Category Archives: Paul Hackett

The new localists?

By Paul Hackett, director of the Smith Institute

The Labour Party has often talked up localism in opposition only to disappoint once in power. But current signals suggest an Ed Miliband government would radically change the way in which public money is raised and spent locally

Labour’s support for localism continues to gain momentum and was given a further push last week when Hilary Benn, the shadow secretary of state for communities and local government, called for a new English deal based on greater financial devolution.

At the launch of the new Smith Institute report on ‘Labour and Localism’ Benn said the case for decentralisation was now ‘overwhelming’ and that ‘money, and the power that goes with it, needs to be moved out of Whitehall and down to communities’. This sentiment was echoed in the institute’s report, which includes essays on local government reform by Labour council leaders and MPs.

With Labour dominating most of the big cities and hoping to do well in the forthcoming local elections, there is a growing feeling that the shadow team now get’s localism and sees it as integral to the party’s evolving narrative around reforming the state and rebuilding the economy.

Whilst it is true that Labour has traditionally talked up the English devolution story in opposition, often only to disappoint in government, there seems to be more than just mood music to the latest pronouncements from Ed Miliband about giving power back to local people and local councils.

This is re-enforced by the success of the Greater Manchester Combined Authority and the roll out of the city-regions concept to other Labour cities, such as Leeds, Sheffield, Liverpool and Newcastle. Richard Leese, leader of Manchester City Council, talks in passionate terms about dynamic economic geography based on sub-regions and comments in the Smith report that ‘the last Labour government took ten years to realise that it could not achieve its objectives through centralised, compartmentalised, nationally imposed programmes. We mustn’t make the same mistake again’.

As we move out of the depths of recession, Labour seems prepared to embrace a more asymmetrical system of government, with different powers transferred down to different councils at different times.

There’s still plenty of anger about the cuts in funding and the way fiscal austerity is disproportionately hurting those councils with the greatest need; and there’s plenty of concern across the party about postcode lotteries, the lack of co-terminosity in many places and arguably too many local agencies (like the Local Enterprise Partnerships) competing with each other. But many are now talking openly about a new more joined-up, place-based localist future and letting a thousand local flowers bloom.

The view from the majority of newly elected Labour MPs (many of them former councillors) is that the party’s past centralist tendencies are unpopular, unfair and unsuited to the new economy. There is also a realisation that any incoming Labour government will face a very tough inheritance and that distributing funding on a fairer basis will be difficult and expensive.

The authors in the report nevertheless argue that the current funding system has reached the limit of its capacity and needs more than just tinkering. That might not translate immediately into anything quite as far reaching as the local tax reform proposals in Boris Johnson’s London Finance Commission, but the idea of city local government having much greater financial self-determination and accountability is taking hold in the Labour ranks – even if business is opposed to local rate setting.

According to shadow local government minister Andy Sawford, Labour is embracing the power of localism and will radically change the way in which public money is raised and spent locally. Clive Betts, the Labour chair of the CLG select committee, claims there is no turning back and envisages a future under Labour where councils have much greater income-raising powers and much more freedom to borrow. He says that a proportion of the national tax take should go to local authorities by right, and not at the whim of the Chancellor.

Labour’s policy reviews are wrestling with the pros and cons of reconfiguring the relationship between central and local government and forming a new financial settlement. That won’t be easy, especially when so many Labour areas have a relatively weak capacity to raise taxes and are heavily reliant on central government to meet the (growing) demand for services. There are also limits to how far local taxes and charges can replace local grant, and reduce the common pot for equalisation.

The labyrinthine system of local government finance doesn’t help, but the elephant in the room is economic geography and uneven economic development, which is getting worse as London races ahead as Europe’s leading global city.

Labour wants financial devolution, but not to enable Westminster City Council (which raises almost as much in business rates as all the eight core cities combined) to declare total financial independence!  The Labour leadership will also have to think long and hard about reforming council tax and maybe embarking on an England-wide property revaluation, which is long overdue (the last rebanding was in 1991) but could cause financial pain for large numbers of homeowners and cost votes.

