The Coalition’s Social Policy Record 2010-2015

This paper summarises nine detailed reports assessing the social policies of the
UK Coalition government elected in 2010. What did the Coalition set out to
achieve? How much was spent and saved? What policies were enacted and with
what effect?
– The Coalition made ‘tackling our record debts’ its most urgent task. However, it also aimed to
deliver radical reforms to achieve ‘a stronger society, a smaller state and responsibility in the
hands of every citizen’.
– Rapid and far reaching reforms were enacted: re-structuring the NHS; expanding the number of
Academies; starting to introduce Universal Credit; pension reforms; widening non-state provision,
increasing local autonomy and reducing eligibility for services and benefits.
– The Coalition’s decisions to offer relative protection to schools, pensions and the NHS meant that
its austerity programme was more limited overall than its rhetoric suggested, and was
concentrated in particular policy areas. Total public spending fell by 2.6 per cent between
2009/10 and 2014/15. However, “non-protected” services were cut by around one-third.
– Although the Coalition stressed the importance of the “foundation years”, real spending per child
on early education, childcare and Sure Start services fell by a quarter between 2009-10 and
2012-13 and tax-benefit reforms hit families with children under five harder than any other
household type. Provision for adult social care users fell 7 per cent per year during the Coalition
period to 2013/14.
– Despite a promise that the better-off would carry the burden of austerity, changes to direct taxes,
benefits and tax credits affected poorer groups most. After initial protection ended, estimates
suggest that poverty increased to 2014/15 and will get worse in the next five years.
– It is too early to assess the full effect of the Coalition’s structural reforms (such as changes to the
school system). Whoever is elected in May 2015 will face many continuing issues including child
poverty, unaffordable housing, pressure on the NHS and social care from an ageing population, a
regionally unbalanced economy, low wages and insufficient affordable childcare. The ‘cold climate’ for social policy – very high public sector debt and a high deficit – also remains.

The Coalition’s Inheritance

The Conservative – Liberal Democrat Coalition that took power in May 2010 inherited a particularly tough fiscal climate. By the end of 2009/10 net public sector debt had reached £956.4bn (62 per cent of GDP), while the current budget deficit stood at £103.9bn (6.9 per cent of GDP). These figures were very high for the UK by recent standards and reflected the impact of the global financial crisis that affected most major world economies in similar ways. Strategic choices had to be made: should public spending be maintained in a Keynesian move to support economic growth, or cut in order to pay down the debt quickly? Should efforts to balance the public finances focus on tax increases or spending reductions? Who should bear the burden of these efforts?
On the issues that are the principal concern of our enquiry – social outcomes, poverty and inequality – the Coalition inherited a better situation than its predecessor. Labour’s social policy programmes had delivered expanded public services. Socio-economic gaps in access to services had decreased. Economic and social outcomes, such as pupil achievements and child poverty, had also generally improved, while differences between the most and least deprived social groups narrowed.

But a lot remained to be done. Child and pensioner poverty had fallen, but overall income inequality had not. There were still large social class gaps in health, early childhood development, school achievement, university participation, and neighbourhood living conditions. An ageing population made the funding of health, social care and pensions increasingly challenging. Other pressures included rising unemployment, concerns about the quality of care, and a chronic under-supply of housing.
What were the Coalition’s aims and goals?

The incoming Government declared that its most urgent task was to tackle the country’s debts. But it also insisted that fairness would lie at the heart of its decisions “so that those most in need are most protected”. The better-off would be expected to: “pay more than the poorest, not just in terms of cash, but as a proportion of income as well”.
Beyond deficit reduction, the Coalition set a further goal of improving social mobility and creating a
society where “…everyone, regardless of background, has the chance to rise as high as their talents and ambition allow them”. Reforms to ‘welfare’, taxation and education were promised, with devolution of decision-making powers from central to local government and communities. Defining its core values as “freedom, fairness and responsibility”, the Coalition pledged to deliver “radical reforming government, a stronger society, a smaller state and power and responsibility in the hands of every citizen”.
What did the Coalition do?

Cut public spending, rather than raising taxes

A fundamental decision announced in the Coalition’s first, “emergency” Budget was to target deficit reduction through spending cuts (77 per cent) much more than tax increases (23 per cent). On the taxation side of its strategy, the Coalition raised the VAT rate from 17.5 to 20 per cent, and increased Capital Gains Tax for higher rate taxpayers. Yet room was also made for sizeable tax cuts – including raising the Income Tax personal allowance from £6,475 to more than £10,000. Corporation Tax was cut, and, from 2013/14, the Income Tax rate for people earning over £150,000 was reduced from 50 per cent (recently introduced by Labour) to 45 per cent.

Gave relative protection to the NHS and schools, but made deep cuts to other budgets

The Government chose to maintain spending in some policy areas and implement deeper cuts
elsewhere. Budgets for the NHS and schools, accounting for more than a quarter of total departmental expenditure, were relatively protected. Spending on health grew in real terms by 2.7 per cent between 2009/10 and 2013/14: a real increase although a smaller growth rate than in previous years and much lower than the increase in need (for example as measured by the increasing elderly population). Schools expenditure fell by less than one per cent up to 2012/13 (the latest data available). A Pupil Premium, paid to support pupils from low-income families, helped maintain school budgets and also directed money towards those in more disadvantaged contexts.
Although funding for schools and 16 to 19 year-old learners was protected, the budget for adult skills training was reduced by 26 per cent between 2009/10 and 2013/14. Higher education spending was also cut – by 44 per cent in the short-term – as government grants for teaching were replaced with student tuition fees and loans.
The biggest losers among ‘non-protected’ services were those provided by local councils. Between 2009/10 and 2014/15, local government funding in England fell by an estimated 33 per cent. Within particular service areas, spending on children aged under five fell 21 per cent between 2009-10 and 2012-13, with falls of 11 per cent for early education and 32 per cent for Sure Start. These reductions coincided with a 6 per cent increase in the number of under-fives. Spending on housing and community amenities, which includes funding to build social housing, fell by 35 per cent between 2009/10 and 2013/14. All the main central government funding streams for neighbourhood renewal were removed. Budgets for residential homes and other adult social care community services were cut by 7 per cent between 2009/10 and 2013/14, while the population aged 65 and over grew by 10 per cent.
Uprated pensions, while reducing other social security budgets

Pensions were protected from Coalition commitments to curtail spending on social security. A ‘triple lock’ was put in place requiring them to be uprated each year by earnings growth, price inflation or 2.5 per cent, whichever was highest. In contrast, cuts were made elsewhere by restricting eligibility for tax credits and working-age benefits and imposing new conditions on claimants. Benefits were made less generous by a change to the inflation index used for annual adjustments and by below-inflation increases from 2012-13, as well as cuts for particular groups.
Restructured the welfare state
Alongside spending cuts, the Coalition embarked on an extensive restructuring of welfare state
institutions. In education, it vastly extended Labour’s programme of directly-funded Academies, and enabled ‘Free Schools’ to be set up by groups of parents, charities or other institutions. Higher education regulations were changed to allow new providers to offer degree qualifications. In the NHS, government introduced major reforms emphasising competition, decentralisation, a range of provider types (public, private and third sector) and outcomes. Delivery of a new, consolidated Work Programme, helping jobseekers to gain employment, was contracted-out on a ‘payment-by-results’ basis. Social housing providers were encouraged to seek more private funding for new homes, charge rents closer to market levels, and move away from ‘tenancies for life’.

