Monthly Archives: July 2012

The Housing Benefit Bill is Still Rising

Post by Paul Hackett, the Director of the Smith Institute. Originally posted on the New Statesman blog  

Housing benefit is becoming the curse of the Coalition. The Prime Minister promised to cut the benefit bill and back those who work hard. But, latest DWP data (19 July) shows that the number of housing benefit claimants continues to rise, and is now well past the 5m mark. The Housing Benefit bill is £23bn and rising, despite the welfare caps and cuts. Dig deeper on the statistics and you see that by far the largest increase is from those claiming Housing Benefit who are in work (the Smith Institute estimates that the rise of in-work poverty since the Coalition came to power will add £1bn this year to the Housing Benefit Bill).

Contrary to Tory claims, it is the under-employed and underpaid, not the unemployed, who are pushing up the cost of Housing Benefit. In-work claimants now accounts for nearly 90% of the net increase in overall Housing Benefit claims. The rise of in-work poverty belies Tory propaganda about the ‘underserving poor’ and benefit scroungers.  Low growth and falling real wages are pushing more people to the margins of the labour market, where pay is not enough to live on. In London, and other high housing demand areas, the problem is exacerbated by higher private rents.

But, this is not a problem made by the recession and the Coalition’s welfare reforms.  The Housing benefit Bill has been increasing since 2000, and doubled between 1997 and 2010. New Labour got hooked into a spiral of subsidising higher social rents. The number of Housing Benefit claimants stayed roughly the same between 2003-2007 at relatively lower levels, but payments to landlords rose year on year.  As the recession hit, the situation got worse as the numbers of unemployed increased. Now we are in third stage, with more claimants as a result of falling real wages and under-employment.

Social and private rents are still going up (social rents have increased by a fifth over the last five years), but they will arguably have less impact on the future Housing Benefit Bill because of the benefit caps. However, they are being offset by cost pressures on Housing Benefit because more people in work are claiming. This is evidenced by the fact that the gap between pay for the bottom 10% and their rents has widened significantly.

Rising rents, falling wages and benefit caps is a triple blow for low income households, and will lead to higher levels of poverty. Labour can’t ignore the problem, which started on its watch. Part of the solution must be reversing the decline in real wages. But, a future Labour Government is also going to have to grapple with subsidies and the balance between revenue and capital subsidies for those who simply can’t afford to pay higher rents.



Why Not Invest Now in Construction?

Post by Denise Chevin (Research Fellow, the Smith Institute) 

A few days ago administrators arrived at the Hertfordshire-based building company Doyle Group, leaving over 200 people out of a job as it set about winding up the business. It’s a stark reminder, if yet another one were really needed, of the parlous state of the British construction industry. Doyle Group is one of the industry’s biggest names to have hit trouble in recent times, not by size but by profile and reputation. It punched well above its weight cementing a name for quality, training and looking after its people. In short it was one of the good guys. “We’re like part of a big family,” staff would often say. Indeed, there were many instances of two generations of the same family being employed by Doyle.

We don’t yet know the precise details yet of what brought down the 50-year old firm, though bad debts and shrunken workloads played a major hand for sure. Struggling to maintain cash flow is a problem for many construction firms right now.

The latest construction insolvency figures show 911 building firms going out of business in the first quarter of 2012. This takes the total to 12,710 construction companies that have failed in the last three years – equivalent to more than 10 a day. Since 2008 the industry employs over 200,000 fewer people.  National statistics showed an 8.5% drop in construction output in April compared with the same time last year, which means the pain is unlikely to ease yet.  And the impact of spending cuts has still to fully kick in. According to Britain’s top civil servant Sir Jeremy Heywood we’re only 25% of the way toward fiscal adjustment, and could face a decade of cuts.

Construction firms have certainly been braced for spending being axed but what they haven’t been quite prepared for is the delays to spending the cash that’s actually been earmarked for new building. Treasury Minister Chloe Smith might not have been able to answer Jeremy Paxman on Newsnight as to where the government is getting its £500m savings from to pay for the delay to 3p fuel tax rise. But I’m sure many building companies can suggest umpteen budgets where the cash is sitting waiting to be spent. Schools, defence and housing are areas that are waiting to come out of the starting blocks through deliberation and review after review.

Housing has had a double whammy from the recession and the shake up in the planning system which has created uncertainty and confusion and anecdotal evidence suggests that applications are now being turned down.  Latest planning statistics showed a fall in applications in 2011. Then there’s the will it or won’t it work questions over the Green Deal. This is supposedly the Coalition’s flagship green policy which is trumpeted as creating 60,000 jobs as households sign up to ‘green their homes’ on the back of saving on fuel bills. Building firms nevertheless, remain sceptical because of a lack of incentives to get the public to take it up.

