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Letwin: Three Nations

The proliferation of means-tested benefits is fostering the existence of three nations in Gordon Brown's Britain, says Shadow Chancellor Oliver Letwin

"The Social Chancellor…

The title of Chancellor of the Exchequer has a long history - one peculiar to this nation.

In other nations, the Chancellor's opposite number usually goes by a more prosaic title - most often something along the lines of Minister of Finance.

There are many reasons why this wouldn't work over here - but in his time at Number 11 Gordon Brown has added another one.

He has extended his role to matters that go far beyond finance, indeed far beyond mere economics of any description.

Gordon Brown is the Social Chancellor - and that is as it should be.

Why should he content himself with dry as dust management, when the decisions he makes reach deep into the lives of millions of people?

To deny the intersection of the economic and social spheres is to deny the facts of life.

So what is the social Chancellor's social policy?

His Cabinet colleagues might ask in despair, what isn't?

Certainly, Mr Brown has exercised an unprecedented degree of control over the spending departments, if not over the spending itself.

But there are two areas of social policy which the Social Chancellor has made all his own.

One is global and one is domestic, but they both concern poverty.

Like Ken Clarke before him, he has rightly engaged with the great issues of international finance bringing them to bear on what remains the great challenge of global poverty.

Meanwhile, at home, he has tried to tackle one of the greatest challenges facing us in our own country - the poverty of millions of our own citizens.

The Chancellor's war against domestic poverty is being fought on many fronts, but in terms of public spending and political capital, he has thrown the bulk of his resources into a two-part strategy:

The first is to get people on welfare into work - even if this means low paid work.

To make the transition into work possible, Labour has built upon the efforts of the previous Conservative Government to eliminate the unemployment trap. We all agree that we do not want to live in a country in which people are better off on the dole than in work.

Through the Working Families Tax Credit and its successor schemes, the Chancellor has accepted the logic of the Conservative Family Credit - to ensure that work, even low paid work, always pays.

In the context of the Chancellor's social policy, work is valued not so much as a means of livelihood, but as a good in itself.

In particular, the model of the working household is seen, with some justification, as a good example to children - who learn that it is through work, if not by work alone, that one makes a living.

There is a more immediate sense in which the Chancellor's social policy is targeted on children - and that is in targeting child poverty through benefits.

It should be noted that not all of these benefits are directly work related - the key target is to manage the income of all households with children so that by 2020 none fall below 60% of the national average.

Nevertheless, the system as a whole operates to push parents into work, with work-related benefits ensuring that they should not lose out as a result of working - at least not in an immediate financial sense.

Gordon Brown's social policy is admirable in its aims, ambitious in its scope and enormously expensive.

But does it work?

Or rather, given that it will be years before its full consequences become known, will it work?

Alas, the question receives only a fraction of the attention it deserves - a charge I lay at the door of politicians and journalists alike.

And yet the Chancellor's social policy has not escaped scrutiny.

For this we must thank two of the finest minds in Parliament, who have, from opposite sides of the House, dedicated themselves to this task.

I speak of Frank Field and David Willetts.

Coming from my lips, such acclaim may be of more comfort to David than to Frank, but I expect the Member for Birkenhead has by now learned to bear the burden of Conservative praise.

Of course, there are very real differences between the two men - but that is all the more reason for finding out what puts Messrs Willetts and Field on one side of the argument and Mr Brown on the other.

Let us begin by asking if the Chancellor's policy makes a difference to the incomes of those households on which it is focused.

This is debatable.

The background is one of growing income inequality, which the Government's own figures show to be higher than at any point under Margaret Thatcher or John Major.

However, Mr Brown would point to other figures showing that the Government is making progress towards its key target on incomes for households with children.

Nevertheless, even this key target is being missed and there is evidence to suggest that what progress there is, has been made by moving households from just below an arbitrary poverty line to just above it - or, in the words of Frank Field, by "picking off the easy ones".

For instance, reports from Save the Children and the Institute of Fiscal Studies have found children in severe and persistent poverty living in households that do not receive any of the main means-tested benefits.

And yet when the system does work, and the various means-tested benefits and tax credits reach the intended families, the effects on household income can be dramatic.

Frank Field gives the example of a single mother earning the minimum wage for a thirty hour week, but whose income more than quadruples as a result of the Working Families Tax Credit and the Child Care Tax Credit.

There have been some changes to the system since Frank Field made that particular calculation, but the basic principle remains the same:

Through work the poorest families can be made considerably less poor, but they still rely on the state for most of their income, and - more importantly - face very high rates of benefit withdrawal for each extra £ they earn.

Does this matter?

As long as people are in employment and out of poverty why should we care where the money comes from?

If low pay plus tax credits equals a decent income plus the dignity of work, then, surely, it all adds up?

Indeed, by getting people off the dole and onto the first rungs of the career ladder, the returns can only multiply, can't they?

Maybe not, for there are a number of potential minuses that must be taken into account.

Let us consider the economic concerns.

I am inclined to discount fears of a negative effect on output.

Pressurising people into low paid work might not make for a particularly enthusiastic addition to the workforce, but we must remember that the alternative is unemployment - where output is zero.