‘Localism’ provided another key theme. Government regional offices and regeneration programmes, were abolished in favour of local decision-making. Local government finance was reformed to provide more incentives for economic development. In addition, two elements of the social security system – the Social Fund and Council Tax Benefit – were devolved to local authorities, both with reduced budgets. New rights were also conferred on community groups. Local government assumed new responsibilities and powers in the context of public health and the public health budget was devolved. However, with the exception of public health, the expansion of local powers and responsibilities took place at a time when budget cuts gave local authorities less capacity to make use of them.
The Coalition also shifted the boundaries of welfare provision, in many cases moving away from
‘progressive universalism’ towards greater targeting. Eligibility was restricted for some benefits and services. Extra conditions were imposed, particularly for out-of-work benefits, along with tougher penalties for not meeting them. In some areas, financial responsibility underwent a wholesale shift from the state to the individual; for example, by trebling university student tuition fees in England and by introducing adult learning loans. In social care there were moves in both directions: on the one hand tighter eligibility criteria for receipt of social care services shifted responsibility towards individuals and their carers; on the other hand the Care Act 2014 introduced a lifetime cap on the total long-term care costs individuals would in future be required to pay.

Embarked on reforms to the content and design of services

In some policy areas the Coalition’s reforms went deeper into the content and design of services, living up to its promise of sweeping changes. These changes are described in detail in the papers that underpin this summary report. For example, the school curriculum and examination system in England were overhauled, justified on the grounds of making them more rigorous, and a new system of teacher training was introduced. In adult skills training, the Coalition instituted changes to the length and quality of apprenticeships, designed to bring England closer to European systems. One of the most ambitious reforms was a complete overhaul of working-age benefits and tax credits, bringing most of them into a single system, Universal Credit (UC), designed to incentivise work and get rid of complicated overlaps in means-tests and taxation. While many people support the principles behind UC, it proved challenging to implement, and there are remaining concerns about its design and the capacity of the IT system to cope with the number of monthly changes in circumstances which will be required. Just 18,000 people were receiving it late 2014, against an original target of 2 million.
What were the results?

Cuts in many services and increasing pressure on others

‘Unprotected’ services have been substantially reduced. In adult social care, where spending was cut despite a growing elderly population, there was a falling caseload (down 25 per cent from 2009/10 to 2013/14) (Figure 1) and ‘intensified’ focus on supporting those with the greatest needs. Housing policies made little impact on the supply of new homes. Between 2010 and 2013 an average of 139,000 new homes per year were completed, compared with 190,000 under Labour. There were 17 per cent fewer adult learners as course funding was curtailed, and loans introduced. Centrally funded neighbourhood renewal activity was drastically reduced, while economic regeneration programmes performed well below expectations in terms of business and job creation. Despite Government endorsements for voluntary activity and a ‘Big Society’, Third Sector budgets also fell, with cuts estimated between 50 and 100 per cent in some deprived neighbourhoods.

Falling number of people receiving community-based, residential or nursing care
services through local authorities, (England).

In early years services, the number of Sure Start children’s centres fell from 3,631 in April 2010 to 3,019 in June 2014, although survey data showed that many of those remaining expected to maintain, or even expand, the services they provided, in part by making them more targeted. There was also new early education provision for 2-year olds and the number of health visitors and Family Nurse Partnership provision for teenage parents expanded.
‘Protected’ areas have been less hard hit. In education, the Coalition kept school funding resources broadly stable. In England, the number of schools increased, pupil-teacher ratios were maintained, and while the average class size increased in primary schools, it fell in secondary schools. Although there were more 16-19 year learners, the proportion not in education, training or employment fell. Health services were protected relative to other areas but pressures on access and quality began to emerge as increases in demand outstripped increases in spending. The proportion of cancer patients seen within 62 days declined and fewer hospitals met their Accident and Emergency waiting-time targets. Public satisfaction with the NHS, measured by the British Social Attitudes Survey, fell from 70 per cent in 2010 to 60 per cent in 2013. Among employment services, the new Work Programme proved cheaper, though no more effective, than its predecessors.
Tax and benefit changes benefited richer groups more, while contributing nothing to deficit
reduction

Despite the Coalition’s insistence that “those with the broadest shoulders should bear the greatest
burden”, the poor bore the brunt of its changes to direct taxes, tax credits and benefits from May 2010 to 2014-15. Up to 2014/15, the poorest twentieth lost nearly 3 per cent of their incomes on average from these changes (not allowing for VAT and other indirect taxes) and people in the next five-twentieths of the income distribution lost almost 2 per cent. With the notable exception of the topmost twentieth, those in the top half of the distribution were net gainers from the changes. Perhaps surprisingly, overall the ‘welfare’ cuts and more generous tax allowances balanced each other out, contributing nothing to deficit reduction.

The combined impact of direct tax and cash transfers was mostly regressive, moving
incomes from poorer households to those that were better off.

Early protection for the poor, but increasing poverty later

As a result of decisions made under Labour and initially continued, benefits rose in line with inflation during the Coalition’s first two years at a time when real earnings fell during the recession. The result was that poverty measured in relation to median incomes (before housing costs) fell until 2012-13. Income inequality also fell during election year 2010-11 and held steady up to 2012-13 at its lowest level for a quarter of a century. However, figures measuring poverty against a fixed income threshold show an increase over the same period – the more so when housing costs are taken into account.
These latest official figures pre-date most of the Coalition’s welfare reforms coming fully into effect.
Modelling analysis by the Institute for Fiscal Studies suggests there will already have been a sharp rise in relative poverty (and in poverty against a fixed line) between 2012/13 and 2014/15 for children and for working-age non-parents, and then a further rise to 2020/21, with the relative child poverty rate reaching 21 per cent, up 3.5 percentage points from 2012/13. Qualitative evidence suggests growing hardship since 2013 among households affected by a combination of falling real wages, rising fuel and food costs, changes to benefit rules, and sanctions.
Pensioners were protected, children less so

As far as taxes and benefits (including pensions) are concerned, pensioners continued to be relatively favoured. As a share of national income, transfers to pensioners had increased under Labour from 5.4 per cent of GDP in 1996-97 to 6.6 per cent in 2009-10. This was also the proportion in 2014-15, although a peak of 6.9 per cent was reached in 2012-13. However, pensioners with care needs were affected by cuts to adult social care.