Many Labour council leaders acknowledge what has been achieved so far on a cross-party basis, but want a distinctive Labour localist settlement which goes far beyond the piecemeal approach advocated by the coalition and practised by the previous government. In place of policy triangulation the call from some quarters is for radical constitutional and financial change, with the Local Government Association taking responsibility for distributing government grant (as happens in Denmark) and cities having control over a range of property taxes.

How far will Labour go towards meeting the ambitions of Labour councils is still unclear. What is becoming more certain though is that Ed Miliband is going to have to offer them a lot more than his predecessors if he wants to present his party as the new localists.

This article first appeared on Public Finance

 

Dealing with debt

By Paul Hackett, director of the Smith Institute

Britons seem to be world-class at spending and second-class at saving. The government must address the personal debt crisis through heavier regulation of payday lenders and policies to tackle stagnant wages and income inequality

The cocktail of austerity, falling incomes and easy credit has pushed record numbers of people into debt. More and more of us are now living perilously on the never, never, and the problem is getting worse. Unless government and regulators take preventative action, we are in danger of sleepwalking into a major personal debt crisis.

There are around six million households in the UK that are already in financial difficulty or at risk of facing unmanageable debt – 23% of all households. That’s double what it was a decade ago, and it is not just down to the growth of payday lending. Unless there is a shift in policy and a change in consumer behaviour then all the signs are that the problem of unmanageable personal debt will get worse – perhaps a lot worse – even if the economy recovers to pre-recession levels.

It is not only the sheer scale of personal debt – all £1.4trn of it – and how it impacts on the macro-economy that should worry policy makers. It’s also the lengthening list of who is most at risk. Problem debt in the future will predictably continue to affect the vulnerable and poor, especially those who are already over-reliant on high cost credit. However, on current trends, problem debt will also start to affect a much wider group, including more middle-income households and many more single and older people.

Research from the Smith Institute shows that it will take longer for tomorrow’s borrowers to pay off the debts incurred in their youth. What we could see is large numbers of Generation Y struggling to service their rolling debts (including student loans and debts from periods of unemployment), which in turn will make it harder to buy a home or build a pension.

Meanwhile, those from Generation X (post-war baby boomers) who have no assets and are on low pay may have to continue working longer into very old age to meet their financial commitments.

Using new ONS data and information from the debt charity StepChange, our report identifies two distinct (and fast growing) cohorts of problem debtors: those with around £12,000 of debt and some assets; and those with £2,000 of debt and few assets. Each group represents around one in ten households, and more than half are in unmanageable debt.

The interesting feature of the £12K debtors is that they are on average incomes and are mostly in regular work. They may well see themselves as middle class, are young and often couple households. They are at risk because they have large amounts of unsecured debt, nearly half of it in the form of contracted loan agreements outside hire purchase, overdrafts and credit card debt (which are also high).

In contrast, the £2K debtors are more likely to be unemployed or on low incomes and therefore struggling to clear relatively small (but entrenched) amounts of debt. This group are just getting by and nearly a third of their debts are from payday loans. Like the £12K debtors, they have no safety net against a sudden crisis, like illness or losing their job.

Coming down the road are hugely significant demographic drivers, such as more single-person households and an ageing population. These, combined with widening wealth inequalities, likely interest rate rises (including more expensive mortgages) and continued pressure on welfare provision, will make it harder for policy-makers to mitigate indebtedness. Without intervention, by 2025 we could well have more than one in four households at risk of serious personal debt.

Part of the solution must be to seriously cap the cost of payday loans, and perhaps include stricter limits on the time debts must be paid back, real time credit checks, and controls on the number of times a debt can be rolled over. Limiting the amount of easy credit available to so-called ‘zombie debtors’ is long overdue, but more help is needed for those who have no choice but to take on extra debt.

Government, the financial industry and debt charities must also do more to improve financial literacy. Some progress has been made with financial education in schools, but the report calls for a sustained national debt awareness campaign similar to the ‘five a day’ fruit and veg adverts. Such a campaign could also include more naming and shaming of irresponsible lenders and perhaps government support for a financial MoT for the over-50s.