A more pressing concern, raised by both Frank Field and David Willetts, is the effect of in-work means-testing on wage levels.

If employers know that holding down wages makes little difference to the income of their employees (due to means-tested top-ups) then it is more likely that they will hold down wages.

In fact, as David Willetts has noted, this very argument was used by Gordon Brown as a rationale for the minimum wage.

Frank Field also raises another possibility, which is that employers and employees will collude in fraudulent reporting of wage levels. Certainly, the perverse incentive to do so is there in the system.

But whether wage costs are reduced by fair means or foul, a tax credit meant for the employee only, could, in effect, become a job subsidy for the employer as well - and it is surely not the purpose of the benefits system to swell company profits at the bottom end of the jobs market.

Is there any of evidence of this wage suppression effect in the real world?

It is probably too early to tell. But I intend to keep a watching brief.

The economic case against Gordon Brown's social policy has yet to be proven.

However, I believe there is a much stronger social case.

Frank Field tells the story of a low-paid worker interviewed by the BBC on the night of the 2001 budget. The man was grateful for the extra cash he would receive through the Working Families Tax Credit, but then "unscripted and unprompted" he added that he'd never now be able to improve his family's lot by his own efforts.

He, and many like him, work not in the hope of personal advancement, but merely in order to qualify for the benefits that make up the bulk of their income and which diminish the further one climbs the career ladder.

Of course, there is a point on that ladder where the rewards of advancement outweigh the loss of benefits.

But the problem for the people at the bottom of the ladder is the intervening rungs where means-testing applies its remorseless logic.

The combined effect of benefit withdrawal and increasing taxation throw up sky-high marginal rates that discourage further progress.

The exact figures change from year to year as the Chancellor tinkers with the system, but both Willetts and Field have calculated combined rates of tax and benefit withdrawal of 60% or more, affecting hundreds of thousands of families.

Is it any wonder that many more families stay safely below the danger zone?

Frank Field writes of a "new serfdom" which he sees as permanent:

"There is now no way by which those most dependent on tax credit will be able by their own efforts to free themselves from this welfare dependency… To rip out the mainspring of a free society - the drive to improve one's own lot and that of one's family… cannot but harbinger ill for our country."

Though life at the bottom is now more comfortable than it was, there is a cost to pay in polarisation - a process by which we become two nations:

One nation in which work is what you do to earn a living, another nation in which work is what you do to get benefits.

One nation in which low pay may be how you start off, another nation in which low pay is how you'll finish up.

A free nation and a dependency nation.

Of course, one could argue that we were two nations anyway - the working and the workless - and that, in the absence of alternatives, we are better off with the new settlement.

But, that seems a counsel of despair.

Surely we should be aiming for something better than very high benefit withdrawal rates, which are the equivalent of very high marginal tax rates for people on very low incomes? And I imagine the Chancellor is aiming at something better. I am sure he does not believe that his regime will create a dependency nation.

If Gordon Brown is right, then the number of families dependent on highly means-tested work benefits should increase only at the expense of dependency on out of work benefits.

In other words, the number of dependent families should, allowing for cyclical changes in the jobs market, gradually decrease as newly working people go on to climb the career ladder.

In the coming months and years we will have all the evidence we need to come to a conclusion.

And if dependency increases we will know that Mr Brown was wrong.

At this point I should say that I was wrong.

Wrong, that is, to use the image of two nations to describe the danger of Mr Brown's policy.

Wrong, because the proper image is of three nations.

The first and second nations are as I have described: The people who work to live on their earnings and the people who work to live on benefits.

But there is a third nation.

The people left behind, people of working age who don't earn enough to live, but who do not, or cannot, get the help they need from Mr Brown's social policy.

The first group comprises those working households who qualify for in work benefits, but who do not claim them.

According to a recent Cabinet Office paper -

"only 62% of those entitled to working families tax credit and between 64 and 78% of those entitled to benefits under the minimum income guarantee claim these benefits."

The paper ventures that this is "partly due to stigma attached to means-tested benefits."

At the time, David Willetts congratulated the authors for a "refreshing outbreak of honesty", though they might also have identified the paralysing complexity of the system as another reason for low uptake.

But at least the authors make this admission:

"...it is possible the efficacy limits of some key policy instruments are being reached. For example, the take-up of some means-tested fiscal measures remain low and further means-tested support of in-work incomes could undermine the incentives of households to enhance their own earnings."

According to official figures released only last month, Government efforts to overcome these "efficacy limits" have failed.

The take-up of means-tested benefits has actually declined, despite the provision of telephone help-lines and supposedly simplified application forms.

People with chaotic lifestyles and people who remain unemployed.

However, even if one assumes that all those who qualify for in work means-tested benefits will eventually claim them, there remains the problem of those with chaotic lifestyles, in other words, people of working age who could and should be able to work, but cannot because their lives are in such chaos.

A good example are those officially classified as 'problem drug users', whose numbers have grown by ten thousand per year since 1997.

To that example, we may add those individuals engaged in other forms of criminal activity or those who have simply dropped out of mainstream society.

This is not an insignificant group.