Meanwhile the cost of working-age benefits not related to having children fell from 3.4 per cent in
2009/10 to 3.1 per cent in 2014/15, and spending related to children from 2.8 per cent to 2.3 per cent of GDP by 2014-15. Concerns about future social mobility might be raised as young children in low-income families were affected by cuts to spending on services, as well as by reductions in benefits for the underfives. On the other hand, poorer school age children received additional help through the Pupil Premium. Fears that the abolition of the Education Maintenance Allowance and the rise in university tuition fees would widen socio-economic gaps in further and higher education participation have not been borne out to date. In fact the proportion of young people not in education, employment and training fell for the first time in a decade in 2013, and increasing numbers of disadvantaged young people applied to university.
Too early to tell for many social and economic outcomes

Most data indicating changes in outcomes are only available until 2012 or 2013, making it impossible to assess the full impact of Coalition policies. The data available to date show that progress in many areas continued in the new government’s early years, but much of this must be considered the legacy of the previous government, since many policies were not fully implemented in the period covered. An exception is education, where, up until 2013, attainment continued to improve and socio-economic gaps to narrow, although no immediate accelerating effect of the Pupil Premium was evident. Early indications are that these gaps may widen when 2014 results are released, since poor pupils have tended to rely more on the vocational qualifications that now carry less value in school league tables.
The overall picture is that there has been little significant change, as yet, in many of the key indicators of social progress and equity. Health inequalities remain deeply entrenched. There is no evidence of closing socio-economic gaps in child development. Gaps in worklessness and poverty between the poorest neighbourhoods and others reduced as the economy recovered, but not quite back to their preeconomic-crisis levels. The Coalition did preside over positive trends in employment, which rose to a new peak in summer 2014, higher than before the crisis. But wages fell and much of the increase was in self-employment and part time working. Some indicators were less positive. Unmet needs for care among the elderly increased. Housing became increasingly unaffordable and homelessness increased.
Still high levels of debt and deficit, and further cuts to come
The protection of health, schools and pensions from major spending cuts meant that even with
reductions of around a third in some other services, the scope for budget savings was limited. Overall, the effect of all the Coalition’s measures in the current parliament has been to cut public spending by 2.6 per cent in real terms, from £674bn in 2009/10 to £656bn in 2014/15 (at 2009/10 prices). As GDP grew, this brought spending down from a peak of 47.1 per cent of GDP in 2009/10 to 43.7 per cent in 2014/15.
The current budget deficit was reduced from 5.9 to 3.5 per cent of GDP. However, public sector net debt rose to 80 per cent of GDP by 2014/15. Current plans to address this are predicted to reduce public spending overall to 38.2 per cent of GDP by 2018/19. Day-to-day spending on public services (excluding benefits and debt repayments) is predicted to fall to its smallest share of national income at least since 1948.

Conclusions

There is no doubt that the Coalition Government formed in 2010 faced a very tough fiscal climate and ongoing social policy challenges. Its response was to seek to reduce the deficit quickly. It also decided to achieve most of its fiscal rebalancing through public spending cuts rather than increased taxes, and to protect the NHS, schools and pensions – all very big areas of public spending – from major cuts. And it implemented some expensive commitments, notably increasing the income tax personal allowance to £10,000 and a more generous system for uprating state pensions.
These decisions meant that while the overall reduction in public expenditure has been less than three per cent, very substantial cuts were made in unprotected areas, largely in local services. In the tax and benefits system, pensions were protected and benefits to lower income families were reduced, while there were tax reductions for some better off households. Despite the aim that the better-off should contribute a greater share of income than the poor, the reverse was the case across most of the income distribution. Poverty rates measured against a fixed threshold rose to 2012/13 (the latest official data) and are predicted to rise further, and there are signs of increasing material deprivation and hardship arising from a combination of rising costs of living, reductions in the value of benefits and eligibility and short-term benefit sanctions. Meanwhile, the ‘protected’ NHS has experienced real average annual expenditure growth rates that have been positive but exceptionally low, while adult social care services have been cut.

Although current public attention rests on ‘the cuts’, the Coalition’s large-scale reforms designed to
reduce the size of the state, stimulate private and voluntary provision and increase personal
responsibility may ultimately prove its biggest legacy. It is too soon to establish their effects on social and economic outcomes. Whoever is elected in 2015 faces a welfare state in flux, with fundamental changes to the NHS, schools, and benefits still underway. At the same time, many problems that the Coalition inherited remain. Increasing need for health and social care, unaffordable housing, a regionally unbalanced economy, and continuing labour market inequalities all remain to be tackled, as do child poverty, insufficient high quality affordable childcare, a weak system of apprenticeships for young people and relatively ineffective mechanisms for helping workless people back into work. The next Government, like the Coalition, will need to address these issues in the context of high public sector net debt and a current budget deficit, and with many of the most straightforward cuts already made. The climate for social policy and those most affected by it will remain cold for the foreseeable future.

Further information

The full version of this paper The Coalition’s Social Policy Record: Policy Spending and Outcomes 2010-2015, is available at http://sticerd.lse.ac.uk/dps/case/spcc/RR04.pdf. It is a summary of nine detailed accounts of changes under the Coalition in all the topics mentioned in this paper: cash transfers, health, adult social care, housing, employment, the under fives, schools, further and higher education and area regeneration. Readers wanting further details are advised to go to the individual papers which can be found at http://sticerd.lse.ac.uk/case/_new/research/Social_Policy_in_a_Cold_Climate.asp. All the papers are part of
CASE’s research programme Social Policy in a Cold Climate (SPCC), funded by the Joseph Rowntree Foundation, the Nuffield Foundation, and Trust for London. The views expressed are those of the authors and not necessarily those of the funders.

Ruth Lupton, with Tania Burchardt, Amanda Fitzgerald, John Hills, Abigail McKnight,
Polina Obolenskaya, Kitty Stewart, Stephanie Thomson, Rebecca Tunstall and Polly
Vizard

The Coalition’s Record on Adult Social Care: Policy, Spending and Outcomes 2010-2015

Approaching 1.3 million older people and younger disabled and mentally ill adults
use social care services in England, and 3.2 million are cared for informally, by their
families and friends. How did the Coalition respond to long-term pressures that are
putting care services and carers under growing stress?

