How to Prepare for a ‘New Normal’

Creon Butler

Welcome everybody. My name is Creon Butler. I’m the Director of the Global Economy and Finance Programme at Chatham House, and I’m very pleased to welcome all our members to today’s discussion on ow to prepare for the post-pandemic ‘new normal’. We have a brilliant panel today and I think it’s a very topical time to look at this question. But before I introduce them, perhaps I could hand over to our Chairman, Jim O’Neill, for some words of introduction.

Lord Jim O’Neill

Thank you, Creon. Good afternoon, good evening for those over in the Americas, if there are any of you, and – sorry, from Asia, and good morning if you’re in the States. Welcome to this really important panel. I’ve been very excited about us hosting this event with three very thoughtful thinkers about big stuff, and my goodness me, do we need some big stuff. I’d just like to be very brief in welcoming you all to benefit from the wisdom of their minds, but also, hopefully, if we manage it well, to have time to quiz our guests. And I only have two introductory comments to say, partly to set the scene and to provoke Creon in handling our three experts.

But first of all, as some of you will know, maybe not many, but the past few years, amongst other things I’ve done, is become heavily involved in the world of antimicrobial resistance, which is relative to what we’ve gone through, more of a slow burning health challenge. But our review became known well for pointing out that, kind of, colossal consequences could happen if we don’t deal with it. And a lot of people thought we were, sort of, being a bit fanciful, but this pandemic has certainly brought home what can happen if handled badly. And in that regard, based on a few things I observed myself and things I get dragged into, including a couple of interesting commissions, it does seem to me that this pandemic has forced policymakers to start to think how we might build, truly Build Back Better, in terms of shifting some aspects of our economy and society away from what could be called just in time management, to one of much more preparedness for future crises, whether that be climate change, or indeed, health crises, or many other.

And then the second thing that links directly to it, obviously, also having gone through best part of 40 years in finance and lived through all sorts of financial crises, one of the very strongest things that I ever learnt is, we do get the other side of these things, even though often it doesn’t feel like it and – but we do, I’m living proof of that. And what is very important is that a crisis should never be wasted and never let a crisis go to waste. And I do find myself, at least, flirting with the idea that the huge, certainly Western challenge since the last huge crisis of 2008, of persistently weak productivity, might actually get tackled more seriously as a consequence of this one, oddly. But I’m sure our own colleague, Creon, has some interesting thoughts on that himself, but his job here is to draw it out of our guests, so, I will shut up and leave it to Creon and our guests. So, thank you very much for all attending.

Creon Butler

Jim, thanks very much. Yeah, it’s a really important question and I think we’re going to have a number of different views on that. I think, more broadly, this is a good time to be asking – having this debate, not least because with the news on vaccines, we have at least got some reduction in the level of uncertainty that we face. In the advanced countries, we can now see a process where new vaccines are rolled out and at least within, let’s say, nine to 12 months, you can see a process under which the need for very disruptive social distancing will come to an end. At least that’s, if you like, the consensus view at the moment. But clearly, the uncertainties, the broader uncertainties will be enormous and it’s not just, if you like, the pace of rollout in developing countries, where there – the uncertainty about quite how far we will reach the whole world is – remains very great, but you’ve also got how much scarring we will have in both the advanced and the developed world. And the leaders will discuss, you know, the precise nature of this “new normal” that you’ve referred to and, you know, all of these are tremendous uncertainties.

But thirdly, in a sense, we have to start making decisions now, we can’t wait. We’ve got to start making decisions about, firstly, how long to keep the exceptional monetary and fiscal stimulus in place, what kind of direct support to give to companies, when we don’t know, in many cases, whether they’re companies that are going to survive or not survive. And so, you know, even though we would love to have more information, we’ve got to start making these decisions now. And that’s why I think having the panel we have at this point is, for me, something I’ve been looking forward to for a number of weeks.

And we have our three panellists: Lord David Sainsbury, who was Chairman of Sainsbury’s from 1992 to 98, Minister of Science and Innovation from 1998 to 2006. He is currently the Chair of the Institute for Government and recently published a book, which I’m sure a number of our members have read: “Windows of Opportunity: How Nations Create Wealth.” Tera Allas is Director of Research and Economics in McKinsey’s United Kingdom and Ireland Office. She currently leads McKinsey’s research on productivity, technology adoption and government effectiveness, all highly relevant topics at the present time. And she’s Trustee, both at the Royal Economic Society and the National Institute of Economic and Social Research. And David Miles, Professor of Financial Economics at Imperial College Business School. David and I once both worked in the Bank of England, many years ago. He then went on to be a member of the Monetary Policy Committee from 2009 to 2015, and his current research interests include policy on financial stability, the housing market and setting up monetary policy.

Each panellist is going to make introductory remarks for three to five minutes and then we will move to a conversation and then to Q&A. So, if everybody could start thinking about how they’re going to put their questions. A few housekeeping points, the session is on the record, it is being recorded and I believe will be available afterwards. If any members of the audience want to tweet, then they can use the #CHEvents. And as I say, if you want to put a question, please use the ‘Q&A’ function and don’t wait until we get to that point. If you have a question on your mind now, please put it there. And then, when we get to the final stage, either I will actually ask you to pose your question directly, or if we’re short of time, then I may gather and read out some of the questions. So, there we are, Lord Sainsbury, over to you.

Lord David Sainsbury

Thank you very much indeed. I think when one is in the midst of a pandemic, everyone hopes, of course, that when it ends, the economy will bounce back and start growing again. But I fear that in the UK we’ll be lucky if, over the next five years, we see any growth over the level we had at the beginning of the pandemic. The Economist view, which it expressed last week that “This year’s darkness may, in fact, mean that the dawn is just over the horizon,” seems, to me, to be a pure fantasy.