The industry is clearly rattling a few cages. Vince Cable convened a housing summit a few days ago to see what can be done to  pick house building up from the floor. But ministers can expect the pressure to keep coming from the builders. During the Olympics the UK Contractors Group, the trade body which counts all the biggest building companies as its members, is expected to plaster giant ads on hoardings on building sites round the capital extolling the importance of the industry – it is 9% of GDP after all – and why we need to get its wheels turning properly again. This week the CBI launched a report calling for the government to bring forward spending in repairs and maintenance at the expense of infrastructure because it is more labour intensive and creates more jobs.  Bridging the gap: backing the construction sector to generate jobs said getting employment levels in construction back up to pre-2008 levels would create an extra 193,200 full-time and 24,300 part-time jobs. Repairs and maintenance projects also tend to be part of long-running contracts and are therefore good for generating apprenticeships. It also confirmed that some funding allocated by housing quango the Homes and Communities Agency to social housing providers had not yet been spent.

Over 500,000 people lost their jobs in construction in the last recession. Employment and training missed a whole generation of people. There’s no magic bullet to the crisis, but as the CBI says, bringing forward spending on repairs and maintenance can happen quickly and create new jobs and get the economy working across the country (and not just the South East). Unlike massive rail projects, or nuclear power, it doesn’t take years to go through planning and design. It’s all a bit late for Doyle Groupm but it might just save other firms. Let’s get on and do it.


Fair Pay is Key to a Labour Election Victory in 2015

Blog by Paul Hackett (Director, the Smith Institute) 

Real wages are still falling and on current trends it may take a decade or more before living standards recover to where they were prior to the financial crash in 2008. “All pain and no gain” is hardly a winning slogan for the Coalition, and it could cost Cameron a second term.  The legacy of the wasted years will be more poverty and more in-work poverty, more unemployment and more under-employment, and widening income and wage inequality.  Labour is working on a recovery plan for jobs and growth, but it will also need an alternative strategy for the world of work which offers better pay for those on low to medium incomes.

Labour’s narrative and core values for a post-austerity age must be centred as much on sharing and redistribution, as it has been of late on growing the economic cake.  That has to include fairness at work and fair pay as well as fairness between the have’s and have nots and between the generations.  A distinctive Labour offer to improve pay and conditions will be critical to winning back the millions of blue collar workers who left Labour since 1997, particularly when contrasted against the Coalition’s wage freeze and Tory plans to promote insecurity at work by giving employers greater flexibility to hire and fire.

Voters are angry about high pay and unconvinced that low pay is the answer.  However, there is widespread cynicism about the ability of politicians to intervene in the market to make a difference. But this could change if the pay gap keeps widening. The latest IFS analysis forecasts that by the time the next General Election comes around, average pay and incomes could slip back to where they were in 2003. We are moving backwards at a quite alarming rate. So by any measure, there can be no speedy return to the status quo ante.

It is worth remembering that the fall in real wages and widening income inequality began under Thatcher in the 1980s but continued under New Labour’s watch. Despite some fantastic achievements (particularly the national minimum wage), real wages stagnated under Labour before the crash. Employment increased, and people were better off, but the bulk of the proceeds of growth went to the top 1%.  Labour did bring poverty rates down, but took its eye off income inequality.

The Smith Institute’s research shows that the reason for this was down to New Labour’s reluctance to support a wider range of interventions in the Labour market. The focus was all on improving the role of the tax and benefit system (especially tax credits), rather than how the market distributes its rewards through pay deals before the state gets involved. Labour was reluctant to challenge the employers’ organisations and make the necessary changes. This is a shame, because there was real repair work to do. The previous Conservative administration dismantled as many of the so-called ‘agencies of pre-distribution’ as they could lay their hands on. Their intention was to empower employers, while keeping the unions firmly in check.

But it wasn’t just the attack on collective bargaining which exaggerated the wage gap between the boardroom and the shop floor, but a deliberate rolling back of labour rights, wages councils and fair wages resolutions. Why Labour was so reluctant to redress the power imbalance at work is for the historians to debate. The key question now must be, what will a 2015 Labour Government do?

There needs to be a strong Labour counter on high pay, but capping top pay doesn’t deliver fairer pay for others. The rewards could just be shifted to shareholders and Sovereign Wealth Funds. Better pay transparency (as offered in the US Dodd-Frank Act) and better corporate governance will help, but if we want so-called “responsible capitalism” we’ll need more than that.

One potential route is to rebuild the unions and other organisations that engage with the workplace – particularly in the private sector. That’s easier said than done, but collective bargaining can make a big difference. Labour  also needs to consider other labour market interventions, such as fair wage clauses in public contracts. Employers will argue that they can’t afford it (as they did with the minimum wage), but the evidence we have shows that this approach works well in other EU countries, so why not here? We could also link fair wage clauses with the Living Wage and with so-called social clauses, which discriminate in favour of using the local workface.

Fair wage clauses are not a panacea to tackling in-work poverty, and will not of themselves narrow income inequalities, but they are a start, and would show that Labour is serious about tackling income inequality.