– The Government legislated to make more people with modest wealth eligible for publicly funded
support, by raising the capital threshold used as a means test from £23,250 to £118,000 (from
2016) and introducing a lifetime cap on care costs. However, this cannot be expected to have much
impact on continued under-funding for social care as a whole.
– Public spending on social care has failed to keep pace since the mid-2000s with demand for
services from growing numbers of older people. Spending cuts imposed by the Coalition intensified
the pressure on social services from 2010 onwards.
– Overall spending is projected to have fallen by 13.4 per cent over the Government’s five years in
office. Already by 2013/14, 17.4 per cent less was being spent on services for older people. By
contrast, the number of people aged 65 and over increased by 10.1 per cent over the same
period, including an 8.6 per cent increase in the population aged 85 or over.
– The number of people receiving publicly-commissioned adult social care services fell by one quarter
between 2009/10 and 2013/14 from 1.7 million to below 1.3 million. Care at home and other
community-based services were hit especially hard, resulting in an average 8 per cent reduction in
the number of users each year.
– The number of people with learning disabilities using community-based services grew slightly, but
all other client groups experienced cuts. The number of service users among working-age adults
with mental health problems dropped by 37 per cent and the number of physically disabled users
aged 65 or over fell by 32 per cent.
– Local services were increasingly targeted on adults assessed as having the most complex needs.
The proportion of social care clients being supported for five or fewer hours a week declined from
37 per cent to 28 per cent between 2009/10 and 2013/14. The proportion receiving care for more
than ten hours a week increased from 34 per cent to 45 per cent. At the same time, nearly three quarters
of councils now arrange some social care visits as short as 15 minutes.
– Monitoring of care services based on users’ perceptions suggests some quality of life outcomes
have improved. Nevertheless, statistics on the abuse of vulnerable adults show 37,685
substantiated cases in 2013/14, while Care Quality Commission inspections revealed serious
concerns about the quality of care in a fifth of nursing homes and a tenth of residential care
homes.

http://sticerd.lse.ac.uk/case/_new/news/year.asp?yyyy=2015#772

The Coalition’s Record on Health: Policy, Spending and Outcomes 2010-2015

David Cameron promised in 2010 to “cut the deficit, not the NHS”. But how have the Coalition’s policies – including health reforms which are widely viewed as going beyond election commitments – impacted on health?

– While the Coalition has ‘protected’ health relative to other expenditure areas, growth in real health spending has been exceptionally low by the standards of previous governments. Average annual growth rates have lagged behind the rates that are deemed necessary to maintain and extend NHS care in response to increasing need and demand.
– Forecasts warn of an NHS ‘funding gap’ as wide as £30bn by 2020/21 unless the growing pressures on services are offset by productivity gains and funding increases during the next Parliament.
– Major health reforms emphasising decentralization, competition and outcomes have been implemented. These have transformed the policy landscape for the commissioning, management and provision of health services in England. The overall framework for political responsibility and accountability for health services in England has also changed.
– Minimum care standards, inspection and quality regulation have been revised and strengthened following the Mid-Staffordshire NHS Foundation Trust Public Inquiry.
– Key indicators point to increasing pressure on healthcare access and quality. These include indicators on patient access to GPs, accident and emergency services and cancer care. Public satisfaction with the NHS is considerably lower than a peak reached in 2010.
– The UK’s ranking on OECD “international league tables” remained disappointing for some health outcomes including female life expectancy and infant mortality.
– Suicide and mental health problems remained more prevalent following the 2007 economic crisis.
– Health inequalities remained deeply entrenched. The difference in average life expectancy between men living in the poorest and most prosperous areas of England is nine years, and six years for women.

http://sticerd.lse.ac.uk/case/_new/news/year.asp?yyyy=2015#772

The Chancellor’s 2014 Autumn Statement: Missed targets and missed opportunities

George Osborne’s Autumn Statement was a reminder of the government’s missed targets and missed opportunities, writes John Van Reenen. The Chancellor’s promise to eliminate the structural deficit has failed spectacularly and the UK economy is barely above its pre-crisis level, a major cause of which was the the decision to launch a premature austerity programme in 2010. Crucially, Osborne’s plans fall short in addressing Britain’s chronic problem of low productivity.

There are things to like in the Autumn Statement. The reforms to end the “cliffs” in stamp duty and make it more graduated tax are welcome, but even better would have been to replace stamp duty entirely with a tax on land values. Rather than taxing people who move, tax the unmoveable wealth that they have. And if you have to raise taxes, few will feel sympathetic with multinationals who will find it harder to avoid taxes or banks who won’t be able to offset their accumulated losses against future taxes.

But the economic elephant in the room is what has happened to productivity. GDP per hour is over 15 per cent below where we would have expected on long-term pre-2008 trends. This is why wages are so low and the deficit remains high. There is nothing serious in the Chancellor’s plans to tackle this pressing issue.

Missed Fiscal Targets

In 2010 George Osborne pledged to eliminate the structural deficit by the end of this Parliament – the 2014/15 financial year. This has spectacularly failed to happen with forecasts of government borrowing rising to £91 billion this year and no expectation of balancing the books before 2018/19. And don’t hold your fiscal breath on it happening even by then.

So what went wrong? Less income taxes have come in than expected in the last year, partly because of the increase in personal allowances, but mainly because of low pay. It’s a stunning fact that real earnings have fallen by over 8 per cent since 2008. Many jobs have been created, but they have generally poorly paid. Low wages, low taxes.

Harpo Marxist Economics

The fundamental problem is that growth has been pretty lousy under the Chancellor’s rule. Don’t be fooled by the 3 per cent headline GDP growth rate. The size of the economy is barely larger than it was on the eve of the crisis representing the worst recovery in over a century. Our faster growth this year is like a “Harpo Marx” effect. The story goes that when Harpo was asked why he was banging his head against a wall. He responded “because it feels so good when I stop.” Similarly, it is unsurprising to have strong growth when you’ve been pushed so far underwater. The real surprise is why it took so long.

A major cause of low growth was the Chancellor’s decision to launch a premature austerity programme in 2010 which choked off the nascent recovery. Austerity eased somewhat since 2012/13, but even the OBR estimates that this knocked off a percentage point off growth per year in 2010/11 and 2011/12. The Eurozone crisis also played a part, as EU leaders administer the same fiscal medicine as Dr. Osborne with similarly disappointing results. Southern European countries can at least say they have no choice if they wish to keep the Euro, but there is no excuse for Northern EU countries like Germany to insist in balancing their own budgets in the face of serious deflationary risks.

Attempting even more severe austerity to meet the 2010 targets – as some on the right have argued – would have been an even more serious error. Like the government’s policy to reduce net migration to under 100,000, it is better to fail at imposing a silly policy than to cause terrible harm in trying to meet it.