There are a number of reasons why I take this view. Firstly, in the period between 2010 and 2019 we had a very poor record of growth, with the analysed rate of growth of output per hour averaging just 0.4%. And we’re not unique in this, all G7 countries saw declining rates of growth over this period. If we then analyse the performance of the different sectors of our economy over the same period, we find that the main reason for our slow rate of growth was foreign competition, which resulted in the high value-added per capita sectors of our economy, today, being a smaller share of the economy than in 2000. And what we did, to keep unemployment down, is create enormous numbers of low value-added service jobs. There’s also the particular problem in the oil and gas sector, which saw a disastrous fall in its GVA contribution to the economy, due to both lower prices and a lower level of production. And I think that GVA contribution of the oil and gas sector is likely to get worse, rather than better, as it gets more difficult to get oil out of the North Sea. And, of course, Brexit is going to make this all much more difficult.

I think it follows from this analysis that the only way we can grow the productivity of the economy is by increasing the innovation and competitive advantage of our high value-added per capita sectors, in the face of fierce competition from countries, such as Germany and Switzerland in Europe, and countries like South Korea, Taiwan and China in the East. I’m not saying we can’t grow our economy in the years ahead, but we’ll need to make it a main priority of the country and bring forward new policies in four key areas. They are, I think, technical education, R&D and innovation, corporate governance and regional levelling up.

Now, in the case of technical education, there is, actually – the government has a major programme of reform. We are at the start of that, and that is simply we’re go – need to push that agenda forward as quickly as possible. But in the other areas, other new policies, I think, will be required. This is particularly the case with the regional levelling up. Now, there are, as everyone knows, substantial regional differences in wealth in the UK, but I think as the work of the Centre for Cities has shown, this is – this divide is not simply due to geography, it’s not due to workers in the North working less hard in the South or being less efficient. It’s due, on the contrary, to the ability of cities in different parts of the country to respond to economic change and reinvent themselves. The levelling up of the poorer regions of the country will, therefore, I believe, require the government to take some major steps to devolve more powers in the area of skills and transport to the mayoral combined authority, and also increase and improve the Strength in Places Fund, so that it can support the growth of more high value-added clusters and jobs in the low-income regions of the country.

None of these things are impossible, but I have to say, at the moment, I don’t see the government or anyone else realising the seriousness of the situation or preparing to take the necessary action.

Creon Butler

Thank you very much.

Lord David Sainsbury

I hope that gives you a truly optimistic and…

Creon Butler

No.

Lord David Sainsbury

…cheerful to start to this seminar.

Creon Butler

I think it’s a very realistic way to start. It obviously immediately raises some of the question Jim was flagging as to, you know, whether because of COVID, some of those political changes you were talking about, you know, decentralisations, may actually be accelerated, not least because that may be necessary as part of the next stage in handling the pandemic. But we’ll come back to that later on, thank you very much for those comments. Tera, perhaps I could come to you next.

Tera Allas CBE

Thank you very much, and I think what I’m going to say is quite different, but hopefully complementary, to what Lord Sainsbury has just outlined, which is all true and all important, as we think about the future for our economy. But the main point I want to start with is just by reminding us that COVID is not the only shock that the economy is facing. And, in fact, the other shocks, especially Brexit, but also some of the megatrends that have been going on in the world, maybe they’re not shocks, but they’re, nevertheless, big forces, are probably going to have bigger structural implications for the UK economy than COVID on its own. And so, when we think about the future, we, kind of, need to put all of those things together and understand what’s happening.

So, on Brexit, for example, it’s really critical to remind ourselves that more than 50% of all of our exports to Europe are actually in services, so deal or no deal, there will be a very significant reduction in our access to the single market there and that will inevitably have consequences for the shape of the UK economy. And one of the big megatrends, which, of course, COVID may have slightly accelerated around automation, means that in about ten years’ time we’re going to see a 20% increase in jobs that are very highly skilled and a 20% reduction in manual, routine, low skilled jobs. And our current system of labour market and skill provision is not really up for that, sort of, huge shift in magnitude.

The common, sort of, theme across all of the different forces: Brexit, COVID, or automation or any other mega trends, is that they affect different sectors very differentially and within sectors, they affects very different businesses differentially. So, there will actually be quite a lot of winners, as well as losers, from all of this and, of course, within each business they affect different workers very differently. And, you know, there are forces pulling in two different directions, on one hand, and it has actually been a bit of a surprise to me, so far, COVID has, in fact, probably more – been more of a levelling down than something that makes the levelling up agenda worse, because London has been particularly hard hit. And this is potentially true for Brexit as well, even though a lot of people say, and I believe this probably is true, that a lot of the effects on professional services and financial services may already have taken place.

But overall, what is – seems to be happening with all of these forces is that they are very skills biased. So, COVID has, essentially, displaced, or at least partially, made uneconomical and unfeasible certain jobs that are very low skilled, in hospitality and in retail. Brexit will inevitably hit some routine and more manual jobs in manufacturing and automation, as I’ve already mentioned, is eventually going to take over a lot of other kinds of, kind of, white collar, but not very highly demanding jobs. And this is a huge concern, because while I appreciate that the government does have a policy and a strategy for technical skills, we do not have a strategy for the 80% of the workforce that is in the workforce still in 2080, the people who are no longer, in any way, going to participate in education. And let’s remind ourselves that a third of those people have a degree, the other two thirds do not, and a very significant proportion do not get any kind of skills training and yet, we need nine out of ten people to reskill by 2030, if we want to keep up productivity. And really, the issue here is one of polarisation.