There’s a big job to be done by the new Financial Conduct Authority to make sure credit products are reasonable and fit for purpose. Government could also do more to support credit unions and stop punishing the poorest in society who are most vulnerable to loans sharks and payday lenders.

However, we can’t ignore the fact that as a nation we seem to have as much of a savings problem as we do a debt problem. The British seem to be world-class at spending and second-class at saving. A concerted approach towards improving personal savings for both the £2K and £12K debtors would make sense, including the reintroduction of Saving Gateway type schemes where the state matches a proportion of an individual’s savings.

But, new pro-saving policies and tougher regulation will only go so far. Even if government heavily restricts payday lenders, we would still have a personal debt crisis. The solution must also include tackling stagnant wages, reducing income inequality and lowering living costs.

This article first appeared on Public Finance

10 challenges for tomorrow’s housing associations

By Paul Hackett, director of the Smith Institute

“the only difference between saints and sinners is that every saint has a past and every sinner has a future” (Oscar Wilde)

In twenty years time we may look back on today’s housing associations as saints battling against all the odds to protect their tenants and provide homes for the most vulnerable. But will tomorrow’s housing associations be remembered in the same way?  As the pressure builds to become bigger, more commercial, and more market-orientated will associations be seen in 2033 as essentially private landlords, with a small minority of vulnerable and low income tenants?  Or will they succeed as independent organisations still focused on their charitable core values and continuing to provide mainly homes and services for the less well off?

The only thing we know about the future is that it will be different.  But how different will in part depend on housing associations themselves.  Associations will have to adjust to a rapidly changing world, but what are the main challenges that that lie ahead?  It’s a long list but here are my top ten to think about.

1. There’s a BIG world out there?

Whether you’re a housing association or a company manufacturing widgets, you can’t escape the global economy.  As we all saw with the financial crash in 2008, when things go badly wrong in one place it’s impossible to contain the fallout.  And it’s not just economic shocks that spread around the planet super-fast. Computer viruses, epidemics, energy problems, conflicts. They will connect us all in ways we probably can’t imagine.  Similarly, the next phase of the digital age may arrive in no time and completely change the way we live and work.

So, don’t forget the big things when you are planning the little things.  You can’t predict mega events, but don’t forget they’re out there.

2. It’s the economy stupid?

By 2033 the UK will certainly no longer be the sixth largest economy in the world. We might struggle to stay in the top ten. But we will still be relatively  prosperous.

Most economists expect the economy to get back to trend growth of between 2.4% pa by 2020. There will of course be ups and downs, but by 2033 we will be richer.  Enough growth to justify an increase housing grant?

But will the wealth be shared out, with more skilled employment and resources for those who need it?  The rich could get even richer and the poor even poorer.  If that happens we stay with a low wage economy, more under-employment and more in-work poverty.  And that means large numbers of tenants in sub-market housing on benefits.

Economic geography is also important. Unless there is some real policy change, the gap between London and the South East, and the rest of the country will get worse – and possible unbridgeable.  Lots of opportunities to cross-subsidise and grow in prosperous places, but few options to be “commercially minded and socially hearted” where values are low and there’s no growth and no surplus.

Is scaling up (and mergers) the only way forward?  Can you blend your localism with commercialism in an ever more fragmented economy? And, in the future will associations only want to compete in the high demand areas?

3. Can you increase supply, and, if so, what’s the magic number?

The housing market is dysfunctional, and that doesn’t look like changing soon. We are building about the same number of social unit as we did 20 years ago, and ten times less than 40 years ago. Private build has been roughly the same (given the economic cycles) for decades.

Even ignoring the backlog, we need 230,000 new homes a year to stand still (whether they are for rent or sale).  We all know the barriers: planning, land values, mortgage finance, public attitudes.  Also, new build is a small part of the market and house prices won’t fall until we build big (Kate Barker said over 300K a year).  But, what should the sector be aiming for – what is the magic number?