But what to do about the productivity elephant?

As analysed by the LSE Growth Commission, Britain has a chronic problem of low productivity rooted in the failure make long-term investments. We argued that we could address this though radical supply side changes in the way we support innovation, and educate, tax and finance our citizens.

A major way of reducing public spending after 2010 was to slash public investment. With low interest rates, under-utilised resources and falling private investment, this was the exact opposite of standard economic advice. The outcome was widely predicted – rather than building, we dug ourselves into a deeper economic hole.

Some of this infrastructure destruction has been reversed, but the Chancellor plans again to accelerate public spending cuts to pay for tax cuts after the election. Since public investment creates capital that can be used in the long-term, it should not be lumped in with current spending like civil service salaries. But for purposes of creating an absolute budget surplus it has been and so, once again, will be ripe for the chop. The Liberal Democrats and Labour rightly want to keep capital investment separate. Let’s hope, if re-elected, this will be one more target that the government misses.

About the Author

John van Reenen is Professor of Economics at the LSE and Director of the Centre for Economic Performance. He tweets from @JohnVanReenen

http://blogs.lse.ac.uk/politicsandpolicy/the-chancellors-2014-autumn-statement-missed-targets-and-missed-opportunities/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+BritishPoliticsAndPolicyAtLse+%28British+politics+and+policy+at+LSE%29

Labour needs policies that end low paid and low skilled work

By Tony Burke | Published: October 27, 2014

The UK has too many poorly performing workplaces, according to a new report

On October 23, the Smith Institute launched a report entitled ‘Making work better: an agenda for government‘ – an independent inquiry into the world of work by Ed Sweeney.

Sweeney of course is the former chair of the Advisory Conciliation and Arbitration Service (ACAS), former deputy general secretary of Unite and former general secretary of the finance union Unifi, now part of Unite.

The report, which runs to over 100 pages, is the product of a nine month inquiry involving research, interviews, discussion events around the UK as well as opinion polling.

It sets out the argument that the UK has too many poorly performing workplaces, with poor treatment of workers who Sweeney’s report states are “underpaid, over-worked and ignored”.

The report also argues that the UK has a “long tail of broken workplaces” which are holding back the recovery and costing the country billions in lost income and in the payment of welfare benefits to those out of work but also to those workers eking out a living in low paid, precarious and agency work.

The report has been welcomed by Labour, the TUC and EEF (the manufacturing employers’ organisation), who were all represented at the report’s launch: shadow business secretary Chuka Umunna for Labour; general secretary Frances O’Grady for the TUC and Judith Hogarth, head Of employment policy of the EEF

Sweeney’s report highlights the UK’s poor performance on a range of indicators, including:

poor productivity, with the USA, France and Germany being 30 per cent more productive than the UK;
a skills shortage and mismatch, with half of employees interviewed saying that their jobs do not make full use of their skills and abilities;
job insecurity with over half of employees worried about loss of employment or job status – the Office of National Statistics now estimates there are 1.4 million zero-hour contract workers;
stagnating pay levels – since 2004 wages for workers on the median wage or less have stagnated or fallen in real terms and since 2010 median wages have fallen by more that 6 per cent in real terms;
and 50 of workers interviewed said they faced unreasonable treatment, while 40 per cent faced disrespect from employers.

The report also recommends that the government should amend the Information & Consultation Regulations to giver workers a stronger voice and bring the UK into line with other EU countries.

The ICE Regulations are barely used by unions to establish these structures as they are dauntingly complex and unions usually face open hostility from some of the worst employers who do not wish to hear the views of their workers, never mind consult with them.

The report makes a series of important recommendations, including a new mandate for the Low Pay Commission to increase the national minimum wage towards 60 per cent of the median wage; a target for government of lift one million workers to the living wage by 2020 and, interestingly, a requirement on the government to promote the positive role trade unions play in achieving fair pay and giving ACAS the power to promote collective bargaining and good employment relations.

At the launch, the issue of collective bargaining was a major talking point, with a number of speakers and questioners (including academics and trade unions) arguing strongly that the restoration of widespread collective bargaining would do much to restore decent work and pay equality.

Speakers pointed out that this was always ACAS’s role (it was the Major government who scrapped ACAS’s role in promoting collective bargaining) and it would require significant political and financial support.

On the role of trade unions, Chuka Umunna said in his remarks:

“The report is right to highlight that trade unions have an important role to play here in boosting training, pay and conditions for their members and helping Britain win that race to the top.

“At a time of rapid global economic change and a cost of living crisis at home, it is vital that the UK continues to have strong and modern trade unions as a genuine voice fighting against discrimination and abuse.”

Building on Ed Sweeney’s report, Chuka Umunna also announced the setting up a further review of Labour’s policies in regard to the world of work, to be lead by John Monks, former head of the TUC and the ETUC, Douglas McCormick, former MD of Atkins UK Rail and Alison Downie, head of the Employment Department at Goodman Derrick LLP.

Frances O’Grady hit the nail on the head at the launch when she said:

“With so many facing stagnant pay and too many new jobs made insecure through zero-hours contracts, agency working or low value self employment, we won’t fix the economy without fixing the workplace.”

Labour has to recognise that in order to win the election and win back working people, there is crying a need to promote clear policies to end low paid and low skilled work; but also to end exploitation, firmly regulate precarious work and create decent employment in decent workplaces.

Tony Burke is assistant general secretary of Unite
http://leftfootforward.org/2014/10/labour-needs-policies-that-end-low-paid-and-low-skilled-work/#more-89607

Why do wages continue to stagnate in the UK as unemployment falls?

Geraint Johnes
The ONS released figures this week showing expanding employment while wages continue to stagnate. What is behind this puzzling picture? Geraint Johnes writes that the slack that has remained in the labour market, in the form of the underemployed and self-employed, offers one explanation for sluggish wage performance.

The latest labour market statistics show numbers in employment rising by 150,000 during the second quarter of this year while wages, rising at an annual rate of just 0.4 per cent, well below the rate of increase in prices, have continued to stagnate. The employment statistics paint a healthy picture while the data on earnings suggest all is not well. That might look like a paradox. It isn’t – it’s the fall in real wages that has allowed employers to hire more workers. But nonetheless there are aspects of the labour market that have puzzled economists for some time.

On the basis of past experience, one might have expected wage pressures to be growing at this stage in a recovery. Unemployment has fallen sharply over the last year – having been stubbornly static for a long time, it fell from 7.8 per cent in the second quarter of last year to 6.4 per cent in the space of just twelve months. In normal times, that would indicate a significant tightening of the labour market, and would lead to employers playing leapfrog with wages in order to attract a limited supply of workers.

