or the urgency that I would feel is as widely shared, but Torsten, do you have the same views?

Torsten Bell:

Broadly people have woken up, maybe 5, 6, 7 years too late to the scale, or at least to the fact that we are doing very badly and that we are relatively doing worse than other economies. This is what a phase of relative decline looks like. In terms of turning that diagnosis into a programme, so I think there's some aspects where some versions of ideology, or at least maybe ways of thinking is a less pejorative way of putting it due cause problems. I think for example, when we think about industrial strategies, we really prefer to talk in terms of sectors than in terms of places. But in a service-based economy actually places as much more important than sectors.

I'd say investment in general, there's a lot of Treasury bashing out there. Understandably, I suppose, when the economy's done pretty badly and taxes are rising. The bit that I think is fairest is I think thinking that public investment is often a waste of money is definitely a historical Treasury position, particularly on transport projects, but also on housing during the 1990s and the 2000s. Remember the 1990s public sector net investment was basically zero in Britain, there's a reason why the trains were falling apart.

Now I think that has died. What we've now got is a bigger problem in some ways, which is one, the fiscal arithmetic has got harder. Since the beginning of the pandemic are the acceleration in our debt interest costs is making the fiscal arithmetic for whoever governs harder, and that is squeezing out the wish to increase public investment. I'm sure if Jeremy Hunt was talking to frankly, he would rather not be continuing what he currently got, which is pencilled in cuts to public investment spending. The reason he's doing that is because he wants to have debt falling in an area when debt interest costs have gone up. So there's a substance problem. And then there's also a politics problem, which comes in two fronts.

One is that we have fiscal rules which don't remotely distinguish between investment spending and if I'm honest, taking a £10 note out and burning it in the street, in the public sector, we treat those exactly the same for our fiscal rules. That is absolutely bonkers thing to do. And one of the results of that is whenever there's a difficult period for the public finances, then what happens is a conservative government, which to be fair had been ramping up plans for public investment spend, finds it easier to cut public investment than it does to say raise taxes or to cut day-to-day public service spending. And that has happened again and again and again in Britain. And that's why we have, only Germany has done less public investment than us over the last 25 years.

And then you've got the normal problem, which is there's an election coming up. You've got a Conservative party that is desperate to create some dividing lines. Lower taxes is the one they have chosen, partly because they're feeling defensive about having raised taxes over the last few years. And that is again, making it much harder to raise public investment in a way that we will need to leaving aside what it means for public services. So I think it's a mixture of, yes, people do get to the diagnosis to some degree not in detail, but overall. They're definitely not serious about the scale of the change it would require to actually start to address this. And then we've got some actual blockages, whether they're from our fiscal rules or from our politics that are stopping us getting on with doing what needs doing.

Jennifer Dixon:

So both of you have written quite a lot about solutions. We've spent some time talking about the twin problems, the hyper churn to policy and short-termism. And Diane, you talked about the productivity commission, a body to monitor, evaluate report on policies to kick the ties to make sure that there is some not swivel eye churning and changing to policy. Can you say a little bit more about that?

Diane Coyle:

Well, it's all impossible recipe for trying to reduce churn. And most other advanced economies now have some institution of this kind. So much to be discussed about exactly how it operates and what its remit is. But the institutions do seem to help stop the policy churn. I would challenge Torsten a little bit about the importance of the details. For example, the changing tax rates around investment allowances, increasing uncertainty for business, fiddling around with the way the electricity market operates when you're expecting generators and the grid to make major investments in a technology change that will have to last for 20 or 50 years.

And further education with changing employers and colleges spent a long time figuring out how the new T-levels are going to work. And then the Prime Minister stands up and makes speech saying, well, we're going to tear that up and do something different. You could weep about that kind of thing and I think it does actually matter. But as well as the possibility as I'm commissioner institution, I think the point about what are local authorities around the country responsible for matters because that consensus building about what an area needs about certain kinds of policies can create much more certainty for businesses and individuals in those places. So continuing with this devolution journey I think is also very important.

Jennifer Dixon:

Perhaps be able to end then with your three wishes, I guess, for a new government. And in particular with reference to is there any hope that a future government would construct an intelligence strategy for the economy that would be long-term and command consensus for the stability that we all want. And with that in mind, perhaps three things that you really hope a new government might do.

Diane Coyle:

Well, I'm going to steal one of Torsten's, which is a fiscal rule that distinguishes capital investment from current spending. Another is increasing certain areas of public investment as a matter of urgency. And I would include the health service in that is obviously going to have dramatic implications to people's health if it continues as it is. And the third is something that we've called for here at the Bennett Institute. That's a universal basic infrastructure, not something that could happen immediately, but it's a mixture of public and private provision of the minimum services that everybody needs as a right, as a citizen, a resident of this country.

Torsten Bell:

Yeah. I think that is really important because economic activity, particularly productive economic activity, the stuff that's maintaining our living standards of the country as a whole is going to be geographically more concentrated than maybe we would like. It's not going to be happening at the same degree all around the country, but the quality of living and the quality of the job should be things that we are aspiring to be good in every single community. And that a large part of that is what Diane is talking about in terms of guaranteed basic infrastructure everywhere.

I mean, my three things would be, we've got to get investment up in the short term. The lever that exists for that is public sector investment. Secondly, we've got to start doing the basics again. And that means saying to people, ‘Britain is going to provide good jobs and good homes.’ We don't need to have abstract plans. We need to just get on with the basics. We need to make sure that people can have certainty about when they'll be working, that we are not going to have situations where, for example, whole warehouses are running their staffing operations on the basis of agency workers, lots of whom have no certainty of their long-term contracts that needs to deeply unbalanced relationships between workers and managers. So good jobs and building some homes. Again, we haven't touched on this, but in the end, there's a reason why Britain has got the most expensive homes once we correct for the fact that they're tiny in the OECD, and that is because we do not build enough homes.

And then thirdly, we have to fairly share the rewards and sacrifices through our benefit system and our tax system. And in our benefit system, the reason why you're seeing lots of families forced to go to food banks during the pandemic and a cost of living crisis is partly because the situation is very difficult. But it's also because we've been choosing to run down the level of support, particularly for larger families over recent years. And if you do that, you will end up with destitution, poverty and homelessness. That is exactly what is happening in practice. So invest, do the basics on jobs and homes, fairly share rewards and sacrifices.

Jennifer Dixon:

So we must leave it there. Thank you very much to Torsten and Diane for their insights today. Links to some of their writings that are relevant to this episode can be found in the show notes. Next month we will return to the NHS and in particular, the question of productivity, which was raised of course by the Chancellor in the spring budget. Until then, thanks so much to Sean and Leo at the Health Foundation for their support, to Paddy and team at Mort Productions. And it's goodbye, until next month from me, Jennifer Dixon.