Consulting hasn’t always had the support from government that it needed

Vicky Pryce is Chief Economic Adviser at the CEBR. She was Director General for Economics at BIS from 2002-2010 and Joint Head of the UK Government Economic Service. She will be the guest speaker at the MCA’s Council Dinner on 12 November. We spoke to her about resolving the fiscal deficit, re-balancing the UK economy and her view on the performance of consulting today.

We’re hearing mixed messages about the immediate economic prospects, with renewed worries about the euro zone and declining growth rates in some of the emerging economies. How confident are you that the UK will continue to grow at healthy rates?

Growth has returned, but mainly because the government has relaxed monetary policy and pumped huge amounts of money into the economy and showed the determination to do so. As a result business and consumer confidence has improved. Rising interest rates could impact on this growth but this is unlikely to happen until after the general election.

Investment is also picking up which is positive but there are still huge uncertainties on the horizon, such as the recovery of the euro zone and whether it dips into recession again and our own relationship with Europe.

If there is a referendum on Europe, the two years between the election and the referendum are going to be full of uncertainty and that is likely to have a dampening impact on growth and willingness to invest.


The government has said that it wants to re-balance the UK economy- from financial services to manufacturing, from London and the South East to other parts of the country and from consumer spending to investment and exports. How well have we been able to re-balance the UK economy?

There has been very little rebalancing in practice because we’re still reliant on consumer spending as the main impetus for growth. As a result of low interest rates, the consumer has been able to go out and borrow again; however they haven’t been borrowing excessively. While the manufacturing sector has been pumping out quite a lot of goods, it is now just over 10% of GDP.

One of the real problems is that the government decided to cut back on capital spending when it came to power. From an economic point of view, this made no sense as it affected private sector investment, employment and growth, quite considerably.

In terms of exports, net trade hasn’t contributed anything to growth at all since the recession, so you could hardly call this rebalancing so far. But at least we have seen growth return and the public sector is now refocusing on increasing infrastructure spending.


The fiscal deficit remains the most significant domestic economic issue. What would be your advice to the next administration?

I wouldn’t worry about the public sector borrowing  for capital spending and would take it out of the equation in terms of looking to achieve any particular fiscal targets. It makes sense to borrow as much as possible for capital projects just now because it’s cheap to borrow and the markets would accept public sector borrowing for productive purposes as in the end it leads to longer sustained periods of higher growth which have the result of improving e government finances. The government should have done more of that recently since rates have been so low.

I wouldn’t worry about the precise timing of when a balanced budget is achieved or even trying to achieve a balanced budget. There is nothing magic about that. I would accept having a small deficit while the economy still needs support which is what most countries aim for- even the EC’s fiscal pact does not call for balance but is happy with anything approaching 3% of GDP. It is though understood that we would need to still be demonstrating a continuing search for savings and efficiencies where possible.


You’ve been a judge at the MCA Awards and are also close to many consulting firms. How would you assess the performance of consulting today?

At the beginning of the coalition, there was much pessimism about how much would be spent on consulting because a lot of it was cut to demonstrate commitment to reducing current spending. I remember when I was still working for the government even before  the Coalition came to power that everyone worried that too much was being outsourced.  What has been clear is that all the changes and efficiency improvements that the government has put in place cannot be done unless you have outside involvement and expertise.

Consulting remains very much at the centre of what government needs to turn to in order to achieve its objectives. Projects will need to be run efficiently and in time and offer good value for money. As there is likely to be increased demand for more efficiency to be had between now and the end of the next parliament, consultants will have a major role to play in that. And as infrastructure spending recovers, support from consulting, engineers, architects and project managers will increase.

Looking ahead, I think there will be an increasing amount of outsourcing, particularly where the private sector is already involved in taking on roles from the public sector such as prisons and hospitals and now much of the parole service too.

We will see more use of payment by results but this requires big balance sheets, banks which are prepared to lend you money and the working capital you need.  So the nature of the consulting sector could change. This will bring with it many problems of balance between small and larger firms , issues about the extent of risk taking and risk sharing the sector is prepared to take , worries about reputational impacts and also concerns about  possible issues of conflicts of interest that may arise in the new environment.  


You’ve worked in consulting yourself and the Business Department has been talking about the economic significance of our industry. Can the UK make more of our strengths as a hub for excellence in consulting?

I was instrumental in encouraging the support from BIS for  the new  Professional Business Services Group which was taken very seriously by the Department for Business. The group focused on the size and importance of professional services including consulting  and on the way it offers vital support to sectors such as financial services.  

Consulting firms have become global as a result of government outsourcing. This means firms can export knowledge they have learned in the UK worldwide.  In order to share their knowledge and become a hub, consulting firms need to have an open market in the UK, where the best people from around the world can come to work.

Consulting hasn’t always had the support from government that it needed but that is changing.


Your recent book ‘Prisonomics’ looked at reform of the prison system. Do you think that the discipline of economics has more to teach social policy-makers?

Economists have been involved in the Home Office and Ministry of Justice for years. The real problem with areas where politics is paramount  is that quite often economics is ignored. For example, one of the issues now is that twice as many people are being sent to prison than 20 years ago while the actual number of crimes has more than halved . These two issues are not linked but economics makes you look at what the real reasons are for this.  

What they are is things like better technology. You can’t steal a radio from a car as easily as you used to. You’ve got cash machines at retail outlets that automatically scan the barcode on an item and  link in with back office data so it’s not possible to pocket money from the cash register. We’re still putting more people in jail despite the fact that society is getting older and richer . The top age for committing crime is only 24.

Prison doesn’t reduce the reoffending rate and it doesn’t act as a deterrent for crime. There are other alternatives which are much cheaper and reduce reoffending rates very significantly.

What is interesting is how economists can put the social side and economic side together to be able to use evidence in the most convincing way.  After all evidence based policy is what we should be wanting to see put in place in the UK. For example in ‘Prisonomics’ I look at the social costs of separating women from their children alongside the huge economic cost. The cost of putting a child into care when a mother goes to prison, an average of £50,000 a year, is as expensive as putting a woman in prison for 12 months and should be added to estimates of total cost.  

Until recently we weren’t able to look at crime data and employment data together. Now we can link social and economic data streams together and demonstrate what works best. Education and employment are the greatest deterrents to both crime and re-offending. This is an area that we should be doing a lot more work in order to make the argument in a stronger way.