But these haven’t been normal times. They may become more normal soon, but they aren’t normal yet. There has remained considerable slack in the economy. Data that we have published at Lancaster University’s Work Foundation suggest that the recession led to many people in work working fewer hours than they wanted to – that is, it led to a marked increase in underemployment. While these people are employed, they form an army of workers who could readily switch from part-time to full-time work as the demand for labour increases. Indeed, in the latest statistics, we are seeing that begin to happen. Over the second quarter of this year, employment rose by 0.5 per cent, but the number of hours worked increased by twice as much. And over the same period, the number of employees in part-time employment actually declined by some 19,000, while the number in full-time employment grew rapidly.

Another form that labour market slack has taken in recent years, rather unusually, is self-employment. Numbers of workers in this category have increased rapidly, and now over 15 per cent of all those in work in the UK are self-employed. Little is known about these new self-employed workers. Many are likely to have chosen self-employment whatever the weather, but it seems as though some, at least, have chosen it in the absence of other, more attractive, alternatives. Around a quarter of the new generation of self-employed workers would prefer not to be self-employed – a far higher proportion than has been observed in the past. Moreover, there is evidence to suggest that the real earnings of the typical self-employed worker have fallen faster than those of employees. But the latest data suggest that the increase in self-employment is now starting to slow – another sign that the labour market is starting to return to normal.

The slack that has remained in the labour market offers one explanation for sluggish wage performance. Another important factor has been the failure of labour productivity to pick up in the aftermath of recession. There is a plethora of reasons underpinning this so-called productivity puzzle, and we have explored these at length at a recent event at the Work Foundation.There are, however, encouraging signs. Business investment, which had been stagnant since the onset of recession, has made a spectacular recovery in the last two quarters for which data are available; in the first quarter of this year, it stood about 10 per cent higher than a year earlier. That is a quite remarkable recovery. Such investment in capital should help increase labour productivity. Once growth in labour productivity is resumed, real wages will start to rise. Just how quickly that comes about remains to be seen.

About the Author

Geraint JohnesGeraint Johnes is Director of The Work Foundation and Professor of Economics at Lancaster University.

http://blogs.lse.ac.uk/politicsandpolicy/wages-stagnate-unemployment-falls/

In work, but poor: barriers to sustainable growth and the need for a living wage

While the UK has returned to growth, many workers continue to suffer economic hardship as real incomes have yet to recover. This means that, just as in the past, the UK economy is relying on an unsustainable growth model where workers spending more than they earn to support the economy. Setting the UK on a sustainable path and reversing the growth of in-work poverty requires policies to raise real wages, writes David Spencer

Rejoice. The UK economy is back to where it was before the crisis. The depression is over and sunny economic uplands lie in the future. Feel good, damn it, the economy is growing again. But there is a reason why the positive growth statistics are treated sceptically. That reason relates to the fact that real incomes have fallen in the UK. Despite the restoration of growth, workers in the UK have continued to suffer cuts in their real pay. One of the arguments for growth is that it raises real incomes – in the UK at least, the reverse is proving to be true. The economy has achieved growth, while many millions of workers have suffered increasing economic hardship with little prospect of improvement.

From a growth perspective, the grim facts of the recovery provide cause for concern. The UK economy has only been able to grow by workers spending beyond their means. Workers have run down savings and borrowed more to increase their consumption and this has driven growth. But workers can only go on behaving like this for so long. Without a rise in real pay, the spending must come to an end and with it the recovery. 

There is no sign yet of net exports recovering to support consumption and any rises in business investment will need to continually confound expectations to offset the further fiscal tightening to come. Again as in the past the UK economy is relying on workers spending more than they earn to support the economy. This is a growth model that cannot be sustained and will ultimately end in disaster.

Even the most ardent backers of the governments current policy stance must harbour some concerns about the prospects for growth in the economy. Lower real wages may help firms keep a lid on their costs but from the perspective of raising demand on a sustainable basis they place restrictions on the ability of firms to grow output. Demand side barriers will bite in the end and terminate the recovery.

But beyond growth there are deeper issues here relating to work and its relation to poverty. Work has long been heralded as the best form of welfare and the route to economic success. This view – summed up in the mantra ‘work always pays’ – has been exposed as a miserable lie. Now it seems that work for many is no escape from poverty. Working hard for a living often means struggling to keep ones head above water.

Evidence shows that in-work poverty is on the rise in the UK. Among working age adults in low income households, the number in working families has been growing and is now greater than the number in workless families. It used to be that worklessness was the prime determinant of poverty. Now it is more likely to be low waged work.

How did we get into this situation? The underlying causes are complex and multifaceted. They include the decline of unions, the deregulation of the labour market, an inadequate training system and the rise of the service sector at the expense of manufacturing. The UK has lacked the necessary modernising forces that would have otherwise led it towards a high wage economy. Instead, it has evolved an institutional structure that has favoured and entrenched low wages.

What can be done? In the short term, policies to raise real wages in the UK would help not only to sustain the recovery if that is the concern but also to address the problem of in-work poverty. The national minimum wage, although a welcome development, has not managed to address the problem of low pay and this is where calls for a living wage come in. Raising the minimum wage to the level of the living wage would be a bold but economically sensible step to take. Critics may say that this will lead to unemployment. Yet evidence shows that minimum wage hikes have not had adverse employment effects. Indeed, their effect has been to increase productivity via higher levels of worker morale and to reduce welfare spending.

Longer-term, the UK needs to break its reliance on a low wage growth model. For this, it needs a new industrial strategy that focuses on building things rather than on making money. It needs to invest in new industries via the help of the State. Challenging vested interests particularly in the world of finance and creating a model of sustainable prosperity based not on endless growth but on the promotion of human flourishing remain the ultimate goals. Whether these goals are achievable under current conditions remains a moot point. Yet they are goals that we need to keep in our sights and agitate for.

In the end, the UK cannot afford to pay workers less. Driving real wages down is a recipe for economic stagnation and human misery. For all our sakes, we should seek a rise in real wages. 

Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting. Featured image credit:

About the Author

David Spencer is Professor of Economics and Political Economy at the Leeds University Business School.

Five minutes with Thomas Piketty: “We don’t need 19th century-style inequality to generate growth in the 21st century”

In an interview with EUROPP’s editor Stuart Brown and British Politics and Policy at LSE’s editor Joel Suss, Thomas Piketty discusses the rise in income and wealth inequality outlined in his book, Capital in the Twenty-First Century, and what policies should be adopted to prevent us returning to the kind of extreme levels of inequality experienced in Europe prior to the First World War. Professor Piketty recently gave a lecture at the LSE, the video of which can be seen online here.

Your research shows that inequality is rising and that without government action this trend is likely to continue. However, are we correct to assume that inequality is a fundamentally negative development in terms of its consequences on society?