In a recent pamphlet about economic inactivity entitled "Left Out, Left Behind", David Willetts calculated that there are over a million people between 16 and 24 who are not working, not studying and not training, and not even registered unemployed.

What is even more disturbing is that no one, not even the Government, really knows who these people are.

We can only help these people by making them more employable, and that means turning their lives around.

In this respect there is only so much a Chancellor can do.

Crude financial measures cannot rehabilitate the drug addict or reform the young offender.

But if Brownery won't do, will Blunketry fare better?

These matters are, after all, the proper concern of the Home Office.

While some initiatives are worthy of praise, I see no evidence of the revolution in thought required to stop the conveyor belt to unemployability.

Least of all in the Government's drug strategy, which majors not on rehab, but on the expanded prescription of methadone - as if making someone chemically dependent on the state won't make them financially dependent too.

Apart from those with chaotic lifestyles, there are those who are simply unemployed - and who are thus also unable to claim in-work benefits.

Though unemployment is a less of a problem in Britain than in comparable countries, this is not uniformly the case.

Local unemployment black spots persist and, among young people, the overall unemployment rate is, according to Eurostat figures, well over 10% - higher than Germany's.

The Government's solution to youth unemployment, the New Deal for Young People, has been, to say the least, a disappointment.

Since its nationwide introduction the rate of reduction in youth unemployment has slowed. Indeed, in the last two years, it has ground to a halt.

Most people who leave the New Deal fail to find sustainable employment, and research suggests that most of those who do would have found work anyway.

Meanwhile an increasing number of young people are lured on to unsuitable and underfunded university courses from which many emerge without a job, but with enormous debts.

In the same period, we have seen a decline in genuine vocational education. There have been steep falls in the number of GNVQs, VCEs and GSVQs awarded, and in the number of Modern Apprenticeships started.

Millions of older people are also out of work and thus left behind by the main thrust of Gordon Brown's social policy.

Most of these do not feature in the unemployment figures because they are on Incapacity Benefit or similar benefits.

There are, of course, some people whose disabilities or illnesses prevent them from working, but there is very real issue with the increasing numbers of people on Incapacity Benefit.

From the mid-nineties to 2000, their numbers fell somewhat. But the trend has since moved back up again - reversing the gains made since 1997.

This Government has talked about the need to get people who can work off Incapacity Benefit.

But because the Government has introduced means-testing of Incapacity Benefit, people already on the benefit are reluctant to risk an unsuccessful foray into the world of work, for fear of having to reapply under the new rules.

As a result, the average duration of dependency on Incapacity Benefit is lengthening.

The sheer persistence of this form of dependency is a much tougher nut to crack than official unemployment, and thus a major obstacle for the Chancellor's social policy, all the more so, because official unemployment is often the lesser cause of worklessness in the poorest communities.

For instance, the University of Glasgow found that while 18,000 people in that city were officially unemployed, 110,000 lived on benefits - of whom two-thirds were claiming incapacity and disability benefits.

But the issue of work isn't the only problem.

There's also the issue of debt.

Insufficiency of gross income isn't always the primary cause of poverty. For many households, the real issue is debt - a factor that Mr Brown's income adjustment strategy does not take into account.

Thus, even where in-work benefits do push household income over the poverty line, debt repayments drag it back down again.

This is a big problem and it's growing all the time.

Citizens Advice Bureaux report an increasing number of crisis debt inquiries.

Personal bankruptcies are at record levels.

Credit card write-offs are at an all-time high.

Mr Brown's boost to family incomes may relieve the pressure, but one should also be aware that household debt tends to rise with household income.

The fact that people on the lowest incomes have the most trouble with debt is not because they borrow more, but because they borrow on less favourable terms.

And the reason why the poor rely on expensive unsecured debt is because they don't have the assets to borrow against or to convert into cash at times of need.

This makes it all the more regrettable that, despite the huge publicity given to small-scale schemes such as the "baby bonds", the Chancellor's social policy in truth does little to encourage those in poverty to build up assets. Indeed, his extension of means-testing provides a savage discouragement to saving.

So we have the Chancellor's three nations:

- those who work to earn a living;

- those for whom means-tested benefits have become a disincentive to self-advancement;

- and those who are left behind: the non-claimants, the chaotic, the unemployed, those who are living on out of work benefits, and those who are in debt.

I do not believe that the Chancellor intended to foster the existence of three nations.

I think the Chancellor shares my desire to foster the existence of one nation.

But, as in the Government's handling of the public services, so in tackling poverty, the expansion of the intruder state has not produced the results for which New Labour sincerely hoped.

What must we do to improve matters?

That is the issue to which we must now, as a nation, turn our attention. If the analysis shows that the proliferation of means-tested benefits is fostering the existence of three nations, then - in pursuit of our ambition to foster one nation - we must examine the scope for welfare reform.

Reform, that is, which aims at welfare. Reform that aims at enabling many more of our citizens to work to earn a living. Reform that aims to reduce the number for whom benefits have become an impediment to self-advancement. Reform that aims to reduce the number who are left behind, out of work or in debt.

Reform that aims, in short, to make people bigger and the role of the state smaller.

The design of such reform is now firmly on my own Party's agenda."

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