There's an opportunity to build a new social contract, tackle inequality, foster innovation and adopt a long-term industrial strategy, write Sam Unsworth and Anna Valer

Sivropoulos-Valero, Anna Valero

Unsworth, Sam

English

LSE Research Online

Building	back	better:	policies	for	a	strong	andsustainable	recoveryThe	Covid-19	crisis	is	already	inflicting	serious	damage	on	both	the	UK	and	the	global	economy.	This	raisesquestions	on	the	appropriate	policies	for	a	strong	and	sustainable	recovery,	contributing	to	global	efforts	to	avoid	adepression,	and	delivering	on	overarching	governmental	objectives,	including	reaching	net-zero	emissions	andreducing	inequalities	across	and	within	regions.	On	14	May	2020,	the	Royal	Economic	Society	hosted	a	webinar	onpolicies	for	a	strong	and	sustainable	recovery,	the	second	in	a	series	of	three.	Here	we	discuss	some	of	the	issuesraised	by	the	speakers,	drawing	on	our	ongoing	work.Unprecedented	economic	crisisThe	economic	crisis	caused	by	Covid-19	is	unprecedented	in	modern	times.	In	the	Bank	of	England’s	illustrativescenario,	UK	GDP	is	expected	to	be	around	30%	lower	in	the	second	quarter	of	2020	than	it	was	at	the	end	of2019.	In	annual	terms	such	a	contraction	has	not	been	seen	in	over	300	years.	As	a	result	of	this	economic	shockand	the	necessary	rescue	packages	put	in	place	by	the	government,	borrowing	will	increase	dramatically.	In	itsearly	assessment	of	the	possible	impact	of	Covid-19	on	public	finances,	the	OBR	estimated	that	HM	Treasury	couldborrow	£273bn,	or	14%	of	GDP	through	2020-21	–	the	largest	single	year	deficit	since	the	second	world	war.	Giventhe	severity	of	the	ongoing	crisis,	it	is	likely	that	these	estimates	will	prove	optimistic.Building	back	betterInto	the	recovery	phase,	further	borrowing	for	productive	investment	in	long	term	assets	should	be	distinguishedanalytically	from	immediate	and	highly	necessary	spending	on	frontline	services	and	general	packages	of	supportfor	businesses,	which	will	continue	to	be	required	for	some	time.There	is	now	the	opportunity	to	form	a	new	implicit	social	contract	which	recognises	the	need	for	higher	public	debtand	equitable	taxation	–	including	increases	in	taxation	for	those	able	to	pay	more	(Hughes	et	al.,	2020).	It	must	beemphasised	that	the	finance	raised	through	these	means	will	provide	material	benefits	to	citizens	in	relation	to	thecritical	social	issues	highlighted	most	acutely	during	the	crisis,	such	as	deep	and	widening	inequalities.	Investmentsin	productive,	sustainable	assets	will	generate	large	multipliers	in	the	short	and	long	term,	enabling	the	UK	toservice	its	increased	debts	via	the	tax	revenues	associated	with	economic	growth,	and	improving	connectivity,	airquality	and	living	standards	across	the	UK.Tackling	inequalitiesLSE Business Review: Building back better: policies for a strong and sustainable recovery Page 1 of 3		Date originally posted: 2020-05-18Permalink: https://blogs.lse.ac.uk/businessreview/2020/05/18/building-back-better-policies-for-a-strong-and-sustainable-recovery/Blog homepage: https://blogs.lse.ac.uk/businessreview/The	economic	shock	caused	by	Covid-19	has	hit	the	young	and	lowest	paid	the	hardest	and	is	expected	to	deepenlabour	market	inequalities.	The	impacts	of	ongoing	disruptions	to	education	will	also	be	uneven	with	school	closuresexacerbating	pre-existing	gaps	for	students	from	disadvantaged	backgrounds.	The	unprecedented	downturn	thatwe	face	appears	likely	to	create	long	term	scarring	where	businesses	become	insolvent,	individuals	suffer	periodsof	unemployment,	and	learning	losses	are	likely	to	damage	future	educational	trajectories.	Greater	income	andeducation	inequalities	as	a	result	of	the	uneven	impacts	of	the	crisis	will	further	reduce	social	mobility	into	thefuture.Moreover,	Covid-19	is	likely	to	intensify	automation	in	some	sectors.	