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A speech given to the Maxim Institute Annual Sir John Graham Lecture, 22 July 2011.

Introduction

It’s a pleasure to be here in Auckland today, and a privilege to be speaking at the Annual Sir John Graham Lecture.

I recall that Sir John was not just an outstanding leader on the rugby field…

…but also an outstanding leader off it in the pursuit of a freer and fairer society.

It is the achievement of a better society that is the topic of my lecture tonight, and I am immensely grateful to the Maxim Institute – on whose board John served for many years – who have been so generous in arranging for me to be here.

The Centre for Social Justice – the think tank I set up back in 2004 – has had a close relationship with Maxim going back a number of years.

During that time we have both learnt a great deal from one another about the importance of basing our work on the fundamental principles of social justice.

We share a common vision – a vision of a freer, fairer and more compassionate society.

A society of the second chance, where everyone has the opportunity to be renewed and nobody is written off.

And a society where responsibility – for yourself, your family, and your community – is seen as a valuable commodity once more.

Debt and deficit

Tonight I want to set the UK’s present austerity programme in context, to show how it is not enough to just squeeze budgets for a few years, and that we need to deal with the causes of the crisis if we are to effect long term change.

On Monday I am making a second speech in Wellington where I’ll go into much greater detail on how we’re reforming the system in three key areas: benefits, work, and sickness and disability.

Reform and change

Let me first explain the backdrop to the situation we find ourselves in today.

Back in the 1970s businesses avoided the UK because of its high taxes, high strike rates and low productivity.

We were losing more than 20 million working days a year to labour disputes, and had a lower rate of productivity growth than any other country in the G7.

Most commentators felt that there was little that could be done and decline was inevitable.

Yet when we look back at what was achieved under Margaret Thatcher in a few short yet turbulent years, it serves as a reminder that nothing is inevitable and that people can change, just as governments do.

After some radical reforms, strikes declined, productivity improved and as tax rates came down, companies started to invest in the UK once again.

Britain was back in business

And these reforms laid the foundation for an unprecedented period of growth.

…63 consecutive quarters, uninterrupted…

…with incomes up and confidence soaring.

We had an economy where growth was driven by productivity increases and underscored by good housekeeping…

...sadly the last government took this improving economy and fell back on an unsustainable formula – growth fuelled by debt and consumption beyond our means.

By 2009 we were harshly reminded that many of the gains in the last decade were built on sand.

And we cannot say that the warning signs weren’t there.

Personal debt had boomed in the years leading up to the recession – rising from around £700bn in the early 2000s to £1.3 trillion in 2007.

My own think-tank – the Centre for Social Justice – warned that these levels of debt were unsustainable in a report published that same year.

Just a few months later, the British bank Northern Rock went to the wall.

Although we talk a great deal about the banks when we speak of debt, it is worth reminding ourselves that the poorest in society suffer the most when debt gets out of control. An inability to pay can often lead to violence in many of the most difficult communities.

But it wasn’t only the British public who spent beyond their means.

The government was at it as well – before the recession started the UK had one of the largest structural deficits in the industrialised world

The result of all of this is that the UK now has an enormous deficit, adding every day to our outstanding debt…

…and we are paying £120 million a day just servicing the interest payments – money that cannot be spent on British schools, British hospitals or British roads.

This is why it is vital we get the deficit under control – a process which is already underway, and one that has allowed us to maintain low borrowing costs despite an unprecedented budget shortfall.

Cultural problem

This is a painful economic legacy, and one that we will be dealing with for many years to come.

But these figures aren’t just about a broken economy.

They indicate that we had lost direction and had become as one with this damaging culture.

A culture of recklessness and irresponsibility.

A culture of live now, pay later.

Where once families worked hard and saved hard to buy the things they needed, they now look to unsecured credit and pay-day loans.

Where once people put money aside and built up assets to provide for their retirement, we now have 7 million people not saving enough to provide for themselves in old age.

And while there have always been fiscally irresponsible governments, the way spending was let rip in the course of the last decade was unprecedented.

Broken society

This culture of recklessness has contributed to the deprivation and breakdown we see across swathes of our society today.

Pockets of worklessness and dependency, often persisting through generations of the same family.

More than 4 million people on out of work benefits, many for 10 years or more.

One of the highest levels of unsecured personal debt in Western Europe.

The highest teenage pregnancy rates in Western Europe.