Working from home has demonstrated that it’s perfectly feasible for people like us, however, 60% of the population cannot work from home, because their job involves actual physical proximity with the customer or the service recipient. So, this polarisation, if we’re to address it on top of growth and productivity, needs to be an explicit part of any sort of industrial strategy. And so, that brings me to my final point. I do think that the government needs to recast its industrial strategy to take into account all of these different changes and not least, also, the Zero Carbon agenda, really think carefully about new arenas, especially around skills. And why do I say this? Because the old recipe, good as it is for certain things, like R&D, infrastructure, education, is really, primarily, going to benefit the people who are already better off and it’s going to benefit men, rather than women. And I think we need an industrial strategy that’s a bit more strategic than that.

And, of course, final point to make about that, it’s not enough to have the strategy, implementation is critical. And there we’re going to need different kind of approaches, which create systemic change and create it over a sustained period of time and create it at scale. Because, quite frankly, anything that doesn’t help at least a million people is really a distraction, rather than a good part of an industrial strategy.

Creon Butler

Tera, thank you very much. I mean, I think you hit the nail on the head in the sense that what you’ve described is, in some ways, a lot more difficult than building HS2 and, indeed, that, you know, that, in some ways, may be why, you know, we’ve grappled with it so many times. But we might come back to that, as well. David, over to you.

Professor David Miles

Thank you, Creon. I’m going to try and be brief and try to be less pessimistic than I might – my natural inclination at the moment is to be pessimistic. But I will try not to sound like Eeyore the donkey, for too long, anyway.

So, the question, the exam question you set me when we spoke a short while ago, was to think about how we might emerge from the pandemic. And I suppose the most optimistic thought is we will emerge and there is what looks like a vaccine, in fact several different vaccines, that all look reasonably effective and that wasn’t obvious a few months ago. So, I think that’s, actually, a massive reason to be optimistic. The bad news, of course, is that when we do emerge, who knows when, fully, maybe by the middle of next year, maybe a little bit longer than that, it will be with rather a lot of damage and I have a fear that that damage will have very long-lasting effects. Damage in the sense that unemployment, in many countries, has been – well, in many countries, has already gone up a lot. In the UK it hasn’t gone up that much, actually, but I suspect it will, rather more, over the next several months. It’s not quite clear how many companies are, kind of, on the verge of insolvency. I have a fear there are a lot of smaller and medium-sized companies that are on the verge of it and may, actually, not reopen. Who knows quite how many that will be at the moment? But unemployment and insolvencies, historically, have quite long-lasting effects on econ – and you don’t bounce back quickly from that kind of thing.

And then – and I’m now beginning to sound like Eeyore the donkey. I think there are – we’re all aware, I think, that there are some, sort of, long-lasting non-COVID medical impacts of COVID, which may stretch quite far into the future, some of which are to do with mental health. On the plus side, there isn’t a whole lot of pluses to outweigh those rather weighty negatives. I mean, one is, and Tera mentioned it a moment ago, is that, you know, we’ve learnt something, at least, about how easy it is for some of us to work from home, so, more flexible work practices, that’s not nothing. And I might say something very briefly about that, just to cheer myself up, in a minute.

I think another plus is that if you had wanted to pick a time when there should be enormous stress upon the fiscal position of governments, this isn’t a bad time for it to have happened, in the sense that interest rates, certainly real interest rates, are at extraordinarily low levels. I still have to pinch myself sometimes when you just look at how low the cost of borrowing, long-term borrowing is for the UK Government. The UK Government, as I think most of us are aware, can borrow, in real terms, issuing index-linked gilts, and sort of, locking in at a low real interest rate, for ten/20/30 years at -2%, -2½%, on some gilts they’re paying minus – almost -3%, I mean, that’s extraordinary. If you borrow at -2½% real and lock in and just wait 20 years, I mean, 40% of the debt’s gone and it’s guaranteed that it’s gone. And that’s been extraordinarily helpful, of course, because what it has meant is that although the stock of debt to GDP in many countries, certainly in the UK, has risen very greatly already, over the last nine months or so, debt servicing costs have not gone up. And if we were to remain in a world in which governments can borrow at -2% or so, even if growth was fairly anaemic going forward and was only, let’s say, 1% over the medium-term, into the future, but you had a -2% real interest rate, the simple arithmetic would say that could run a primary deficit of 3%, maybe even a bit more than 3% of GDP, and stabilise the debt to GDP ratio. And that would mean, for example, that the UK Government could run a primary deficit of £60/70 billion a year indefinitely, and that’s sustainable and it’s fine.

Of course, it’s sustainable, now here’s Eeyore the donkey, it’s sustainable as long as it’s sustainable and then, maybe, there’s a shock and real interest rates go up and the UK Government can’t borrow at -2½% real. And, of course, it isn’t a free lunch, anyway, because there are the other people on the other side of that who’ve bought those index-linked gilts and are putting up with 40% of their real value being wiped out if they hold them for 20 years. And there’s plenty of pension funds, and I happen to be involved in one, as an academic, the University Superannuation Scheme, which had a whopping great deficit going into this mess and have got an even bigger than whopping great deficit as we emerge from it. So, even the low interest rate story is not an ambiguous good, but I think, on balance, it’s been really rather helpful in allowing governments to feel that they could let the deficits rise very sharply to cushion many of us from the blow of the pandemic.

Let me offer just two brief final thoughts. One is coming back to the issue about will work and business practices be significantly changed? I think, to some extent, they will. It’s not obvious that that’s a way – that they will be changed in a way that will be good for productivity. I suspect that people working from home, those that can, will, at best, have no higher productivity working, you know, two days a week from at home and three days in the office than if they’d gone back to the situation they were in before. So, I can’t see that boost in productivity.

However, there is a distinction between productivity and what you might call welfare and life satisfaction and welfare and life satisfaction is far more than product – far more important, in fact, than productivity. So, it may be that even though these flexible work practices don’t boost productivity and might even diminish it somewhat, they may, nonetheless, for those who were lucky enough to take advantage of them, generate a substantial increase in life satisfaction.

