Imperial academics debate how the 2013 budget should be spent

On the day of the announcement of the 2013 budget Imperial College Business School academics outline how the budget should be spent.

Professor Jonathan Haskel, and Professor Carol Propper, who are both Professors of Economics, reflect on how the budget should be spent on stimulating the economy and what areas of health needs addressing.

Professor Jonathan Haskel

Multipliers, austerity and the Budget

“Who would have thought that the ‘multiplier’ would become such an intense focus of economic argument? It is the centerpiece of Keynes’ diagnosis of how to get the economy out of recessions. The argument is simple. There are unemployed construction workers. The private sector is not keen on investing, perhaps because they are too wary of future prospects. So let’s have the government borrow the money and invest instead. So what effect does that have? Spending money, say on a new underground line, employs construction workers. They buy lunch and leave the waitress a tip. The waitress spends the tip on a drink. The publican spends that money on a holiday. So that the original government spend multiplies itself via this succession of consumption decisions and boosts the economy.

This argument has made a comeback in recent years, as commentators want Chancellor George Osborne to spend more to boost the economy. Why doesn’t he do it?

For one thing, the economy doesn’t look very much like what it did in the 1930s. Underground lines have been built already. Building HS2 uses huge machines and not armies of workers with shovels. So the employment per pound spent is very likely much lower than back then.

An obvious riposte to that is to spend on something relatively labour-intensive such as housing. Indeed, in the 1930s the UK built almost 300,000 houses per year, mostly in the private sector. Despite the rising population, only around 100,000 houses per year are built today. Tim Leunig of the London School of Economics points out that building a house employs 3.5 workers for a year, so getting back to the 1930s levels would create another 700,000 jobs. Of course, that was before planning restrictions. So now, spending on housing employs lawyers.

The other type of earlier government spending that was very labour-intensive was of course the armed forces. But again, times have changed. Suppose the government spends more on the forces who then buy more drones. Most are made in the US. Suppose they are shipped directly to Afghanistan. It’s hard to see how the multiplier chain of successive spending ever comes to the UK. And drones employ computer operators and software writers who control them. Even if they are in the UK, these are hardly creating opportunities for the unemployed construction workers in the Keynesian parable.

Finally, labour markets are much more open now than they were. Spending more might improve the job market prospects of Europeans in general, rather than just UK citizens. This is surely a good thing, but domestic politicians don’t always make that kind of calculation.

So if there is any scope for government-led reflation, what might it be? To be effective, it will have to be both forensic and quick. So if it’s housing, it will need unblocking planning restrictions. Or, one might spend on the infinity of little infrastructure projects that are surely needed,such as small-scale improvements to transport and public buildings. Another area is to be broader in thinking about infrastructure and spend on e-infrastructure like the internet. Still, another is to spend on the science base, as the coalition has tried to do.

A lot of these suggestions are not very eye-catching, and therein lies their problem. Small building generates few photo-opportunities hence the political taste for Grand projets, whicharelarge scale building projects. The alternative is to simply wish we were back in the economy of the 1930s and that any pound spent would quickly re-employ waiting armies of unskilled labour. But we have to devise policy in the economy as it is, not as we would like it to be.”

Professor Haskel has previously co-authored a study on the economic impact of university research in 2010. The assessment showed that the £3.5 billion a year spent on publicly funded research generates an additional annual output of £45 billion in UK companies. The data also suggested that the benefits of research spending in higher education are greater than those from other areas of government-supported research and development.

Professor Carol Propper

Prevention is better than cure

“The House of Lords Committee on ageing this week warned of the tsunami of diabetes, coronary health disease and stroke that is to hit Britain in the next 20 years, with the consequent huge financial implications for public and private spending on health and social care services. These diseases are strongly linked to lifestyle. The growing obesity epidemic suggests our lifestyles and therefore our future health appears to be getting worse rather than better. If we are to cope with the financial costs of greater aging we need to address prevention in a major way.

Yet it seems that George Osbourne’s budget will be silent on focused attempts to do this. While we may see the usual rises in tobacco and alcohol duty, we seem unlikely to see a ‘fat’ or a ‘sugar’ tax or a minimum price for alcohol. This is a wasted opportunity. It is clear that for such taxes to lower consumption of harmful goods depends on a number of important conditions.

The tax must feed into higher prices.Price rises must bring about reductions in consumption of the harmful substances and must not encourage switching to other non-taxed harmful substances. On top of this there are issues about how to use these types of taxes effectively. For example,these taxes may be very regressive if the highest consumers are the poorest.

We can examine whether some of these conditions are met using models and simulations and researchers are doing this. However, not all behavioral responses can be captured in simulations. This seems an opportune time to experiment with ‘sin’ taxes. The lessons from our seemingly inexorable rise in the obesity in Britain are that we need every tool we have. We can have ‘carrots’ in the form of price discounts on leisure activities, but these are costly. We can try ‘nudge’ policies that make us do the right thing via lower costs. We can try spreading health information more widely. The room for outright bans on sugar or fat is much more limited than, say, for tobacco as these products are not harmful in small quantities. We therefore also need our ‘sticks’ in the forms of targeted tax induced price rises. We therefore should begin to experiment with these to see whether they work and what their distributional implications are.”