Over a million children growing up in households with parents who are addicted to drugs or alcohol.

And the worst thing of all: this was before the recession had even started.

We had an entrenched culture of social breakdown even while the economy was growing.

I understand we were not alone in this - as the Ministry of Social Development statistics indicate, even before the downturn in New Zealand…

…when many firms were reporting serious difficulty in finding workers at all skills levels…

…10% of the working age population were on welfare.

We saw similar trends in the UK labour market.

Though employment levels rose by some 3 million in the decade leading up to the recession, more than half of the rise in employment was accounted for by foreign nationals.

It wasn’t as if there weren’t enough people to do the jobs in the UK.

We had over 4 million people sitting on out of work benefits over this period…

…rising to 5 million by the end of the recession 

…some of whom were genuinely sick or disabled, but many of whom were capable of working.

One million have been out of work for 10 years or more.

This is an issue I discussed when I was speaking in Madrid earlier this month.

I made it clear then that the number of jobs going to foreign nationals is – in many ways – a symptom of a problem we have at home with an unprepared and disaffected workforce.

For too long these people have been thought beyond redemption…

…easier to maintain on benefits than to help back into work…

…and so Governments have washed their hands of the challenge, preferring to keep the economy going by letting labour come in from abroad.

But this is an incredibly expensive approach, because it means propping up whole swathes of people on costly benefits when they could be in work.

We have to tackle the problem from the other end – looking at the root causes of our broken society rather than treating the symptoms alone.

The Centre for Social Justice

This was a challenge I was determined to face when I established the Centre for Social Justice.

Rather than focussing on the symptoms of poverty and social breakdown we were determined to unearth the root causes.

We commissioned two reports into social breakdown, “Breakdown Britain” and “Breakthrough Britain.” Altogether some 600 pages of in depth analysis. What we found, again and again, as we visited some of the poorest communities in our country, was the same five issues at the heart of social breakdown.

These are what I call the five pathways to poverty:

• Family breakdown

• Poor education

• Debt

• Addiction

• And welfare dependency and worklessness

These pathways to poverty feed on each other in powerful ways, and can push families into a damaging downward spiral.

Take family breakdown, where evidence that those growing up in a broken home are:  

• 75% more likely to fail at school

• 70% more likely to become addicted to drugs

• And 50% more likely to have an alcohol problem

Or addiction, where we found that almost one third of young people who have been excluded from school have been involved with substance abuse.

And so often these pathways had a knock-on effect on further destructive behaviour, particularly criminal activity.

We found that 70% of young offenders were from lone parents families…

…and we estimated that something like half of the UK’s prison population were problem drug users.

And, even more interesting, we found that as many as half of all young people going through the youth justice system had been in care or had substantial involvement with social services.

It’s interesting because this compares to only around 3% of children in the general population. 

As we looked at these issues more carefully we unearthed the immense costs of this breakdown.

We put the costs of educational underachievement at £18bn per annum.

The costs of family breakdown at over £20bn per annum.

And the cost of crime – so often a product of these pathways to poverty – at some £60bn per annum.

Almost £100bn – every year – spent on simply treating the symptoms of social breakdown.

These eye-watering figures were a result – at least in part – of the damaging culture I spoke about before.

A culture of short-termism had set in which was more focussed on chasing headlines than on changing lives.

So instead of investing in fundamental changes to the system – changes which may have taken a number of years to bear fruit – Governments resorted to reactive but eye-catching tweaks around the edges.

These tweaks were expensive and often ineffective – but because they were funded by debt it was possible to push the burden of them further down the line, onto the next generation.

Tax Credits

A prime example is the system of tax credits introduced by the previous Government, ostensibly with the goal of making work pay.

In fact, more often than not these tax credits made things more confusing for claimants, and they created perverse incentives which encouraged work at just 16 hours – no more and no less.

But they played another role as well.

Because there was a child element, paid in and out of work, tax credits became a useful tool for tweaking child poverty rates.

Add a few more pounds to tax credits at the annual budget and you could triumphantly announce that you had pulled thousands of children out of poverty.

But had this changed anyone’s life?

Had it made it any more likely that these children would go on to succeed in school, hold down a job, or form a stable and loving relationship?

In the case of a family troubled by addiction you may only have made things worse, with more money simply fuelling the families’ problems.

And because you haven’t made a permanent change in their life, you’ll find that before long they will have cycled back below the poverty line, and you are back where you started.