They may also generate changes in land and house prices, as people realise that there’s no necessity to be quite as close to the most expensive bits of real estate and where house prices are expensive and where they used to think they needed to be to work. And that may be, you know, somewhat beneficial to younger people, who probably do want to live near the centre and may have less opportunity to work from a distance. And so, we may see something that absolutely has not happened in the UK yet, surprisingly, which is some change in land and house prices, falling in expensive areas, possibly quite significantly, as people reallocate activity and where they want to spend their time, hopefully to the benefit of young people, who otherwise have taken much of the brunt of the pandemic so far.

Just one final observation if I can, and I’ll try not to rant too much about this, but I do feel that in this country, maybe not so much in other countries, but in the UK, we did make a mistake in the government thinking that it could rely, almost exclusively in the early months of the pandemic, on scientific advice from Epidemiologists, who are very learned people and have done a very good job in analysing the potential spread of the virus and what you might do about it, but never thought it was their job to think about the wider economic, social and non-COVID medical costs of measures to try and control the epidemic. And so, we’ve found ourselves in a situation where nearly all the expert advice going to government, certainly for a long period, starting in March, but still not ended, I think, the advice has been somewhat lopsided, in the sense that it has been focused very much on what do you have to do to control the spread of the virus and control deaths from COVID? But not been thinking about the wider costs, many of which are medical and to do with future medical costs, not thinking so much about the cost. So, I hope that we will put in place, before the next pandemic or other health crisis comes along, a way of combining medical, scientific, expert advice, if you like, narrowly on the medical problem, with consideration of the costs, or various measures to try and control it, which I do not think has been well done this time round. Thanks.

Creon Butler

David, thanks very much. I mean, just on your last point, I think, you know, there’s a job for policymakers, I think there’s also a job for our academics. You need a new, if you like, combined theory of, you know, how you do economics and health together, or economics and climate, which is something already, but we might come back to that.

So, well, thank you very much for those introductory comments. I would just like to encourage everybody now to start putting their questions forward, through the ‘Q&A’ box and then we’ll pick them up shortly. But what I would like to do, actually, Lord Sainsbury, is come back to you, first of all, and particularly on the question of innovation, having been Science Minister to the UK over quite a lengthy period. I mean, one of the striking things about the pandemic is when you look at the performance of the pharmaceutical sector and research on developing new vaccines, you have a situation where, in this extraordinary environment, you’ve – we have crunched ten years of development into one year, and seemingly so. And the question I have is, doesn’t that tell us something about how you should do innovation, more generally, which has broader applicability and may be relevant to the way we should be doing innovation in the future? Or I’m – or I – or is it just that this was, sort of, sitting there ready to happen and it will only ever happen when you have an emergency of the scale that we’ve had? Perhaps I could put that to you.

Lord David Sainsbury

Well, I – and let me say, first of all, I think we have a major problem on innovation in British industry at the moment. And the reason we are losing competitive advantage in world markets is that lots of other countries, particularly the South Koreas, the Taiwans, the Chinas, are now innovating very fast and we’re not keeping ahead of them. So, we’re losing competitive advantage and if you look at the statistics, worldwide statistics, on, you know, which are the 50 top innovative companies in the world, you’ll find that Britain almost certainly has no-one in that category. So, I mean, I think we have a big problem on this.

Is there something we can learn from the pan – the response to the pandemic? Probably there is something, but it’s not very much. And the reason I say that is because the actual way you deal with this particular problem is, kind of, well-known and well-established, the only problem is to develop the drug, which specifically deals with that virus. So, it’s not like finding a drug to deal with a new illness, it is, in a way, a pretty, kind of, structured process. That’s not to say that it hasn’t been done absolutely brilliantly, but I’m not certain you can do any particular lessons from this. And we’ve got to find ways in which our companies can be a lot more innovative, because we have a real problem in a number – many sectors, actually, where we’re falling behind technologically.

Creon Butler

I mean, on that, more generally, I mean, the – we’ve known about the UK productivity problem for a long time and as, I mean, I think Jim was saying at the start, you know, what could be different this time round? I mean, you’ve laid out, I think very clearly, the challenge, but what is it that could make a difference, either because of the context in which we’re doing, or something else that would mean that this time round we do tackle it in a way? Because I don’t think any of the things that you’re proposing are, you know, radically different to things that you’ve said before or others have said before, in a sense, it’s just now is the time, urgent time to do it.

Lord David Sainsbury

Well, I think there is one very big difference to what I’m saying and what most other Economists are saying, which I think I’m, basically, saying when Economists talk about productivity, I think that many of them, and certainly many other people hearing them, think that what we’re talking about is production efficiency. And, of course, productivity, which the Economists are talking about, is not production efficiency, it’s value added per capita. And that is important, because the value added per capita, which companies earn, is affected by competition and I think we’ve got to understand that the problem of productivity is one of competition and we’re up against very fierce competition from the developing world, who are innovating very fast. And we’ve got to stop just thinking it’s about production efficiency, it’s also about competitive advantage. And we’ve got to get – make certain that British companies really understand this point and really have proper plans and strategies for increasing the innovation and competitive advantage of their businesses. So, I think if we can get that message across, then we can start really trying to push up our productivity, in that sense.

Creon Butler

Thank you very much. Tera, if I could come to you next, really, which is around your – the thing you focused on, in terms of the importance of skills, the fact it’s very difficult and, yes, in a way, when you look at various OECD studies, and so on, it’s not, kind of, rocket science. I think there are ways in which, certainly in terms of the quality of education in schools and so on, people have been doing this again and again and again, and one could see, you know, in certain systems, like Canada, Finland, Singapore and so on. So, my question is, is there – is this really about things that we know we need to do and doing them right and consistently, and in a way, sort of, taking the politics out of that process, or are you saying that because of COVID, because of the changes, there is something, else which is totally different in the way that we need to approach this question of helping the bulk of our population acquire the kind of skills that are going to be necessary?

