How Osborne's Budget can increase confidence

The state must have more faith in its own power to tame recession.

The state must have more faith in its own power to tame recession.

This week's Budget will reflect whether George Osborne's team has learned some economics over the last few months. If not, here is a last minute crash course, focusing on the need to increase "confidence" (the government's buzz word). But whose confidence?

1. Market confidence

Low interest rates in the UK aren't a reflection of "market" confidence, but of the fact that the economy is not growing. As in most stagnant economies, interest rates remain low - as does also inflation, which is only rising due to international commodity prices. The fact that the UK has its own currency, with an active central bank, partly explains why the bond markets are not fearful of a default and why Britain's AAA credit rating has not been downgraded, yet.

But the increasingly low growth forecasts for the UK, and the recent warnings by ratings agencies (including Fitch last week), show that the markets know that one of the world's most "austere" nations is in trouble because austerity does not generate growth.

Lesson: In your speech, don't use the "market'"and low interest rates as the reason that you need to continue austerity. Remember that savers are punished by low interest rates and life insurers - an important UK industry and a source of finance for recovery - could be seriously undermined by them. And if you think that the fixed rate on 100 year bonds is the solution, this will only make markets less confident. It demonstrates that you think rates of return will remain very low for an extended period. If not, it's unclear why anyone would invest in these.

2. Business confidence

Private business investment is not driven by tweaks in taxes, but by expectations about future technological and market opportunities. This is what Keynes meant by investment being driven by "animal spirits" and is the reason why there is too little investment in downturns and too much in booms.. It is also the reason why even in booms, there is little investment in countries, or particular regions, with low future growth opportunities. Weak private business investment in the UK and the fact that various companies are picking up and leaving (Pfizer, GSK, Sanofi) , is not due to their high taxes, but the lack of positive expectations about future growth in the UK.

Lesson: Don't try to increase investment by decreasing corporate taxes. Evidence is that these "savings" will not be reinvested back into production. Likewise reduction of the 50p rate will not "trickle down" to the rest of the economy, it will only increase inequality as all such measures, especially in the USA and the UK, have in the last decades. To increase investment, government must invest in those areas that create high expectations about technological and market growth: education, research in emerging technologies, modern infrastructure, and constructing a financial system that can nurture long-run, innovative investments.

3. Confidence in competition

When competition is strong, businesses feel the need to differentiate themselves to increase market share, whether via advertising or innovation. This is why there is rarely dynamism in sectors where competition is lacking. Competition policy should nurture those types of businesses that are most interested in growing via new products, processes, or new markets for existing products -- and in so doing create jobs. One way to invest in such opportunities is to properly fund the whole 'eco-system' of innovation, promoting broad technological areas rather than trying to pick winners within them.

In doing so it is important not to mythologise some of the actors, especially those with strong lobbies (e.g. small/medium enterprises, venture capital). It is not true, for example, that the SME sector as a whole is being starved of funds. Indeed UK SMEs get somewhere between £7-8 billion pounds a year in direct and indirect government support - more than either universities or the police. It is the high-growth, innovative SMEs (about 6 per cent of the total) that need support, which must be tailored towards their precise needs. And it is not true that the problem in the UK is commercialisation, the target of the new Catapult Centres. The lower amount of market relevant research is the UK's the problem; so setting up Catapult Centres, without investing in public R&D and stimulating business to do the same, is like pushing on a string. The UK's R&D/GDP ratio is 1.3 per cent, compared to 2.6 per cent in Germany and the USA. Unlike Britain, the former has increased its spending since the crisis.

Lesson: Invest in measures that can help generate the company strategies and structures that enable UK companies to produce products and services that the world wants to buy. Only in this way will UK companies win procurement contracts in their own country (it is hardly surprising that Siemens' won the Thameslink train deal, with its very high R&D spending, and investment in green technology). And don't focus so much on new vehicles like Catapult Centres, which will have all the force of a pea-shooter if the research base remains underfunded.

4. Bank confidence

Quantitative easing (QE) by the Bank of England has not resulted in higher growth because this injection of money has simply ended up in the coffers and bonus pools of banks, which are not lending. They are scared because they, like business, do not believe there are growth opportunities in a country that has problems with both demand (consumer spending) and supply (new business output). Banks' complaint that they are not receiving enough demand for new loans highlights the slump in demand afflicting the economy. Thus ironically, post-crisis QE has benefited only the actors that have been most responsible for the crisis, letting them recapitalise on the cheap without reducing business finance costs.

Lesson: To increase lending, the government should create a National Investment Bank that could offer the kind of "patient capital" needed by businesses investing for the long run. As private investment banking will not be viable on the past scale after banking reforms, this could be constructed from the skeleton of RBS. At present there is £500 billion of net financial surplus hoarded in the UK (and $1.1. trillion in the USA), mainly in pension funds; government can play a greater role in releasing these funds, which also have a public dimension, in particular directions like "green" investments with high future returns (see Nick Stern's recommendations).