Even more subtle, this policy had a longer term effect creating what Frank Field from the Labour Party referred to as: the couple penalty

This is where you earn more through benefits if you live apart than if you live together. 

In essence government money has incentivised families to break up, with all the attendant consequences for children that I have already mentioned.

More than £150bn has been spent on tax credits since 2003, mostly on families with children.

Yet progress on child poverty has been weak and the last Government left office with income inequality at a record high.

And for those who ask how this has anything to do with income inequality, they should recall that it is middle income earners who always carry the heaviest load when governments raise taxes. It was on their shoulders that the extra spending fell – small wonder then that over the last few years their net incomes have remained at best static whilst the richest have seen theirs rise.

Expensive and ineffective, this was an approach for the short-term which didn’t worry about the consequences for the next generation.

Living longer

We’ve seen this same damaging approach to our retirement system.

Life expectancy in the UK has increased significantly over the course of the last century, but we haven’t seen anything like corresponding increases in the State Pension Age.

The fact that people are living longer is great news, but it does present us with some difficult decisions about how we fund an increasingly expensive retirement system.

Successive Governments have found it easier to kick this issue into the long grass, hoping that someone else will pick up the pieces.

Again and again that cultural barrier to reform has come crashing down…

…”live now, pay tomorrow”…

…and the hard choices have been ducked.

But if we don’t get this right we risk pushing the burdens onto the next generation.

My concern is that as my generation heads towards their retirement it is our children who will bear the greatest burden and cost in the future.

They will have to pay to bring up their own children…

…save for their pensions…

…find property in an increasingly tight property market…

…at the same time as helping to pay for their parents’ retirement income.

And unless we do something about the debt, they will have to pay that off as well.

This is why the figures show that they are likely to be the first generation in more than 30 years to have retirement incomes which will fail to keep up with average earnings in the rest of the economy.

Theirs is an uncertain and insecure future.

And – if we don’t act now – it could be a future of low incomes, low expectations and high taxes.

Principles behind the reforms

That’s why we’ve been trying to steer a new course in Government.

And, in my capacity as Secretary of State for Work and Pensions, my efforts have been particularly focussed on the welfare and pension systems.

I will outline the welfare reforms we are undertaking in more detail when I speak in Wellington next week, but I’d like to use this opportunity to touch on some of the principles underpinning them.

William Beveridge, the man widely credited with creating the modern welfare state in the UK, was clear that the welfare system must not be allowed to stifle ‘incentive, opportunity or responsibility’.

But the welfare system we have today seems more removed from these values than ever before.

It is a system that penalises positive behaviours while rewarding destructive ones.

It is this distortion of those founding values that we are looking to put right.

Making work pay

First, we have to get the incentives right, making sure that work pays.

Under the system we inherited some people were losing more than 90 pence in every pound they earned as they moved into work – a travesty when most higher rate taxpayers lose just 50 pence through the income tax system.

It was assumed that because people on benefits only had one choice – working or not working – it didn’t matter what rate you took their money away at.

But it actually makes a big difference.

After all, if you come from a family that has never held work and a community where few enter the world of work, then being out of work carries no stigma and is in effect another form of job to the unemployed.

You can’t lecture someone in that situation about moral purpose.

No – the one thing they react to immediately is the notion that it pays to be in work, and that it pays to do more hours when you work.

It is also worth noting that the pattern of work has changed. Most welfare systems set up in the aftermath of the last war assumed work was full time but now, with many more women in the work force, there are more part time jobs. The present system penalises people who take these part time jobs with harsh withdrawal rates because it was originally assumed that someone moving from unemployment would move straight to full time employment

So we have to have a clearer, simpler system that gets the incentives right.

Employment support

The second part of our reform programme is about putting in place a more effective system of employment support.

For years support to help people back into work has been failing to look at people as individuals, more interested in the numbers of boxes ticked than the number of people helped into work.

It was a system more focussed on the type of organisation that delivered the support, than whether the support they were delivering actually worked.

And the organisations delivering support have had little or no connection with those they had placed in work, meaning too many churned through the system.

Without help, many have fallen out of work for the most trivial things.

So we have to move towards a relentless focus on what works, rewarding the best providers not just for getting people into a job – but also for helping to keep them there.

All the evidence shows that the difficult part is holding someone who has been out of work for a while in work until they get the work habit.

Mentoring is critical, and it pays dividends in the longer term.