An	extremely	low	cost	of	capital	combined	withfalling	labour	productivity	and	rising	labour	costs	due	to	necessary	social	distancing	measures	could	tip	the	balancein	favour	of	investment	in	capital	over	labour.	At	the	same	time,	jobs	in	labour	intensive	services	(e.g.	hospitality)are	at	risk	due	to	social	distancing.	Therefore,	beyond	the	need	for	government	to	provide	adequate	social	security,there	must	be	a	well-planned	transition	for	those	displaced	by	the	current	crisis	due	to	changing	economicconditions	on	the	demand	and	supply	side.	Transition	can	be	enabled	via	programmes	of	government	investment	inprojects	with	high	job	creation	potential	–	as	is	the	case	in	many	areas	associated	with	the	zero-carbon	transition(for	example	insulating	homes,	low	carbon	heating,	tree	planting	and	peatland	restoration	–	see	CCC,	2020);together	with	continued	focus	on	skills	and	lifelong	learning.	Such	programmes	will	also	generate	wider	co-benefitsfor	society,	and	build	the	foundations	for	long-run	sustainable	growth.Part-time	work	and	short-term	measures,	together	with	job	guarantees	in	sustainable	projects	should	play	a	role.New	approaches	for	adult	skilling	and	lifelong	learning	should	be	sought,	including	exploring	the	potential	for	humancapital	tax	credits	to	incentivise	employers	to	train	their	workers.	A	national	tutoring	service	could	help	closewidening	education	gaps	for	disadvantaged	children	due	to	school	closures,	and	measures	at	the	local	level	toaddress	mismatch	between	skill	supply	and	demand	will	be	required.Innovation	must	be	centre	stageInnovation	is	crucial	for	enabling	the	global	community	to	both	deal	with	the	Covid-19	crisis	and	find	its	way	out	of	it.Digital	technologies,	including	AI,	are	already	working	alongside	innovation	in	medicine	and	medical	equipment	toprovide	solutions	to	the	challenges	presented	by	the	pandemic.	More	broadly,	innovation	is	required	for	achievingsustainable	long-run	growth	in	advanced	economies	such	as	the	UK	(LSE	Growth	Commission,	2013,	2017),	fortransitioning	to	net	zero	greenhouse	gas	emissions	and	for	addressing	other	societal	challenges.	It	follows	thatinnovation	policy	needs	to	go	beyond	fixing	specific	market	failures	to	be	‘mission-driven’,	generating	and	directingdemand	for	innovation.The	UK	can	continue	to	build	on	its	clean	innovation	strengths	via	consistent	policies	and	incentives	on	both	thedemand	and	supply	side,	and	benefit	from	growing	global	demand	into	the	future	(Rydge	et	al,	2018;	Unsworth	etal.,	2020).	The	existence	of	spillovers	is	a	key	justification	for	public	support	for	research	and	development	(R&D),and	analysis	of	patents	shows	that	spillovers	from	clean	innovations	in	the	energy	production	and	transport	sectorsare	over	40	per	cent	greater	than	in	conventional	technologies.The	research	and	innovation	system	faces	a	number	of	new	risks	–	from	the	impacts	on	university	finances,	todifficulties	faced	by	innovative	start-ups	or	scale-ups	accessing	finance.	The	drive	to	2.4%	R&D	as	a	share	of	GDPcan	be	accelerated	via	incentives	in	the	tax	system	(including	effective	carbon	pricing	and	R&D	tax	credits),appropriate	regulation	and	demand	side	mechanisms	that	create	growing	markets	for	new	technologies	and	directtechnological	change	(Acemoglu	et	al.,	2012).	Current	low	oil	prices	create	an	opportunity	for	introducing	a	robustcarbon	price,	essential	for	ensuring	that	innovation	continues	to	be	directed	towards	zero	carbon.	