Tera Allas CBE

So, I think that problem has, for a very long time, been misdiagnosed. It is not about education. We can fix education and get better at it, but quite frankly, only a couple of million people who are currently in – still in education, are going to be in the workforce by 2030. We need the other 35 million people who are already there, to actually get better at skills and we don’t have any solutions for that here in the UK. There are countries that have some solutions, who are starting to grapple with those solutions, but quite frankly, most countries have, historically, failed to re-educate the people who’ve lost their jobs because of technological advances. It’s been talked about, but not implemented. I think that there are two, sort of, strong things that Singapore, for example, does, which I think we can learn from, but it’s, obviously, not necessarily 100% comparable to the UK. The first one is giving employers much more of an incentive and an obligation to retrain people.

Our analysis suggests that employers would actually benefit themselves if they looked at their workforce much more as an asset to be built and cultivated and had less of a fire and hire attitude and much more of an attitude of looking at what are the potential of these people? And if we invest them in a little bit, we actually get an enormous return for investment. Our estimate is 75% of all reskilling and upskilling that needs to be done in the UK should have a positive return for the shareholders of the businesses that already employ these people. So, you know, there needs to be some kind of a shift in mindset here, from a hire and fire, to how do we actually build the existing asset that is people and human capital in businesses, as well?

But there are clearly also some big market failures here. And in some countries, such as Germany, or in Denmark, the government does take a much more active role in reskilling people who’ve been displaced from the labour market, not just sending them on courses to do interview training, but actually genuinely looking to employers in those regions to say, “Well, where are the jobs of the future going to be? What hands-on, very job related, very, kind of, action learning oriented, training does this person need to secure a job and then to hold onto it?” We all know that adults learn very differently from children and so, that’s incredibly important to take into account in all of that. So, I think there are misconceptions here about the magnitude of the problem, because people keep going back to education as the solution, but that will only help the 20% of people and not the 80% that we need helped. And, you know, both government and employers have a role to play.

If I can, very briefly, comment on something that Professor Miles brought up, super-important, about how do we think about these trade-offs between lives – livelihoods and life satisfaction? It’s not the case that we don’t have a framework, we absolutely have one. In fact, we have the green book that already lays out exactly how to do these trade-offs, we just don’t implement it. It has a carbon price, it has a price for people’s wellbeing, it has a price for mental health, it has all these prices in it, it’s just that, you know, it hasn’t happened to have been the particular toolkit that was used in this particular crisis. And it’s fascinating that I listened in to a seminar where eminent Professors and others were talking about how these trade-offs were made, and it was pretty clear from that conversation that the objective function the government had was not to maximise welfare of UK citizens. It was to minimise the damage to the NHS, and so, that’s fair enough, if that is your objective function, then, you go about, you know, setting your strategy in one way. If you think about how to maximise welfare for all citizens in the UK, then you might think slightly differently.

Creon Butler

Thanks. I mean, of course, you’re absolutely right about the green book. I mean – but I think the problem is, as soon as you start taking those prices of life, put them out in the public domain, you know, it becomes very – a very controversial area to be in, even though, ultimately, as you say, there is a price of life in all government policy.

David, you may want to come back on that, but I want to – I just couldn’t resist your – just going back to your point about index-linked debt, in particular. I mean, as you know, I’m quite a fan of index-linked debt, have been for years. But if we could do this, why do we not – you know, only 20% or so of our issuance now is index-linked. Why aren’t we going massively into index-linked debt now, in order to have this situation where we can reduce the real value by, you know, relative to GDP, 40% or so over those 30-year periods, I mean – and then, we wouldn’t be having to worry about wealth taxes and things of that kind?

Professor David Miles

Very good question and I have not understood, for many years, why the UK Government, or the – and the Debt Management Office arm of the UK Government, thinks that it should stick to what I think are relatively rigid rules that have been in place for a long time. Well, we must issue so much conventional debt and we must issue some of it at three years to five years, and then five to seven, and then, you know, some relatively small fraction should be in index-linked debt, and not all of that’s at the long-term, either. No, I think there’s a very strong argument to saying that if you can – if somebody’s willing to buy your debt at a real interest rate of -2½% and lock in at that for 30 years, you should bite their hand off. And why would you issue anything else? I know this – the – when I’ve put this argument to people at the Debt Management Office, who are very thoughtful people, they, kind of, you know, look at me as if I’m this small child that’s said something very silly.

Creon Butler

I mean, it seems to me that everybody’s scared to do something so radical, unless everybody does it at one go. So, you know, this – there is this, sort of, element of – anyway, we’re – there is a question there.

Professor David Miles

There is.

Creon Butler

We’re now at the point we could perhaps go to some questions from the audience, but Jim, I just wanted to come with one question to you, which is something we’ve talked about from time-to-time, which is about the possibility of a very strong bounce back this summer because of pent up demand, savings, and the fact that, you know, while some industries may well have been fundamentally transformed, clearly, some industries are just waiting until the need for social distancing disappears and there’s really nothing fundamentally wrong with them. So, I just wonder if you could give your view as to the likelihood of that and, in particular, you know, what the inflation risk might be, attached to it, which would, you know, go to the point David and I have just been discussing?

