18 November 2010
An Open Left event at Demos
Reforming welfare – Won’t work without work
Keynote speaker: Douglas Alexander, Shadow Work & Pensions Secretary
Good morning. It’s very good to be here at Demos. For years, Demos has been at the heart of creative thinking on the centre-left, but now with the creation of the Open Left project, with people whose talent I saw during my time in Government like Kitty Ussher and Richard Darlington, I suspect Demos will be even more central to the renewal of progressive politics in the years ahead. And I’m particularly grateful to Chris Melvin from Reed in Partnership for chairing today’s event; Chris and his company have been on the frontline of delivering welfare to work services and I’m hugely grateful for the work they do.
Let me being with the broader canvass on which the labour market and welfare reform should be seen, starting with the political context, before discussing the appropriate policy responses.
What we have witnessed in recent months in economic policy, I believe, marks the end of an era and the beginning of an experiment. With the CSR the dice has been rolled. The outcome for growth, jobs and tax remains uncertain. Yet it is also true that the deficit, how it arose, where responsibility lies, and how it can most effectively be reduced remains a key issue of economic debate and political controversy.
The starting point for this discussion is to acknowledge a paradox. In the days and months after the global financial crisis, most people, faced with the need for the Government to act decisively to stop the collapse actually supported the policy we implemented. And they also supported the subsequent action we took to respond to the recession by keeping people in their jobs and homes.
That action allowed 116,000 firms to defer over £2 billion in taxation until the recovery was underway and introduced measures that helped keep home recessions at half the rate of the 1990s recession.
Indeed, even at the time of the election when voters were asked whose policy, without party labels, they supported on dealing with the deficit, they were more likely to support Labour’s policy.
Yet in May, many, many of these people left us. Why? There are of course a range of reasons why past supporters decided not to back us in May. But I would suggest that part of that loss of support reflected the fact that we got the recession response right, and yes that meant a temporarily higher deficit, but the politics wrong in leaving the impression that we were too unwilling to talk about the consequences of our decisions.
I believe that the label of “denial” was defied by the fiscal plan laid out by Alistair– and that’s why I support Alan Johnson in his endorsement of his predecessor’s approach. But too man y people still got to polling day with the impression that Labour preferred to talk about familiar political dividing lines rather than future policy consequences.
In making the right judgments during the crisis, we saved the taxpayer from the untold cost of a recession turning into a depression. But, as with every important choice you make in Government, there was a price to be paid – the public got that and they were worried that we didn’t.
As I argued within Government at the time and as I still believe today, the repeated refusal by some to use the word “cuts” for many months after the global financial crisis and the repetition of phrases like “Mr 10%” gravely damaged voters’ confidence that we got it.
It didn’t resonate economically or emotionally with the experience of families and households across the country and it gave spurious credence to the charge of denial, with which our opponents to this day seek to damage us.
So ho w should Labour, now in opposition, respond? The truth is the safest place to stand in life and in politics. The trust voters felt in Labour was diminished in the last Parliament and we must work to rebuild that trust in this Parliament. And we can do so, by advancing the case with humility and confidence that there is a credible and better approach than either denial or dogma.
But there is another step Labour must take to win back trust and support. The Conservatives now want to create a false and damaging image of a Labour Party that sits in Westminster rubbing its hands at every bit of bad news and willing a double dip recession.
When Labour came to power in 1997, the Conservatives shot their credibility by almost immediately forecasting a “downturn made in Downing Street” with barely disguised glee. Both Alan Johnson and Alistair Darling before him have been far too wise to be tempted into that kind of politics.
I sincerely hope the British economy achieves strong growth in the years to come. Even in our final weeks and months in office we were taking steps to secure post recession growth this year – growth we have now seen emerge. And it’s not contradictory to say that George Osborne is taking unnecessary risks with the recovery and to nonetheless hope that the recovery takes hold.
Yesterday’s Office for Budget Responsibility forecast, showed how that growth strengthened earlier this year, but how it was expected to be somewhat slower next year and the year after.
In the sometimes overblown media claims about double-dips, and rapid recovery, I think there is a risk that the real and present danger in the jobs market goes almost unnoticed. So today, I want to look at what’s happening in labour markets here and abroad. I’m worried that, the Government is too complacent about the risk of a slower and more painful return than many yet realise to the levels of employment and unemployment we have become used to.
We saw it yesterday, with the Chancellor failing to recognise the fact that the ILO unemployment rate and the claimant count are now both set to rise next year, and were both revised up in each year from January onwards.
The Government’s response to these challenges has been defined more by cuts than by reform. However today, I also want to talk about the one element of their strategy that could help – the Work Programme – and set out some of our thinking about how to ensure it doesn’t fail.
