Labour and the Tories should scrap their fiscal rules and deliver on levelling up, economist says

The Tories swept to power in the last election on the back of two key promises.

Boris Johnson made “getting Brexit done” and “levelling up the UK” central parts of his election campaign, which penetrated the Labour heartlands and delivered the Conservatives a thumping majority.

But Andy Haldane, chair of the government’s Levelling Up Advisory Council, said progress on tackling regional inequality in the last parliament was disappointing and that Brexit “got in the way” of achieving it.

“It's not good enough so far,” the former chief economist at the Bank of England said in an exclusive interview with ITV News. “We must, must do better.”

Haldane helped the government design the Levelling Up White Paper which was published in February 2022.

It set out how the government planned to close the gap in economic inequality between South East England and the rest of the United Kingdom - a gap which has been described as one of the worst in the developed world.

The document outlined 12 “missions” to achieve levelling up. Of these, Haldane told me only “one or two are on track” and “the greater number of them are off-track”.

Andy Haldane told ITV News that levelling up has not been "good enough so far"

Haldane’s assessment chimes with two reports recently released by reputable, independent think tanks.

The Institute for Fiscal Studies (IFS) described the levelling up progress as “glacial” adding that “on many metrics” regional inequality has gone “into reverse”.

Meanwhile, the National Institute of Economic and Social Research (NIESR) called the policy “a failure, so far.”

NIESR calculates the gap in living standards between Yorkshire and The Humber and London has tripled from £2,093 per household to £6,086 in the past five years.

Haldane and I sat down to speak at the University of Bradford.

“So far, the tide has not turned,” he acknowledged.

“There’s huge amounts more need doing. We sit here in the least well-connected city in the UK.

"We sit here in the youngest city in the UK with too few young people making good on their potential. This is absolutely not job done. Absolutely.

"This needs more heave-ho, money and powers and energy.”

In the last parliament, the UK was hit by two shocks that no one could have predicted.

The Covid pandemic and Russia’s invasion of Ukraine, which sent energy prices skyrocketing, are factors that inevitably blew levelling up off course. But for Andy Haldane, these factors alone do not explain the lack of progress.

“They made a bad situation worse,” he tells me. “But the truth is, even without them, things wouldn’t have proceeded as quickly as I would have wished.”

For Haldane, there was another force at play; Brexit.

Haldane said leaving the European Union made the creation of investment zones and freeports “more easily” possible but he argues the net impact was negative.

In his view, Brexit damaged trade with the EU to such an extent it ultimately “made levelling up harder than it might have otherwise had been.”

“I think the evidence is pretty clear. There has been a headwind to our economy generally, and therefore to a degree [Brexit] got in the way of us levelling up,” he said.

"We know that trade with the EU has taken a big hit," Haldane said

Haldane is also critical of the way levelling up funding has been administered, describing the process as a “bureaucratic headache”.

He calls for a “fundamental rethink and refit of how we go about funding local areas”, including allowing decisions about the allocation of funds to be determined at the local level and increasing access to private sector capital.

The man who describes himself as a “critical friend” to the government remains optimistic that things can be turned around by 2030.

It may be challenging, he tells me, but with significant “political will”, a “big shift in policies and practices” and a “dose of public monies”, it is feasible, he argues.

Levelling up is multi-faceted and closing deep-rooted geographic inequalities around the country won’t be cheap.

The problem is that whichever party comes into power after July 4, they will find the government hemmed in financially.

Both Labour and the Conservatives have pledged to grow the economy.

Levelling up features heavily in the Tory manifesto and although the phrase is not really mentioned in Labour’s manifesto, Haldane believes Labour will also take it seriously.

They “may not have used the words 'levelling up', but it’s very clear from what the leadership have said, this is at the core of Labour’s mission,” he believes.

“Whoever comes to power will need a greater boldness than is currently written in manifestos, but manifestos do not define all that government does. I’m confident that greater boldness might occur in office, that a new government will rise to the challenge of levelling up,” Haldane hopes.

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One of the challenges is that ‘public investment’ - the money the state spends on the creation of long-term assets, such as roads, railways, bridges, schools and hospitals - is set to be cut in real terms in the next parliament.

Many economists think this is a mistake, and Haldane is one of them.

Falling public investment is “not consistent on growing our economy, or on making good on levelling up”, Haldane said. “We will not grow unless we rethink the profile for public investment” in a “pretty radical” way, he adds.

For Haldane, the answer is clear: we need to borrow more.

“The way you pay down debt is not through austerity. Where you pay down that debt is by growing your economy, and that requires investment.” Trimming investment to reduce debt only serves to “make a bad situation worse”, Haldane said, adding “that deepens the debt hole".

NIESR argues that public investment needs to consistently be held above 4 to 5% of GDP, which would require up to £50 billion of extra borrowing a year.

Haldane agrees and insists there is room to borrow.

The problem is that both Labour and the Tories have signed up to a ‘fiscal rule’ which commits to having national debt falling as a share of national income over a five-year period.

Haldane insists there is room for manoeuvre as the markets are "smart"

According to the manifestos, public investment would fall to 2% of GDP under another Tory government and to 2.5% of GDP if Labour wins.

Andy Haldane said the fiscal rules are “self-defeating” and should be abandoned.

They “need to be at best tweaked, at worst junked for something more sensible that enables the investment that catalyses that growth because ultimately that is the route to paying down debt,” he said.

Debt is already at a near 70-year high and 14 successive hikes to interest rates mean the cost of borrowing is much higher than it was a few years ago.

How much debt is too much? There is no agreed level but Liz Truss’s government showed what happens when markets take fright.

Haldane insists there is room for manoeuvre. “The markets are smart,” he insists, “it all depends upon what you are borrowing for.”

“If you're borrowing to pour money into the river, that is money wasted, and they will penalise you on financial markets if you do that. If, however, you're borrowing to build a bridge over that river, that's a fundamentally different proposition. You're creating an asset that will yield positive returns to our country over the long term,” said Haldane.

He believes the party manifestos contain sensible ideas but are not ambitious enough. As it stands, they are unlikely to revive economic growth and raise living standards in the way politicians are promising.

“Whoever comes to power has an obligation politically, economically, morally to do what's right for many, many millions of people across our country,” Haldane said.

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