Public procurement

A report by the Centre for Social Justice (CSJ), ‘Spending it Better: Taking Back Control of Public Contracts to Level Up Britain’, suggests the way the Government buys goods and services should be reformed to assist its levelling up objective. The CSJ states that the Government awards £290 billion of contracts to private firms each year, for example, to build facilities such as schools and hospitals and to run public services. It says this is more than twice the total NHS budget.

Prior to Brexit, the rules governing how contracts were awarded (‘procurement’) were governed by EU law. The CSJ argues these rules have had “perverse effects”, such as awarding contracts to an overseas bidder at a low contract price, but with substantial costs to UK jobs, tax revenue and the economy.

Since Brexit, the Government has more freedom to design a new system (though still within a framework put in place by the World Trade Organisation). The Government consulted on a new procurement strategy in December 2020 and has not yet published a response. However, a June 2021 statement of procurement policy said factors such as “social value, quality of delivery and environmental concerns” will be considered when awarding contracts.

The CSJ suggests that policy should go further, particularly by linking procurement to the ‘levelling up’ agenda. It argues that policy “levers” to bring about levelling up are difficult to find, but that contracting could be one.

It makes three recommendations. First, that, wherever possible, government should introduce a duty on public bodies to award contracts to tenderers that are active in poorer areas. For local authorities specifically, there should be “a presumption of spending locally unless there is a reason not to”.

Second, the CSJ calls for a wider ‘value for money’ test. This would take into account, for example, additional welfare spending that might be needed if a superficially cheaper tender won a contract.

Finally, the CSJ argues for local authorities in poorer areas to be able to apply for the right to award central government contracts locally. It said this would help devolve spending power, while maintaining Cabinet Office oversight.

In combination, the CSJ says these steps would promote the use of “public money for public good”.

Why didn’t the Bank of England raise interest rates in November?

The Bank of England (‘the Bank’) recently generated significant comment by voting to leave interest rates unchanged. Many observers had expected the Bank to increase rates, given recent rises in inflation. For example, the Economist reported that recent Bank communications had a “hawkish tilt”, meaning that they pointed towards an interest rate rise in the near future. It argued that concerns about inflation are being felt in many advanced economies, but that the additional impact of Brexit may exacerbate the issue in the UK.

Explainer: Inflation and the Bank of England

Inflation is the general change in prices over time. It is significant because it affects living standards: if prices of goods and services increase by more than income, people can afford to buy less of them.

Compared to earlier periods in the twentieth century, inflation has been low and relatively stable for much of the last 30 years, as the graph shows. Between 1991 and 2021, inflation averaged 2.7%. In the previous 30-year period, it averaged 8.0% (measured by retail prices index, RPI). However, in recent months, inflation has been rising sharply. This has prompted questions about whether policymakers should take preventative measures.

Inflation in the UK, 1948 to 2021

Graph showing the inflation rate in the UK from 1948 to 2021

(Office for National Statistics, series CZBI)

The principal policy measure used to manage inflation in the UK is the Bank of England’s base rate. This is a key interest rate that influences other interest rates throughout the economy, and hence also other economic variables. The Bank reduces the base rate when it wishes to stimulate activity and prices, and increases the rate when aiming to lower activity and prices. In doing so, the Bank operates on a mandate from HM Treasury. Its primary aim is to keep inflation, measured by the consumer price index (CPI), close to 2%. However, it also has to support the Government’s general economic policy, for example, to promote growth and employment.

What factors influenced the bank’s decision?

In deciding the level of rates today, the Bank is presented with two conflicting concerns. On one hand, the economy has been through a major shock and is still in the recovery period. Raising rates could reduce the strength of this recovery, adversely affecting variables such as employment, earnings and government borrowing. On the other hand, not increasing rates could allow inflation to rise rapidly and well above the target 2% rate, jeopardising living standards.

Key factors in the decision include whether the recent increase in inflation is likely to be temporary, or longer lasting, and how far inflation will rise.

The Bank said that current factors affecting price levels included:

  • Staff shortages, including in areas such as haulage and catering, leading to higher pay increases in some areas. As pay is an important part of firms’ costs, increases tend to lead to higher prices as firms look to maintain profits.
  • Disruption in supply chains, partly as a result of these staff shortages and partly as a result of rapid global growth following the pandemic. Brexit may also be a factor in supply bottlenecks.
  • Rapid increases in global demand for goods.
  • Sharp rises in energy prices, which are reflected directly in price rises for some goods (eg utilities and petrol) and indirectly for others, as energy is a key cost for companies.

On 4 November 2021, the Bank’s Monetary Policy Committee (MPC), which makes interest rate decisions, voted to keep the base rate at its historic low of 0.1%. However, it was not unanimous: two members out of nine voted to increase the rate.

The Bank’s report argued that current inflation pressures are largely temporary. It forecast that the CPI will initially rise further, peaking at 5% in April 2022, but thereafter would fall back as supply chain disruptions ease and the world economy returns to normal. The Bank said it expects to raise the base rate to 1% by the end of 2022 and that inflation will return to close to its 2% target in two years’ time.

Reaction to the decision

However, some commentators, including the former Bank of England chief economist Andy Haldane, have warned that inflation pressures, though currently only affecting parts of the economy, could spread more widely. He said there was a risk that if people begin to expect higher inflation, they could demand higher wage settlements, which could further impact prices. This is known as a ‘wage-price spiral’ and could lead to higher, and more persistent, inflation. Others have argued that the Bank’s programme of quantitative easing, another form of monetary policy support for the economy, could lead to further upwards pressure on inflation.

Following the MPC’s decision, the value of the pound fell against other currencies. This can also increase inflation, because it makes imports to the UK more expensive.

In its report, the Bank stressed that there were still uncertainties in the outlook for inflation and the wider economy. It said it would update its assessments as relevant data emerged.

Cover image by Adrian Pingstone on Wikimedia.