5. Consumer confidence

Four types of demand drive GDP. Demand by government, by private business investment, by consumers and by what other nations demand from us (exports) minus what we demand from them (imports). Of these, consumer demand is the largest, and the most stable component, about 65 per cent of our GDP. It is much more predictable than private investment, as it is largely a function of disposable income. Thus even if you get all the policies above right, if you cut down on disposable income during a recession, you'll turn it into a depression. This is indeed the real current risk. And falling household incomes (from the rise in VAT, freeze in public sector pay, cuts to fundamental social services, and general downturn of the economy) will be made only worse with the further cuts that will be needed as a consequence of the 50p rate reduction.

Lesson: Consider reducing VAT, and releasing the public sector pay freeze, both of which are damaging to demand. While marginal rates have little effect on top earners they do deter effort and initiative at very low rates of pay (see Mirrlees Report). So what is needed is to decrease the marginal rate on very low earners - sometimes 100 per cent or more - not worrying about a 50 per cent rate at the top. Do whatever you can to steer councils away from spending cuts in areas that sustain the social fabric, including after-school clubs that allow women to work more and youth clubs that allow young people to feel valued members of society.

Perhaps the biggest lesson around confidence is that government must be more confident of its own powers. It should use the ability to tame recessions through monetary and fiscal policy, and invest in the future by funding the knowledge base that is the source of new waves of growth. The new green revolution is just beginning and, like all technological revolutions, will not happen without government playing a lead role, absorbing most of the uncertainty before the private sector dares to enter. This entrepreneurial role must lead the vision in next week's Budget if the UK is to play a meaningful role in the world economy.

Mariana Mazzucato is Professor of Economics and RM Phillips Chair in Science and Technology Policy at the University of Sussex. She is the author of The Entrepreneurial State.

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As children face a mental health crisis, should schools take the lead in fighting it?

There is a crisis affecting the mental health of England's young people. As Children’s Mental Health Week gets underway, the government must put schools at the heart of mental health services.

Three children in every classroom have a diagnosable mental health condition. Half of these are conduct (behavioural) disorders, while one third are emotional disorders such as stress, anxiety and depression, which often becomes outwardly apparent through self-harm. There was a staggering 52 per cent jump in hospital admissions for children and young people who had self-harmed between 2009 and 2015.

Schools and teachers have consistently reported the scale of the problem since 2009. Last year, over half of teachers reported that more of their pupils experience mental health problems than in the past. But teachers also consistently report how ill-equipped they feel to meet pupils’ mental health needs, and often cite a lack of training, expertise and support from NHS services.

Part of the reason for the increased pressure on schools is that there are now fewer ‘early intervention’ and low-level mental health services based in the community. Cuts to local authority budgets since 2010 have resulted in significant erosion of these services, despite strong evidence of their effectiveness in reducing escalation and crises further down the line. According to the parliamentary Health Select Committee, this has led specialist child and adolescent mental health services (CAMHS) to become inundated with more severe and complex cases that have been allowed to escalate through a lack of early treatment.

This matters.  Allowing the mental health of children and young people to deteriorate to this extent will prevent us from creating a healthy, happy, economically productive society.

So what part should schools play in government’s response?

During the last parliament, the government played down the role of schools in meeting pupils’ mental health and wider emotional needs. Michael Gove, during his tenure as education secretary, made a conscious decision to move away from the Every Child Matters framework, which obliged local authorities to work with schools and health services to improve the ‘physical and mental wellbeing’ of all children in their local area. He argued that schools policy needed to focus more heavily on academic outcomes and educational rigour, and references to children’s wellbeing were removed from the Ofsted framework. This created a false dichotomy between academic standards and pupils’ mental health - why can’t a school promote both?

But since Gove was replaced by Nicky Morgan, a new window of opportunity for meaningful reform has opened. Following her appointment in 2014, Morgan has called on schools to promote resilience and protect pupil’s mental health when problems first arise. The Department for Education has made tentative steps in this direction, publishing advice on counselling in schools and announcing a new pilot scheme to link schools with NHS services.

However, much more needs to be done.

The only way to break the pressures on both mental health services and schools is to reinvest in early intervention services of the kind that local authorities and the NHS have been forced to cut over the last few years. But this time around there should be one major difference – there is a compelling case that services should be based largely inside schools.

There are strong arguments for why schools are best placed to provide mental health services. Schools see young people more than any other service, giving them a unique ability to get to hard-to-reach children and young people and build meaningful relationships with them over time. Studies have shown that children and young people largely prefer to see a counsellor in school rather than in an outside environment, and attendance rates for school-based services such as those provided by the charity Place2Be are often better than those for CAMHS. Young people have reported that for low-level conditions such as stress and anxiety, a clinical NHS setting can sometimes be daunting and off-putting.

There are already examples of innovative schools which combine mental health and wellbeing provision with a strong academic curriculum. For example, School 21 in East London dedicates 2.5 hours per week to wellbeing, creating opportunities for pastoral staff to identify problems as early as possible.

There is a huge opportunity for Nicky Morgan – as well as Labour’s shadow mental health minister Luciana Berger – to call for schools to be placed at the heart of a reconstructed early intervention infrastructure.

This will, though, require a huge cultural shift. Politicians, policymakers, commissioners and school leaders must be brave enough to make the leap in to reimagining schools as providers of health as well as education services.

Craig Thorley is a research fellow at IPPR, where he leads work on mental health. Follow him @craigjthorley