Lord Jim O’Neill

Hmmm hmm. So, you know, well, first of all, as many people know, I’m somewhat removed from the day-to-day and week-to-week of this, in the way that dominated over 30 years of my life. But maybe that gives perspective, too. But from what I – listen, from what I can see and linked to one other thing I made a note of, where if we had more time, I’d encourage further discussion, is I think the speed of this vaccine rec – success might herald something that is more permanent than people give credit for. And I – you know, I’m somebody that did believe early on, because of my own adult relationship, let’s call it, with that health world, I, kind of, was very persuaded early on that these guys were going to get it right. And I think it might actually result in some big permanent lessons about vaccine discovery, and so – and it might have relevance for climate change, as well. If you put proper intent with money and allow proper focus on it, it’s quite amazing what simple things can achieve.

But, to your question, linked to that, I remain of the view, especially because of this huge rise in the household savings rates, in very peculiar places that don’t like to save, including the UK, that we’re going to have a big bounce back next year. And so, some of these structural issues will get, again, massaged by what’s going on with the cycle. I – the, kind of, inherent pessimism of everybody that’s talked here, I share much of what they say, but it’s going to be camouflaged, I suspect, next year, and there will be other issues that come up with it. Including, you know, this, sort of, weird state of affairs where we all just – because it’s never happened, we all just believe inflation will never happen. And I’m not – you know, I, personally, would be alert to some of the things that worry me, that, you know, I’m, kind of, in that camp, too, but I think it’s not right to just completely dismiss it.

Creon Butler

Thank you very much. Okay, well, we have a number of our questions from our audience and, in most cases, I think they want me to read the questions. So, maybe I could start with one from Rob May, which is, “Does our return to a national industrial strategy hasten the decline of neoliberal globalisation, and if so, will withdrawing from economic interdependence between countries weaken the systems and institutions of global governance required for mitigating the effects of COVID-19 and climate change?” So, I think this is a really fundamental choice, in a sense that quite a number of things that we’ve been talking about might only happen by having, you know, if you like, national p0licies, rather than global policies, or – you know, that’s a question. But perhaps, Tera, I can ask you to have a go at that one first, and then we’ll see if others have got views, as well, thank you.

Tera Allas CBE

Of course. I am, of course, not a Politician and, in theory, not supposed to have policy opinions either. But having worked in government for ten years, inevitably, I do. I don’t think that domestic and international are, in any ways, opposites or mutually exclusive. So, maybe of the things that, ah, yes, Lord Sainsbury and I was referring to, are both to fuse the UK’s domestic industries and productivity, so that we need less resource to produce the basic services we all require domestically, but also, to improve the UK’s competitiveness globally. And even though there may be short-term, you know, political, geopolitical, but also, kind of, practical reasons why there’s a bit of distance between the UK and other countries, I, fundamentally, still believe that the way that we are going to be all benefitting is by collaborating with other nations. A lot of that collaboration takes place completely under the surface, within firms themselves, with their suppliers, with their customers, where government intervention doesn’t need to come into play and that’s probably a good thing.

On an international front, of course, you know, to solve the world’s problems, it will be critical to continue to try our best to collaborate with other nations and, indeed, to encourage every nation to collaborate on things like climate change and, indeed, you know, pandemics and whatever. So, I don’t see those two, at all, in contrast with each other. I hope that the politics and the rhetoric doesn’t cause us to think of them as two separate things.

Creon Butler

Thank you. Would anybody…

Lord David Sainsbury

Can I?

Creon Butler

…else like to come in?

Lord David Sainsbury

Can I come in on that?

Creon Butler

Please do, yeah.

Lord David Sainsbury

I mean, I think one of the problems we have at the moment is that Economists are terrified of saying that our low productivity is related to our competitors of world markets, though, absolutely demonstrably, it is. And the reason for that is they fear that this will mean we become protectionist and we drop free trade, and we start having tariff barriers. I think that this is a huge mistake. I think we need to face up to the fact that our low productivity growth is, indeed, a result of competitive forces and other countries doing better. But absolutely the wrong strategy is to then try and pull out of world markets and start having tariff barriers, ‘cause we know that that, in the end, reduces everyone’s productivity and value added. So, what we have to do is find ways of increasing our competitive advantage and if we do that, we can go on competing with developing world and their lower wages. But it’s, as I’ve said before, “It’s a race to the top, it’s not a race to the bottom.” It’s we’ve got to go into the more difficult areas, the areas where science and innovation are even more important and compete on those grounds and if it’s – we see it as a race to the top, we can come out on top, without having to have tariff barriers. But tariff barriers is absolutely the wrong way to go.

Creon Butler

Thank you. David, would – did you want to add anything there, or shall we…?

Professor David Miles

Well, I was, and sorry, I know Lord Sainsbury and O’Neill know much about this than I do, and Tera does as well. So, I wasn’t sure what the premise of the question was. I mean, was it that there is going to be a return to something called a national industrial strategy? I wasn’t clear that that…

Creon Butler

I think the presumption was that to do some of the things, I mean, this may not be correct, and I think what Tera and Lord Sainsbury are saying, you know, is not necessarily correct, but to do the things we want to do, we may have to give up some of the global frameworks that we have, where we have, sort of, pan-international arrangements for flows of investment and so on. So that, you know, there’s a trade-off, if you like, by doing the things that we want to do and maintaining the world that we’ve established, you know, up until the middle of this decade.

Professor David Miles

I must say, my instinct when I hear the phrase ‘national industrial strategy’, my heart sinks, to be honest with you.

Creon Butler

Yeah.

Professor David Miles

Harold Wilson and white-hot heated technology and…

Tera Allas CBE

Can I just mention…

Creon Butler

…comport…

Tera Allas CBE

…one other point that the OECD has done quite a lot of work on this global value chains and participation in global value chains, which is the opposite of retreating into an island of the UK, just alone, is actually critical for productivity, innovation, competition, all of the things. So, in fact, the correlation goes in that direction, the more you compete and the more open your borders are, the more your businesses are then forced to actually do exactly that, sort of, moving up the value chain and creating GVA per person that Lord Sainsbury is talking about. So, yes, I think all of our hearts sink when we hear about product – you know, protectionism.