Without	this	thereis	a	risk	that	progress	will	stall.The	diffusion	of	innovation	into	the	“long	tail”	of	smaller	firms	is	also	important	from	a	productivity	perspective	–while	the	crisis	has	forced	many	firms	to	accelerate	their	adoption	of	digital	technologies,	it	will	be	important	tounderstand	better	the	barriers	to	doing	so,	the	extent	to	which	any	positive	changes	persist	(e.g.	increased	remoteworking	and	flexibility)	and	how	policies	into	recovery	can	help.A	long-term	industrial	strategy	which	is	coherent	from	national	to	local	levelLSE Business Review: Building back better: policies for a strong and sustainable recovery Page 2 of 3		Date originally posted: 2020-05-18Permalink: https://blogs.lse.ac.uk/businessreview/2020/05/18/building-back-better-policies-for-a-strong-and-sustainable-recovery/Blog homepage: https://blogs.lse.ac.uk/businessreview/Given	the	response	to	Covid-19	and	the	extent	of	government	support	to	industry	it	entails,	there	is	now	a	chanceto	build	a	strong	partnership	between	the	private	and	public	sector	accelerating	investments	towards	a	low-carbon,sustainable	and	inclusive	economy.	Over	the	years,	the	UK’s	industrial	policy	has	lacked	the	consistency,	scale	andlongevity	required	to	effectively	direct	investment	(LSE	Growth	Commission,	2017).	The	formulation	of	coherentpolicies	for	investment	should	be	shaped	by	the	UK’s	industrial	strategy,	re-emphasised	nationally	and	locally,updated	and	relaunched	as	a	central	pillar	of	recovery.	All	investments	must	be	driven	not	only	by	productivitydefined	in	a	narrow	sense,	but	also	by	broader	measures	of	health	and	wellbeing.	Consideration	of	this	long	runoutlook,	combined	with	the	proper	valuation	of	different	forms	of	capital	–	particularly	human,	social	and	natural	–can	inform	policies	to	crowd	in	investments	in	innovation,	infrastructure	and	skills,	garnering	popular	support	at	thenational	and	local	levels.♣♣♣Notes:This	blog	post	is	based	on	discussions	at	the	RES	Policy	Webinar:	Policy	for	a	strong	and	sustainablerecovery.	Chair:	Nick	Stern.	Speakers:	Tera	Allas,	Diane	Coyle,	Stephen	Machin,	Rain	Newton-Smith,	AdairTurner,	Andres	Velasco.LSE’s	Centre	for	Economic	Performance	and	Grantham	Research	Institute	will	be	working	together	in	thecoming	weeks	and	months	to	deliver	a	series	of	reports	examining	the	different	aspects	of	the	UK’s	recoveryfrom	Covid-19,	including	strategy,	policies	and	finance	for	sustainable	and	inclusive	investment.The	post	expresses	the	views	of	its	author(s),	not	the	position	of	LSE	Business	Review	or	the	London	Schoolof	Economics.Featured	image	by	Fred	Moon	on	UnsplashWhen	you	leave	a	comment,	you’re	agreeing	to	our	Comment	PolicySam	Unsworth	is	a	policy	analyst	at	LSE’s	Grantham	Research	Institute,	focusing	on	climate	policy,finance	and	diplomacy.	He	was	previously	a	manager	in	PwC’s	sustainability	and	climate	changepractice.	Sam	managed	projects	in	the	UK,	Sub-Saharan	Africa,	South	America	and	South	Asia.	Healso	spent	two	years	as	part	of	the	Climate	and	Development	Knowledge	Network,	focusing	onclimate	diplomacy	in	the	lead-up	to	and	aftermath	of	COP21	in	2015.	Prior	to	this,	Sam	worked	at	theNGO	Renewable	World,	which	installed	off-grid	energy	projects.	He	holds	a	Masters	in	Conflict,Governance	and	Development	from	the	University	of	York.Anna	Valero	is	an	ESRC	innovation	fellow	at	the	CEP.	She	received	her	PhD	in	economics	at	theLSE	in	2018.	Her	research	is	focused	on	the	drivers	of	productivity	and	innovation,	and	in	particularthe	role	of	skills	and	universities	in	explaining	differences	in	economic	performance	between	firmsand	regions.	Anna	has	also	been	working	on	UK	productivity	and	industrial	strategy	more	broadly,and	in	2017	was	a	research	director	for	the	LSE	Growth	Commission.	Previously,	Anna	was	amanager	at	Deloitte’s	Economic	Consulting	practice.		LSE Business Review: Building back better: policies for a strong and sustainable recovery Page 3 of 3		Date originally posted: 2020-05-18Permalink: https://blogs.lse.ac.uk/businessreview/2020/05/18/building-back-better-policies-for-a-strong-and-sustainable-recovery/Blog homepage: https://blogs.lse.ac.uk/businessreview/

Building back better: policies for a strong and sustainable recovery

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Building back better: policies for a strong and sustainable recovery

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