Trusting the deep state, improving the nanny state and arming the British state

Afternoon all,

Looks like Starmer found the money for defence down the back of the foreign aid budget – a seismic but not unforeseen development. More on that in Chart of the Week…

In domestic news, we’re pleased the conversation has shifted towards child poverty this week. We published our analysis on what it will take to turn the tide on rising numbers (spoiler: good things don’t come cheap).

Today marks my one month in the TOTC hot seat, and it took all my self-restraint not to bring you a Something for the Weekend about pancake day to celebrate. Instead, it felt more in keeping with the times to muse on the trouble with our volatile world.

Have a great weekend,

Ruth

Chief Executive
Resolution Foundation

P.S Please share our upcoming Working in the think-tank sector event, aimed at those from various less well represented groups, with any aspiring bright sparks who might be interested.

Trouble trusting. New research (spanning 143 countries and nearly 60 years) suggests trust in governments has declined by 7.3 percentage points in democratic countries since 1990, with trust in parliaments also falling by 8.4 percentage points. Meanwhile, trust in “implementing institutions” (police, courts, civil service) has been stable or rising – the people love a blob. This suggests lack of trust is not so much about the state itself, but our elected representatives. The authors note there’s much to learn from the countries who’ve increased trust, including Denmark, Ecuador, and New Zealand. Similar recent analysis found people *really* trust scientists, and want them involved in society and policymaking – music to my ears as a physics graduate.

Nanny state? The previous government increased childcare support for working parents. So, how’s it going?  IPR analysis looks at the childcare experiences for parents on Universal Credit (UC). Unfortunately, provision is complex (sometimes financial, sometimes in kind, sometimes universal, sometimes means-tested), partial and geographically patchy. On top of that, parents face *stricter* work conditionality rules, creating complex decisions for them to manage work, childcare and a household budget. Combine that with the fact that parents on UC need to pay costs up front and then wait for reimbursement, and you have a system where there is surely scope for improvement.

Bonjour barriers. This column examines recent research on Europe’s labour productivity gap with the US. Our larger firms aren’t pulling their weight, our younger firms are less dynamic and smaller, and we’re swimming in small, low-growth firms. Why? Smaller, segmented European markets lead to intra-EU trade intensity that’s less than half the trade across US states. But wait, I hear you cry, it’s called the single market, right? Well, despite EU market integration, this research finds that (despite fewer barriers than before) internal trade barriers are much higher than previously thought. Average intra-EU trade costs for services could be as much as 110 per cent relative to domestic trade flows. Any of you with some trade know-how might be thinking that seems preeeetty high. The authors note that these estimates are upper bounds, but these internal trading barriers would also track with the fact that UK services trade didn’t suffer from our departure from the single market as much as we anticipated.

Quite capital. This study looks at which capital investments in American school facilities help students vs. which are valued by homeowners. On average, investment raises test scores *and* house prices, but impacts vary. Improving students’ learning environment improves academic achievement, whereas spending on visible external amenities (e.g. sports pitches) drives up local house prices. The research also finds that capital investments are most beneficial in districts with higher proportions of disadvantaged students. Happily, these districts were slightly more likely to fund infrastructure projects. So, if we want to improve outcomes for socio-economically disadvantaged students, we should invest in their learning environments and target the areas where they’re over-represented. Great – now we just need to find the cash.

Something for the Weekend? | Nobody knows what’s happening next

If there’s one word to describe the world right now, it’s volatility. That’s true in terms of jittery financial markets, trade wars and war wars. It all makes people less certain about what their governments might do next – pushing  global policy uncertainty through the roof in recent weeks. Britain is not immune from this. As we recently showed the price of UK gilts is currently even more sensitive than usual to global developments.

On the other hand, when the Chancellor gets her final pre-policy numbers from the OBR on Tuesday (and given we know the early rounds weren’t pretty) she might be hoping for some (positive) volatility on this occasion.

But volatility matters closer to home too. Next week we’re publishing major new research on pay volatility across Britain (it’s bigger than you think). Come along on Tuesday to find out which sectors have the most unstable earnings, and how much pay cheques  can vary from month-to-month – but I can tell you right now why it matters.

For a start, insecure earnings (alongside insecure housing and low savings) are associated with poor mental health.  Income volatility also carries wider economic costs. It’s harder to save when you don’t know how much you’ve got coming from one month (or week…) to the next. And as this study shows, it can lead to extra reliance on debt, and higher costs when accessing credit. The switch from Tax Credits to Universal Credit (with awards updated monthly rather than annually) should help to offset this volatility and smooth family incomes. But as this study (and our own work) shows, it’s design can actually exacerbate this problem – with a one-off good month dragging down benefits the following month.

Chart of the week

Governments are always under pressure to spend. But as COTW shows, some pressures are more acute than others. Heath spending has steadily increased in the post-war era, rising from just under 3 per cent of national income in 1955 to 8.4 per cent today. We currently spend a whopping £211.6 billion a year (largely) on the NHS. This has mainly been funded by falling defence spending – down from 7.6 to a little over 2 per cent over the same period – and supported by the low interest rates (and debt interest costs) in the years pre 2020. Starmer made a big move this week (and despite the challenges it’s good he told us how he’ll pay for it), but the real question is how the state can afford future defence and health pressures together. With the debt interest bill at over £100bn and the aid budget now just 0.3% GDP, to get to Starmer’s 3% ambition there will need to be a different answer.