Lord Jim O’Neill

Creon, I’ll just…

Lord David Sainsbury

Also, can I just make a distinction? There is a real distinction between national industrial policies, which are some kind of planning activity and where government says the money should go here or goes there. That’s quite different from what I would talk about, which is what I’d describe as enabling policies, and that is policies to support R&D in particular places, to support new training and skills, and, indeed, in my view, do something about corporate governance and remuneration of Executives, which I think are all important issues. But they’re not about the old-fashioned idea of industrial strategy, which is government says, “We’re going to plan the economy and tell Industrialists what to do,” ‘cause that never succeeds.

Creon Butler

Jim?

Lord Jim O’Neill

Creon, I’ll just throw in some 20 seconds. I love what David just said there and it’s a strong part of my own views, as you know. But rightly or wrongly, my own personal impression ‘cause of my own involvement in all the levelling up and Northern Powerhouse stuff, is this government is going to make another, hopefully slightly more serious attempt, on some kind of industrial strategy in the New Year. And I do think they like the politics of the aspect that that question is drawing out of people, if not having thought at all as thoughtfully as they should about the realities of the dilemma.

Creon Butler

Yeah, thank you. I’d like to now move to another question, which I think connects quite well with this, from Michael Pugh, which is around infrastructure and I mean, his question is, “Well, isn’t this a great time to do infrastructure?” And obviously, David’s said to that the incredibly low cost of finance over a very long period of time, and this is a big part of much of what the government’s been talking about. But I think there is a fundamental question of, well, yes, but what type of infrastructure should you prioritise and where should you prioritise it?” I mean, do you go – do you put it in those parts of the country where, actually, the return is highest, or in those part of the world – the country where, in some ways, the need is greatest? So, it would be good if I – if we could get each of your views on that infrastructure question and maybe I could start with David. Given that this is one of the things we could be doing, in response to COVID-19 and because of the financing, and it’s a brilliant time to do it, how should we do it?

Professor David Miles

Well, it’s a good – in some ways, it is a good time. It’s very cheap to borrow, as we’ve noted several times already, and I can see that part of the question is asking about housing and social housing. I think there’s one reason for being a little bit cautious about an enormous expansion in house building, particularly it’s – well, whether it’s social housing or private housing at the moment, and that’s because I think there’s going to be a great deal of uncertainty about quite what the longer-lasting impacts of COVID might be on where people want to be, where companies want to locate work, how feasible is it for people to live in places that they didn’t used to think consistent with working where their job was? And there’s a slight risk that you could, if the government, sort of, hurried into infrastructure spending in this area on the residential side, that you end up building, or allowing to be built, large numbers of houses where it turns out you’re dealing with, sort of, yesterday’s shortage.

So, I’m un – I can understand absolutely that you might say, okay, we’re going to be in a world where unemployment is higher, when it’s very cheap for governments to borrow. There may be some spare capacity in the construction sector, that’s not quite so obvious. Isn’t this time to build lots of houses? I’m – I think it’s also a risky time to do it and maybe it’s a time to just see how the landscape has changed in terms of where the demand for people to actually live turns out to be. It’s also a situation where we’ve got used to extremely high immigration into the UK and driven quite a large share of the increase in population. It may turn out that that’s very different over the next few years. I mean, it’s certainly different this year. Now, of course, maybe a very substantial part of that is COVID, but some of that may continue into the future.

Creon Butler

Thank you. Tera, you’ve obviously talked about the need for skills, but on the question of infrastructure, what’s your take on how we should approach both the opportunity and the prioritisation of what we should be doing now?

Tera Allas CBE

Sure. So, first of all, I’m going to sound a little bit like a broken record, ‘cause, actually, the evidence is extremely clear that we get more value out of every pound spent in infrastructure, if we also invest in the human capital to go alongside it. But putting that to one side for the moment, I think, as Professor Miles already implied, it very much depends on which kind of infrastructure we’re talking about. Are we talking about roads, are we talking about rail, Broadband, housing? These all have very different characteristics, both in terms of the short-term job creation potential and whom they create jobs for. Answer men, because 85% of people in those sectors are male. And what the long-term net present value of those investments is, depending, obviously, on how you look at that, and, you know, to what degree you also consider the green, sort of, net zero targets that the government has. And on that front, too, I suspect there will be some uncertainties about exactly what bits of infrastructure are the most valuable.

I have to go back to look – the Eddington Report, from I think maybe 2009/2004, something like that, which essentially concluded that where you have bottlenecks, that is where the need is and that is also where the value is biggest, and that will be a starting point number one. And the starting point number two would be that when we compare ourselves to other countries, one of the biggest reasons for our levelling up problem is lack of agglomeration. We have a large agglomeration in London and round it, but our second cities are just simply not at that same level of productivity and connectiveness. And that does really drive productivity and opportunities for both jobs and businesses, and, you know, all kinds of good things. And so, I guess my answer has to be that, again, it doesn’t make sense to think of infrastructure in the abstract.

When we’ve looked at international examples of cities or regions that have genuinely regenerated, it has always been a package of things around infrastructure and industrial support, and R&D and reskilling, and you know, even things like cultural aspects of, kind of, regenerating the area. And I’m not sure that just putting the money for infrastructure there is going to have those same effects.

Lord David Sainsbury

Can I just come in on that…

Creon Butler

Please do, yeah.