These are the twin principles for reinvigorating our labour force – getting the incentives right and getting people work ready.

Disability reforms

But there is a third change we have to make if we are to enable all households to benefit from work.

We have to reform our system of support for those groups that have been written off on inactive benefits for too long – labelled as too difficult to help.

This needs to start with reforms to the support we provide to sick and disabled people.

The whole culture around these benefits has been about looking at people as helpless and incapable – the name of the main income-replacement benefit said it all: ‘Incapacity Benefits’.

But we know that there are many sick and disabled people who can work and want to do so, and it is completely unacceptable to leave them written off on benefits.

That’s why we’re moving to a model that is about asking what people can do, rather than focussing on what they can’t, with regular objective assessments to assess changing conditions.

Lone parents

The other group we have to re-engage is lone parents.

In the post-war decades too many single parents were written off simply because they had a child.

Little distinction was made between those whose caring responsibilities precluded them from doing any work at all, and those who were able to work within certain parameters.

Equally, little effort was made to keep lone parents engaged with the labour market, even before they were ready to take up employment.

The longer you spend out of work the more alien the processes and practices of the jobs market become – no wonder some lone parents found it impossible to re-engage when they’d been detached from the labour market for more than a decade.

Until very recently [November 2008] lone parents could claim an inactive benefit – known as Income Support – until their youngest child reached 16.

Fortunately there has been a process of change underway for a few years on this issue…

…with the age falling progressively to 12, 10 and then 7.

And we are building on these reforms, ensuring that parents are accessing support to move into work…

…matched by conditionality…

…once their youngest child has reached the age of five.

Getting households into work

And it is important that we continue with these reforms.

It cannot be right that so many households in my country continue to be without work – some 1 in 5 – when we know that there are many people who could work with the right support.

This isn’t about lecturing or hectoring.

It’s about recognising the incredible value that work can bring to households – beyond the monetary value of higher incomes. Through work people develop hugely in character, by taking responsibility and making decisions. Furthermore people develop networks of friends and acquaintances that help extend their sense of community and self.

And it is households that are critical here.

We often focus on debates about distribution of income in our society without thinking about the distribution of work.

The last Government maintained that they had got more people doing more work.

But the trouble was that they were too often the same people working more hours and doing more jobs.

All the while, far too many of those who were unemployed stayed out of work, and we reached the stage where one in five of all households had nobody in work.

If a household where somebody is already working gets another member into work, it can be hugely beneficial.

But if a workless household gets someone into work it can change that whole family’s life.

That is why in any reform we shouldn’t spend all our time focussing on different family types who have work…

…but should instead concentrate more on whether a household has work. This requires that the first person into work sees that work pays.

These are not always easy choices we are making, but I believe they are the right ones.

Keeping ‘hard to help’ groups maintained on welfare was a decision taken for the short term – with the social and economic costs pushed onto the next generation.

We need to start taking the long view once more, understanding how we can change people’s lives rather than maintaining them.

State Pension Age

And it is the long view that we are trying to take to our retirement system as well, where we have a brewing crisis of affordability in the UK.

We have taken the difficult decision to accelerate increases in the State Pension Age, asking people to work for slightly longer before they receive their state pension.

I cannot emphasise strongly enough how important this reform is for the UK – it would have been easy to duck the decision and push the consequences further down the line, even onto another Government.

But this would have cost an extra £30 billion between 2016-17 and 2025-26 – an unacceptable burden on the taxpayer at a time when we are grappling with difficult public finances.

Conclusion

I hope this illustrates the point that I’m trying to get across tonight.

Our reforms are long-term investments.

They are sometimes hard decisions, but that is because we are trying to face up to the challenges of tomorrow.

We want a welfare system that renews people, and doesn’t write them off.

A welfare system that promotes responsibility, not destructive behaviours.

But that requires far-reaching reform – not just eye-catching schemes or tweaks to welfare payments.

At the same time, we want a retirement system that gets people thinking about tomorrow, not just today.

A system that shares the costs of ageing more fairly between the generations.

A system that is sustainable for the future.

Most of all, I want a system that rewards and incentivises positive behaviour, and in so doing actually helps improve lives by driving a cultural change through our society.

By doing this, we can once again give young people – who may have come to believe that their lives would at best mirror those of their parents, but never exceed them – a chance to aspire once more.

You may say these are high hopes.

High hopes – perhaps.

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