Looking abroad helps us both to better see our domestic political debates and what’s happening in our labour market in a wider context.
In the United States, people have started to use the phrase “jobless recovery”, with unemployment on the ILO measure, still above 9 per cent as it was at the end of last year.
While the Administration is at pains to avoid a tag that would be both unfair and unhelpful, there is still a lot in the employment figures to worry about. When the last set of unemployment statistics were published, Labor Secretary Hilda Solis talked about a fall in the unemployment rate from 10.1 per cent to 9.6 per cent. But this in a country that was used to unemployment rates of half that.
And while the Tea Party Movement is built on a dozen disparate grievances, one of them appears to be a perception that jobs are not appearing and families and communities are being left behind.
In Europe, the International Labour Organisation forecasts that European high income economies will see no return to the pre-crisis levels of employment in the next five years. French, German and Italian unemployment are all set to fall by, at most 0.7 percentage points in the next two years according to the OECD forecast at the start of November. That forecast also predicted Irish unemployment to be over thirteen per cent this year and next year – and it was conducted before the impact of this lat est crisis.
It’s too early to say what the recent instability will mean either for big economies like Germany or for Portugal, Ireland, Greece and Spain – but in an interconnected European market, what happens in those countries will have an impact on the British labour market.
The point here is not actually to flag up the scale of the recovery that still needs to happen in the global jobs market.
It is to say that while growth and jobs go together, you can’t assume that returning to growth means returning to full employment. Some recoveries see strong jobs growth, others see little.
In fact, the point works the other way; some recessions can mean mass unemployment for modest falls in GDP, some recessions hit growth harder than jobs.
The UK’s own Office for National Statistics has compared what happened to jobs in the three recessions the UK has experienced since 1979. I joined the Labour Party in the wake of the 1980-1981 recession w hen the Linwood car factory was shut down and the area I grew up in and now represent was devastated. When people think back to their own memories of that recession, and the second Tory recession in the 1990s, unemployment is what people always come back to.
The last recession – which was global, unlike its two predecessors – lasted longer and saw a bigger fall in Britain’s national income than in either the 1980s or the 1990s.
But the ONS study shows that on a comparable basis, in the last recession, employment fell by substantially less than in the 1980s and 300,000 less than in the 1990s. That doesn’t mean that being made redundant was any easier for anyone touched by the recent recession. But the difference didn’t happen by chance. It confirms that recessions can be worse or better because of the choices made by governments, central banks, employers and employees.
A central point risks being lost in this debate: the international and historical evi dence is that you can return to growth without creating enough jobs, just as you can even go into recession without succumbing to mass unemployment. Policy choices are central to the route taken.
The figures I just quoted about jobs in the UK during the recession, aren’t actually to flag up the virtues of government or central bank intervention, important though that was. Economists Paul Gregg and Jonathan Wadsworth, writing for the LSE’s Centre for Economic Performance, have noted how, in this recession “firms did the right thing in, wherever possible, holding onto valuable labour in the face of the pressure on profits”.
Of course measures like the Time to Pay scheme to let business delay their tax payments helped with that, but we should be very clear that British business as a whole did the right thing in this recession and they deserve real praise from across the political spectrum for doing so.
After the 1980s recession, there was a painful wait b efore the Lawson boom that saw job numbers growing again. After the 1990s recession, unemployment remained stubbornly high but private sector employment did recover – as CIPD chief economist John Philpott put it recently, because many employers “oversacked” following Norman Lamont’s exit from the ERM.
The consequence of that effort to keep people on during a recession, however, means that we have not seen a jump in vacancies since the recession officially ended.
If a company has already got more staff on its books than it needs to fulfil the orders it has, then even if orders pick up, there will be long period before it starts advertising for new vacancies.
So what do we see in the British labour market today? On the surface figures that are read out once a month on the rolling news, it looks more resilient than some expected. We all welcome that good news. But the detailed figures reveal some worrying trends:
• Vacancies have fallen every month since June and, even when seasonally adjusted, stand below the levels they were at the start of the year when the UK was only just emerging from recession
• The claimant count has fallen by just 15,000 since this Government was formed – a 1% drop in five months. If we continued at that rate, it would take 15 years for the claimant count to drop below a million. And that means that long term unemployment is also rising, with all the attendant risks that poses.
• There has been a growth in economic activity. But looking at the last quarter’s data, it’s not clear that that is coming from a strengthening recovery. 150,000 more people were economically active in the last quarter; but half of that increase came from women between the ages of 50 and 65 who started to see their pension age rise from April. A further 20 per cent of the increase was men over the age of 65. That’s a demographic change that means we need more jobs to raise real employment rates, not a green shoot.