There is no problem with inequality per se. In actual fact, up to a point inequality is fine and perhaps even useful with respect to innovation and growth. The problem is when inequality becomes so extreme that it no longer becomes useful for growth. When inequality reaches a certain point it often leads to the perpetuation of inequality over time across generations, as well as to a lack of mobility within society. Moreover, extreme inequality can be problematic for democratic institutions because it has the potential to lead to extremely unequal access to political power and the ability for citizens to make their voice heard.

There is no mathematical formula that tells you the point at which inequality becomes excessive. All we have is historical experience, and all I have tried to do through my research is to put together a large body of historical experience from over twenty countries across two centuries. We can only take imperfect lessons from this work, but it’s the best that we have. One lesson, for instance, is that the kind of extreme concentration of wealth that we experienced in most European countries up until World War One was excessive in the sense that it was not useful for growth, and probably even reduced growth and mobility overall.

This situation was destroyed by World War One, the Great Depression, and World War Two, as well as by the welfare state and progressive taxation policies which came after these shocks. As a consequence, wealth concentration was much lower in the 1950s and 1960s than it was in 1910, but this did not prevent growth from happening. If anything, this probably contributed to the inclusion of new social groups into the economic process and therefore to higher growth. So one important historical lesson from the 20th century is that we don’t need 19th century-style inequality to generate growth in the 21st century, and we therefore don’t want to return to that level of inequality in Europe.

How would you respond to those who doubt whether there is sufficient evidence to draw this kind of conclusion?

This will always be an imperfect inference because we are in the social sciences and we should not have any illusions about what is possible. We can’t run a controlled experiment across the 20th century or replay the century as if World War One and progressive taxation never occurred. All we have is our common historical experience, but I think this is enough to reach a number of fairly strong conclusions.

The lesson we have already mentioned – that we don’t need the kind of extreme inequality of the 19th century in order to have economic growth – is simply one imperfect lesson, but there are other important lessons if you look at, for instance, the rise of inequality in the United States over the past 30 years. For example, is it useful to pay managers a ten million dollar salary rather than only one million dollars? You really don’t see this in the data: the extra performance and job creation in companies which pay managers ten million dollars rather than one. In the United States over the past 30 years almost 75 per cent of the aggregate primary income growth has gone to the top of the distribution. Given the relatively mediocre productivity performance and the per capita GDP growth rate of 1.5 per cent per year, having nearly three quarters of that going to the top isn’t a very good deal for the rest of the population.

This will always be a complicated and passionate debate. Social science research is not going to transform the political conflict over the issue of inequality with some kind of mathematical certainty, but at least we can have a more informed debate using this historical cross-country evidence. Ultimately that is all my research is aiming to do.

What specific policies can be used to prevent us returning to the kind of extreme levels of inequality you have discussed?

There are a large number of policies which can be used in combination to regulate inequality. Historically the main mechanism to reduce inequality has been the diffusion of knowledge, skills and education. This is the most powerful force to reduce inequality between countries: and this is what we have today, with emerging countries catching up in terms of productivity levels with richer countries. Sometimes this can also work within countries if we have sufficiently inclusive educational and social institutions which allow large segments of the population to access the right skills and the right jobs.

However while education is tremendously important, sometimes it’s not sufficient in isolation. In order to prevent the top income groups and top wealth groups from effectively seceding from the rest of the distribution and growing much faster than the rest of society, you also need progressive taxation of income and progressive taxation of wealth – both inherited and annual wealth. Otherwise there is no natural mechanism to prevent the kind of extreme concentration of income and wealth that we’ve seen in the past from happening again.

Most of all, what we need is financial transparency. We need to monitor the dynamics of all of the different income and wealth groups more effectively so that we can adapt our policies and tax rates in line with whatever we observe. The lack of transparency is actually the biggest threat – we may end up one day in a much more unequal society than we thought we were.

Thomas Piketty is a Professor of Economics at the Paris School of Economics. He is the author of Capital in the 21st Century (Harvard University Press, March 2014).

Why the gap between rich and poor has narrowed. And why it won’t last

The narrowing of inequality is almost certainly a blip

Money no copyrightj“The rich get richer and the poor get poorer,” as the saying goes. It’s widely accepted that, in recent years, economic inequality has accelerated in the West. As the best selling author Thomas Piketty has noted, this is the scale of income inequality we are now dealing with:

“In a few weeks, Wimbledon will return to our television screens. The top tennis players in the world will compete for prize money that, boosted by broadcast income from more than 200 countries, will this year total £25  million.

“Forty years ago, the total prize money was £91,000. Taking into account the rise in the cost of living, the players will receive 33 times as much this year compared with in 1974. Over the same period, average real hourly earnings in manufacturing have merely doubled.”

 

As the below graph helpfully demonstrates, from the late 1970s up to the current recession the share of income going to the top tier of the population increased significantly. The top 1 per cent have a 14 per cent share of national income today, compared to less than 6 per cent in the late 1970s, according to the World top incomes database.

Income inequalityj

And yet contrary to popular wisdom, since the onset of the recession income inequality in Britain has actually narrowed. Indeed, believe it or not the better off were the hardest hit in the early years of the downturn, while the very poorest were sheltered to some extent by their reliance on benefits and tax credits.

The fall in income since the recession has been “largest for the richest fifth of households. In contrast, after accounting for inflation and household composition, average income for the poorest fifth has grown over this period (6.9 per cent), according to the Office for National Statistics.

As the prime minister claimed during a session of PMQs late last year, inequality in Britain is at its lowest level since 1986.

This seems bizarre when you consider that we hear it said so often that the government is waging some kind of war on the downtrodden through its austerity agenda. It’s almost as if the coalition were enacting the economic agenda of the left or something.

But hold your horses for just a second. Inequality has narrowed in recent years, but it’s unlikely to stay that way; for while the incomes of the wealthiest fell the most during the initial stages of the economic downturn, it is the poor who are now feeling the squeeze and who will be the hardest hit as changes to the benefits system take effect.

The Independent Institute for Fiscal Studies (IFS), which has looked in detail at the cumulative impact of the government’s welfare reforms, said last year that much of the pain for lower-income groups was “occurring now or is still to come because these groups are the most affected by cuts to benefits and tax credits”.

“If the OBR’s macroeconomic forecasts are correct, then most of the falls in real incomes associated with the recession have now happened for middle-and higher-income groups,” senior research economist at the IFS Robert Joyce said.

If we look at some of the coalition’s reforms to the welfare system, it’s fairly easy to see why that might be the case, for many of the changes have only recently come into effect:

The Bedroom Tax – introduced in April 2013

Universal Credit – introduced in April 2014 (ongoing)

The Benefit Cap – introduced in April 2013

Changes to child tax credits – introduced in April 2012

Changes to Working Tax Credits – introduced in April 2012

In other words, and as the IFS has recognised, many of the government’s welfare reforms have only really started hurting the poor in the past year or so – and the pain will continue in the years to come.