Lord David Sainsbury

…just to emphasise one point I think Tera’s making, which is, we mustn’t talk about infrastructure as a single category. I mean, there’s infrastructure, which appears – can be seen to be critical for productivity and that is the one which we have to go to. Because we’re already going to have to spend quite a lot on the whole climate change agenda and any other money for infrastructure needs to be very carefully targeted on things like transport in cities, where it is a – there is real value to be got. But trans – infrastructure – and I think broadband would be another area which is important. But, you know, the – I remember about a couple of years ago there was a big thing about, you know, government’s going to spend more on infrastructure and what this meant was we’ll reverse the Beeching cuts on the railways. If that’s the kind of infrastructure, and we just do not want it. It’s got to – you know, it’s not free money in the end and we have to really focus it on productivity, if we’re going to be serious about this competitive agenda.

Creon Butler

It’s almost free if it’s funded by index-linked debt, but never mind.

Lord David Sainsbury

Yeah.

Tera Allas CBE

Can I – Creon, can I just add one irritating little factoid on Broadband, though, which is the vast majority of businesses are saying they have plenty Broadband for their business needs. It’s the people streaming Netflix that would like better Broadband and I’m not convinced that that adds to our productivity. So, again, what – like facts, facts, facts, facts would be something that we need in the infrastructure debate.

Creon Butler

Thank you very much. I have one final question and I – because I’ve only got three minutes left, I’d ask if you could each give your, sort of, 30 seconds response to it. And it’s actually a very broad question promoted by, I think, Rebecca Dugard, was asking about basic income. But I think there is a much broader question around the tax and benefit system. Now, Lord Sainsbury talks about climate change, but there are many other questions around our tax and benefit system, not least in terms of how, you know, how far we need to change it in order to fund the extra debt that’s built up with COVID and so forth, whether it is actually a way of driving some of the changes in our innovative – innovation and competitive structure that we want to bring about.

So, my question is, a very short question, do you think this is an area that should have, if you like, have spread over a number of years, but a wholesale rethink about our – particularly our tax system, and to what extent it delivers for us, using perhaps the COVID experience as, you know, the – a justification to do this? Or is that something you would put to one side and say, actually, there are other priorities we need to focus on first? So, as I say, it’s a 30 second answer and, David, maybe I could come to you first.

Professor David Miles

Okay, 30 seconds, I think there are two things that undertaxed, one I’m sure is undertaxed, one I’m not quite so sure, but I think it probably is. Housing is definitely undertaxed in the UK and taxing it more in line with other commodities, in a sense, a house is a commodity, it’s more than that, but it’s als – it also is that, would bring in quite a lot of revenue and almost certainly be to the benefit of younger generations, who’ve taken a big hit during the pandemic. The other thing I suspect is undertaxed is carbon. So, carbon and houses.

Creon Butler

Great, thank you. Lord Sainsbury?

Lord David Sainsbury

I think there’s always a danger of thinking there’s some magical way we can change the tax system and it usually is extremely difficult and long-term. I do think our social security system at the moment is in danger of causing absolute the maximum pain and distress to people and doing very little to do what it was supposed to, which is incentivise people to work. And there’s some really quite simple things, which penalise all sorts of people and those should be changed and they’re not difficult to do and we should just get on and do it.

Creon Butler

Thank you. Tera?

Tera Allas CBE

So, the good news is, I’m not allowed to comment on tax and welfare. So, what I will do instead is just give you three pointers from the really interesting experiment that Finland did, I’m originally from Finland, on basic universal income. And because the report is in Finnish, I figured I’d read it and try and figure out what they’re actually saying, and there are three – I mean, we’ve written an article, but are three really interesting things. It is, first of all, way more complicated than you ever thought to put in place something like a universal income, so we have to connect it to every single other policy you have around tax and welfare and that’s tricky to do.

Second thing is it did actually increase employment a little bit, because people felt freer to take, you know, shorter jobs, more temporary jobs, fewer hours, and so that was a benefit, but it was a very small one. The huge difference was on welfare and wel – sorry, wellbeing. So, people who were on universal basic income felt much less stressed, they had much less, basically, concerns about their financial security and they were able, therefore, to look after their wellbeing much better. And so, if you were to think about it in that kind of broader context that Professor Miles mentioned, which is about, kind of, not just money, but also people’s happiness and life satisfaction and whatever, then it does become quite an interesting set of questions around what we can learn from those experiments.

Creon Butler

Yeah, very much so, thank you, and Jim, I can’t resist giving you a chance to talk about the tax system.

Lord Jim O’Neill

Ooh, my goodness me. I, you know…

Creon Butler

Is it a priority?

Lord Jim O’Neill

…I…

Creon Butler

Maybe that’s the question, is it a priority to look at this…

Lord Jim O’Neill

I mean, we need to…

Creon Butler

…or should…?

Lord Jim O’Neill

And what I think needs to happen, that would also, in my strong suspicion, change the productivity argument, is change the set of incentives between business and labour. And it – and if I had a specific tax thing, I’m not sure making share buybacks illegal is as far as I would go, but we should certainly change the circumstances into such. So much money is spent supporting companies and price earnings ratios, completely wasted money.

Lord David Sainsbury

I – that would certainly get my vote very, very quickly.

Creon Butler

Thank you very much. Well, unfortunately, we’re out of time. I think we were, kind of, edging towards a consensus at the end there, but my other panellists didn’t have a chance to comment. But I would just like, first of all, to thank all of our viewers for watching and for the questions they put. I’m sorry that it wasn’t possible to get to more of them, but they were all pretty heavy hitting questions. And also, very much to thank our panellists for their thrilling contributions and for giving us their insights today. I’ve certainly enjoyed the discussion and it’s given me a great deal to think about and Jim, also, if I may thank you for provoking us, at various points, it’s most welcome. So, with that, I’d like to thank everybody and say goodbye, ‘til next time.

Lord Jim O’Neill

Also, you, Creon.

Tera Allas CBE

Thank you.

Creon Butler

Cheers.