These are issues that the Government doesn’t seem comfortable with. For their economic policy relies on the idea that the private sector will create
– enough jobs to employ those people who lost their jobs in the recession
– and then hundreds of thousands more jobs for everyone who loses their jobs as the public sector is cut – either the hundreds of thousands of direct public sector roles that the OBR estimates will go or the further half a million private sector jobs that rely on government contracts that Pricewaterhouse Coopers predict will go.
Writing in the Observer last month, Will Hutton set out the scale of that challenge “the private sector [outside business and financial services] that generated a mere 300,000 jobs between 1993 and 1999 is now expected to generate more than 2 million between now and 2015”.
Yesterday the Office for Budget Responsibility published figures that showed
• that the ILO unemploym ent rate and the claimant count are not expected to fall to pre-crisis levels at any point between now and 2015
• that both were somewhat lower than predicted in 2010, but are now expected to rise in 2011
• that yesterday’s changes to the forecast will mean an extra £500m has to be spent over the coming years on social security benefits
The Chartered Institute for Personnel and Development agree with the OBR in that they don’t predict a double dip, but they have expressed concerns that the OBR forecast is “very optimistic” on employment. The OBR’s summary of independent forecasts has claimant count unemployment 120,000 higher next year than under the OBR predictions.
Whoever had won the last election, the deficit would have had to come down. I don’t stand here today and tell every public service worker that, if we had won the General Election in May, every job would have been safe.
But the impact of cutting the deficit on demand in the macroeconomy is a well rehearsed argument and no one here needs me to go through it once again. Most people now have a firm view on one side of it or the other although, incidentally, if you’re a Liberal Democrat, it seems you now a firm view on the opposite side to the one you held on May 5th.
But the microeconomic argument against cutting too far, too fast, I believe, is equally strong, if you look at local and sectoral labour markets. In many areas, the local council or the local hospital are the biggest employers in town. It’s true in my own constituency.
Whoever had won the General Election, I’d have been working with local businesses to try and encourage investment so that the private sector was creating enough jobs for people to go to if there were fewer jobs in the public sector locally.
But last week we saw just what the pace of cuts means – with the Conservative Chair of the Local Government Association predicting 140,000 local government jobs to go in England in just one year, 2011. Although the Government wanted to focus on figures in the OBR forecast yesterday that suggested fewer public sector jobs will go by 2015 than had initially been expected, yesterday’s publication promised a steeper reduction in 2010/11 and in 2011/12, where the data is more reliable, than was forecast in June.
Over a number of years, with the right support, businesses in each area might be able to deliver the alternative jobs. In the long run, across the country, businesses will grow and the labour market will adapt to the new demands of a rebalancing economy: if high-tech manufacturing really takes off, more people will start training as engineers, if new industries in particular areas start advertising for good jobs, more people will naturally move to those areas.
But the pace of adjustment matters. For people in work now but worried they might lose a public sector job or a private sector job dependent on government contracts, it isn’t possible to adjust to a different economic geography or learn a whole new set of skills overnight.
The risk of a too static labour market wouldn’t just hurt people who are out of work – the continued threat of unemployment will leave millions less secure and less likely to spend money in the local economy. That is likely to mean that certain people and certain communities fall into the jobs gap just as they have done before.
We don’t just need to avoid a jobless recovery across the country, we need to prevent one in any community. Otherwise, the risk is that we don’t see jobs emerging in those areas and a hugely expensive and socially damaging trend of rising long term unemployment can’t be reversed because there are so few vacancies in certain areas.
Unfortunately, that isn’t the only problem that George Osborne has left for Iain Duncan Smith to solve.
I hope that anyone looking at the approach I’ve taken sin ce becoming Shadow Work and Pensions Secretary will see that wherever possible, I’ve tried to offer a constructive response to the Government plans; trying to work with them where they are making reasonable reforms, suggesting changes to their more rushed announcements that could limit the damage and only invoking the toughest language when it is justified by the evidence.
As Ed Miliband told the BBC last week, despite tangible successes in getting people into work, for example in relation to sickness benefits, we should have gone further to reform welfare. Now the Government are implementing the plans we started in 2008 to move people off incapacity benefit and onto the improved Employment and Support Allowance and they have my support in doing so.
But we also have to point out that by scrapping Regional Development Agencies and offering their successor bodies neither funding nor the capacity to act, the Government is left without agents on the ground to help strengthen a regional jobs recovery. Decisions like the Sheffield Forgemasters Loan also fly in the face of any strategy for jobs.
Iain Duncan Smith’s top priority is work incentives and he is right to think that clear incentives to make work pay will make a difference to employment. That’s why I’ve said I want to work with him on the Universal Credit even when there are questions to be raised about how much the Treasury has managed to limit some of the Universal Credit’s potential.