At the other end of the income scale, pay is already outstripping inflation (wages including bonuses in the January to March period grew by 1.7 per cent. Significantly, for those who don’t receive a bonus pay is still lagging behind inflation). Top pay is also on the rise again. Research from last year found that the UK’s top 100 chief executives were paid £425m in 2012 – up by £45m 2011.

So what does this mean? It means that the narrowing of inequality is almost certainly a temporary blip. The recovery is well in motion for the rich, but there is a great deal of pain still to come for those at the bottom.

http://www.leftfootforward.org/2014/05/why-the-gap-between-rich-and-poor-has-narrowed-and-why-it-wont-last/

Without reform, the funding model for the Work Programme is set up to fail ESA claimants

The government’s Work Programme, whereby providers are paid on a results basis, is not fit for purpose and risks failing Employment and Support Allowance (ESA) claimants. Drawing on new research, Timothy Riley explains the problems with the funding model. In essence, getting the minimum performance benchmarks wrong creates a vicious circle of lower funding leading to lower performance, leading to still lower funding. He argues for a way forward that would cost no more than the government had planned.

The Work Programme is the government’s flagship national employment programme. It is substantially different from previous programmes, both in terms of its larger scale and the way it is commissioned. It is delivered by a range of (primarily private sector) providers who are largely paid on a payment by results basis, the results they are paid for being sustained periods in work for customers. The payment model differs for different groups of customers based in part on the benefits they claim, with job outcomes for customer groups considered to be further from the labour market being associated with larger payments.

Unfortunately, recent performance data has shown that whilst the Work Programme is performing better for the main Jobseeker’s Allowance (JSA) payment groups, it is still well below the Department for Work and Pensions’ expected minimum performance levels for the Employment and Support Allowance (ESA) payment groups.

Figure 1: One-year job outcome measure – equivalent minimum benchmark compared to actual, by participant group (Jun 2011–Dec 2012 referrals)

Riley fig 1

Source: DWP: Information, Governance and Security Directorate; Inclusion calculations. Average weighted by monthly referral numbers.

The Centre for Economic and Social Inclusion recently published a new report, Making the Work Programme work for ESA claimants, which sets out the problems with the funding model for Employment and Support Allowance claimants and what could be done to fix it. The report is a part of a wider project called Fit for Purpose, supported by 22 organisations and looking at the future of employment support for people with health conditions and disabilities. The final report will be available in the summer.

Specifically, we argue that a toxic mix of a weak economy, lower than expected referrals to the programme, changes to the rules on who is referred, provider under-performance and setting the targets too high in the first place have combined to lead to big shortfalls in funding and support for those on the programme.

Our calculations suggest that around 11% of ESA claimants that are required to take part in the Work Programme would have achieved a ‘job outcome’ if the Work Programme had not been introduced. The DWP, however, set their estimate at 15%. These targets have been missed in every contract, and as a consequence – because the Work Programme is a ‘payment by results’ programme – funding to support ESA claimants has been substantially lower than anticipated.

Of course, you could see this as a policy success: performance has been below expectations but the DWP has not had to pay so much to providers – so the risk of failure has been successfully transferred away from tax payers. But this would be a pretty short-sighted view. The state still picks up the tab through the benefits bill, and lower funding means more people out of work for longer and receiving less support.

We argue that getting the minimum performance benchmarks wrong risks a vicious circle of lower funding leading to lower performance, leading to still lower funding. In a sense, this means that the funding model has been set up to fail – with lower outcome payments, and therefore lower funding overall, hard-wired into the contracts.

We estimate that the money available to providers to deliver services to ESA claimants (based on DWP spend on ESA customers) is likely to be about 40% lower than was originally planned, with DWP likely to spend on average £690 per ESA claimant compared to an estimated £1,170 when the programme was designed. And this is going to get worse: as of April 2014 there are no more ‘attachment payments’ paid to providers when customers join the Work Programme, meaning that at current performance the DWP will pay providers on average only £550 per participant – which needs to cover two years of support.

When these figures are grossed up for the whole programme, taking into account lower referral numbers as well as lower performance, we estimate that the government will invest less than half of what it intended to on supporting ESA customers through the Work Programme – with spending around £350 million compared to the £730 million expected.

In the event, we find evidence that Work Programme providers are actually spending a bit more than they receive from DWP on ESA participants, in order to maintain some levels of service. In effect they are cross-subsidising from outcome payments for Jobseeker’s Allowance participants. Whilst this may be helping to paper over the problems with the payment model, it is clearly neither satisfactory nor sustainable in the longer term.

Our report sets out an alternative model that we argue should be implemented for the remainder of the programme. This new funding model is based on four key assumptions:

  • That spending should be restored for new participants to the same level as was originally intended – but foregoing the ‘savings’ that have already been banked by the Government;
  • That in return for increasing funding we should expect increased performance;
  • That the model should remain strongly outcome-based, so that risk is shared between the taxpayer and those providing services – in our proposal, around three quarters of funding would be linked to getting and sustaining jobs; and
  • That funding should be highest for those that need the most support (and specifically, those who used to claim Incapacity Benefit).

Our proposed payment model is below.

Proposed Work Programme payment model for ESA claimants

PG5 – ESA Volunteer

PG6 – ESA Flow

PG7 – ESA ex-IB

Attachment payment

£350

£350

£350

Job entry payment

£600

£900

£1,250

Job outcome payment (three months in work)

£1,150

£1,400

£4,000

Maximum job sustainment payment*

£2,300

£4,700

£9,620

Cost per attachment

£1,018

£1,181

£1,413

* Same overall levels as current model, but paid over 9 months after job outcome payment.

Without reform, in our view the funding model for the Work Programme is set up to fail ESA claimants, particularly those joining over the next two years. Whilst we and many others are rightly thinking about what should come next with ‘Work Programme Mark 2’, it is critically important that the Work Programme Mark 1 works for ESA claimants. Our report shows the failings of the current payment model for ESA groups, and a way forward that is achievable and would cost no more than the government had planned.

Note:  This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting. Homepage image credit: Grant Kwok

About the Author

Tim RileyTimothy Riley is a Senior Researcher at the Centre for Economic and Social Inclusion. He specialises in research into labour market and skills policy, with recent projects including high profile evaluations of Lone Parent Obligations for the Department of Work and Pensions, and Want to Work for Jobcentre Plus, and has led Inclusion’s work on ethnic minority employment. @TimRiley83.

http://blogs.lse.ac.uk/politicsandpolicy/archives/41681