John Eatwell on the case for making social capital the bedrock of Britain’s longer-term economic recovery
Everyone is aware that the British economy performed poorly in the decade prior to 2020, with the lowest growth rate per capita since the Second World War, and the second lowest rate of productivity growth in the G7.
Then came a triumvirate of shocks, First Brexit, which the OBR estimates has reduced long-run GDP by 4% a year – forever. Second the pandemic, in which we suffered the highest number of deaths and worst economic performance in Europe. And now the cost-of-living shock, derived from the toxic combination of Brexit, the pandemic and Russia’s invasion of the Ukraine. The resultant impact on the economy has been greater than in any comparable country. Britain lacked resilience.
The traditional answer to this lack of resilience looks to problems in what the government typically calls the ‘wealth producing’ part of the economy – the private sector. This alone, we are told, generates the wealth that provides resources to the public sector. The dominant flow is one way. This conventional wisdom is seriously flawed, neglecting the vital role of social capital in the determination of economic performance.
Social capital refers to investment in society: education, health, the legal system, the police, social security, defence – all vital elements of the glue that binds us together. It provides an indispensable foundation of economic activity. Without investment in social capital the economy loses all resilience.
Flawed analysis has generated flawed policies. Social capital was the target of Tory austerity. From 2010 to 2019 real-terms public service spending was cut by 20%, making Britain ill-prepared for the shocks to come.
Faced with COVID, how resilient could the economy be without a fully equipped and fully staffed health service? Between 2010 and 2019, health spending grew at an average real-terms rate of 1.6% per year – lower than any previous decade in NHS history. England entered the pandemic with 39,000 nursing vacancies; as well as fewer doctors, hospital beds and CT scanners per person than in many similar countries.
This had a direct long-term impact on the economy, over and above the costs of the lockdown. Just under half of the 1.1 million workers ‘missing’ from the labour force are absent due to long-COVID and post-lockdown exits. Had they returned to work, the OBR estimates that GDP would be more than £8bn greater.
Another austerity target was education. School spending per pupil in England fell an average of 9% in real terms between 2009 and 2019, with the most deprived fifth of secondary schools experiencing an even worse fall of 14%. This squeeze on resources is ‘effectively without precedent in post-war UK history’, according to the IFS.
England is one of only a few OECD countries where the young have worse literacy and numeracy skills than 55 to 65-year-olds. Perhaps the government was trying to balance things up as it cut spending on adult education by 49%. Is it any wonder there is a skills shortage?
The damage done by Conservative policies towards health and education has been amplified by the persistent increase in inequality. The bitter irony is that there is clear evidence that the main mechanism through which inequality impacts on growth is by undermining education opportunities for children from poor socio-economic backgrounds. It lowers social mobility and hampers skills development.
The Office for National Statistics has shown that growing inequality has been predominantly the result of cuts in social security. When combined with deteriorating healthcare and underfunded education, this has helped diminish our resilience further, limiting our ability to respond to shocks and endangering our economic future.
Recognising the wider role of social capital suggests that improved economic resilience and growth requires not Mr Sunak’s longed for ‘small state’ but the reversal of destructive policies. Not just the desperate short-term approach of throwing money at problems. But an unrelenting commitment to rebuild social capital plus a more ambitious plan for sustained investment at higher levels than in the past.
There is, however, a problem. It is far easier to destroy social capital than to build. It’s as if you don’t bother to service your car for years until it suffers a catastrophic breakdown. The cost of repair is then far greater than the earlier ‘savings’. Or, to take an analogy beloved of Conservative commentators, “you don’t fix the roof”.
It will cost more and take longer to restore our social capital than the spurious ‘efficiency’ savings of Tory Chancellors. Fixing the roof will require both well-crafted long-term policies and a covenant with the British people. The covenant will comprise a commitment to better-informed debate around the scale and content of public expenditure – a debate that embodies accountability.
The case is clear for long-term strategies for investment in health and education, and in reducing inequality. All evidence points to the fact that this investment is growth enhancing. Secure social capital provides the bedrock on which the private sector thrives. It would also provide the resilient economy that the people of Britain deserve.
Lord John Eatwell is a Labour Peer and a Professor Emeritus of Financial Policy at Cambridge University
Published 7th June 2022