But what did George Osborne do for work incentives in his Budget? From next April, 20,000 more people are going to lose 90 pence in every extra pound they earn because of his Budget. Millions of families will see their tax credits tapered at a faster rate, so they lose an extra 3p in the pound as they earn. And the extra targeted tax credit for those in their 50s who return to work – often the hardest to reach – was abolished.
In the Spending Review he went further, cutting the amount working families could claim for childcare and allowing the value of the Working Tax Credit to fall behind compared to Jobseeker’s Allowance so that the gains from moving into a job will be lower for thousands of families.
One day, Universal Credit might solve some of these problems. Geoffrey Howe famously complained of being the opening batsman, sent to the crease with a bat that the team captain had broken. On work incentives, Iain Duncan Smith has been sent to the crease with nothing but the promise of an exciting new bat that will be fully operational in seven years time.
Of course, Andy Coulson and Chris Grayling will never tire of creating a splash about a huge toughening of the welfare system that actually turns out to affect a tiny fraction of people. But if you look at what the Government is doing on conditionality, they are themselves admitting that their new sanctions regime will be applied to a handful of people and don’t substantively go beyond the existing rules about claimants of Jobseeker’s Allowance seeing their benefits cut if they refuse a reasonable offer of a job.
And by scrapping the Future Jobs Fund that created jobs for unemployed young people – jobs that they had to take or lose their benefits – they have actually scrapped the toughest conditionality regime of all; a requirement to take real work and the offer of a real job tied together.
In this Parliament, Iain Duncan Smith only really has one tool to try and reduce unemployment.
From next summer, he will be launching a new system of welfare to work support called the Work Programme.
I’ve been clear that I think the principles behind the Work Programme – continuing the move to payments based on outcomes rather than processes, bringing in private and voluntary provision – represent continuity with Labour’s Flexible New Deal and are something I want to encourage.
And of course, I can see the potential in having dozens – perhaps hundreds – of providers trying new and innovative ways of getting people into work, with techniques that are successful being financially rewarded and emulated across the system. Chris’ company is just one of a number of bidders that are keen to take on one of the toughest tasks in Britain today; getting someone from benefits into sustained employment.
But there are key questions that will determine if the Work Programme is a success or a failure.
Firstly, we can’t afford bureaucratic vacuums as the transition is undertaken. The major bidders need clarity to design their financial models.
Subcontractors, especially small charities, shouldn’t be left in the dark or in the lurch over the next few months when they are going to be absolutely vital to the long term success of the programme.
And most of all, next year may be precisely the point at which the risk of problems in the jobs market is going to be at its highest and people will need all the support they can get – so nobody can afford to have half a system running for the first six months of the year.
Secondly, we need a structure that really does reward and incentivise results. On pricing, we are told that the pricing system will reward providers that help those hardest to reach, but will it treat, for example, all people on Employment and Support Allowance, the same? The danger then would be that it wouldn’t be financially viable to invest the extra money that it will take to help those furthest from the labour market within each group of claimants.
Will it treat each local jobs market the same? The risk then could be that providers have fewer incentives to work in areas that have high unemployment but very few vacancies.
And will we see genuine competition – with several firms competing in each region? If we do, we should expect to see market discipline but there also needs to be public scrutiny too – the Government needs to be clear about what role local authorities will have in scrutinising the work of providers in their area.
And finally, will providers be faced with a pricing structure that genuinely allows them to innovate and doesn’t bar some options on ideological grounds? For example, one of the most effective models we came to in government, but one which appears to have been rejected by this Government on purely ideological grounds were Jobs Guarantees and the Future Jobs Fund.
Obviously subsidised jobs can only play a limited role in the overall labour market, but they can make a huge difference for some of the most difficult cases. The Government’s alternative of unwaged work experience looks likely to be less effective or targeted. But similar models to our jobs guarantees within the Work Programme, paying providers by the results they achieve, could create a system that combines the effectiveness of the jobs guarantee with the efficiency of a private sector solution.
So let me make clear: I do think the Work Programme if properly designed and delivered can play a big role in helping reduce unemployment. Just as with the Universal Credit, my starting point is a readiness to cooperate with the Government where they propose positive reforms that build on our work in office.
But the wider jobs gap is an issue that the Government doesn’t seem to have recognised. In the end, some of the media speculation over the possibility of two quarters of negative growth has obscured the real risk of too slow employment growth in the years ahead.
We are seeing in the US and in many other industrialised countries, a painfully slow return to pre-crisis levels of employment.
For the UK, my fear is that George Osborne’s agenda, even with some amelioration from Iain Duncan Smith, will make that return slower and more painful than is yet widely understood.
As in their whole approach to welfare reform, without work it won’t work.