Councils can add to the mix – maybe 5-10K a year.  Housebuilders can supply more homes to let. But, should the sector contribute 60K a year, or 90K a year, which is three times the current rate. How is that even worth considering without big subsidies for sub-market housing?  Will the ‘Robin Hood’ model of cross-subsidy eventually mean less not more?

4. Who are homes for in 2033?

Today’s baby boomers are tomorrow’s tenants, and there will be a lot more of them. A lot more single people, a lot more lone parents, more older people, a lot more very old, and a lot more of Eastern European origin.

Also, there will be fewer home owners, fewer people with good pensions.  That will mean some people will have to work longer, which will change the profile of who you house.

Are housing associations prepared for an ageing and more diverse society?  Are you part of the adult social care solution and can you offer the range of services people will need at the cost they can afford?  Does it matter if you stay small and stick to the knitting?

5. When will housing become ‘affordable’?

I don’t know what will be affordable in 2033, but it has to be better than today. In one part of the country you have places where social and private rents are the same, in London the gap is so wide people can’t afford to live in anything but social housing.

The problem is real wages haven’t kept pace. We’ve had 30 years of worsening income inequality and house price inflation. The average earnings to house prices ratio was roughly 1:3 in the 1990s – it is now 6:1 and in London 9:1. That sort of ratio is unsustainable.

And, housing association rents have consistently been rising above incomes – which hardly help.

Maybe it’s time to end rent controls and embrace price discrimination and differential rents?  Will the private rented sector become more affordable and more competitive, if so how should you respond?  And, will the future finally see strong growth in the intermediate market?

 6. Will grant come back?

Subsidised housing needs subsidy, but how much?  Less grant means more private finance, which is likely to be more expensive in the future (it can’t get much cheaper!).  There is also a worry that the ‘gold rush’ in the bond markets could fall away if an association gets into financial problems.  The Dutch housing association crash proved very expensive and raises concerns about deregulation and privatisation of the sector.

The elephant in the room is Housing Benefit, which is underpinning much of the sectors’ borrowing. Can associations survive without HB?

A world without grant offers new freedoms but new risks, but how will it affect sub-market housing?  Can the sector navigate a new sustainable funding path using pension funds and the capital markets?

7. An end to the welfare reforms?

When will there be an end to the regressive welfare reforms that are doing more harm than good?  Part of the problem is that public attitudes have hardened against social transfers and the welfare state. Will the country’s social conscious and unwritten social contract inevitably dissolve, which will surely be to the detriment of the sector?

Despite all the demand management and cost savings we can dream of, welfare costs will continue to rise (especially healthcare). Can associations do more to help, and become part of the solution?  Should the sector be advocating more radical ideas, such as switching Housing Benefit revenue to capital investment in new homes – easy to say, but hard to do?

8. Who will be your friends?

The sector has arguably struggled to be loved, not least by local and national politicians.  It’s been making new friends recently and has shown that it can do much more than social housing.  But expectations of what associations can do (and afford) are rising.  As we (hopefully) move from austerity to posterity, will  relationships change? Where do associations belong regarding the brave new world of localism and city regions?  Are you connected enough in the right places?

The direction of flight is towards more local, private services, with the councils providing the safety net – perhaps more often on a cross-border basis.  Where do associations fit into this, and is the future about more collaboration. But how easy is it to really pool resources?

Self-financing of council housing under the new HRA regime could offer exciting opportunities, as could the NHS Trusts who are looking for alternative ways of coping with demand. But does the sector have the capacity and capability to do things differently and forge new partnerships, not least with the private sector?

9. Less will be more?

Will there be 1,500 or so housing associations in 2033? Few people believe it. Some say under 100, others under a 1,000.  Can the sector grow as it is without more mergers, and what support should government and the Natfed be giving?  There is of course a concern that big may not be best and that if associations lose their charitable status (perhaps in order to merge with a private business) then they could go the way of the Co-op – and be sold to hedge funds!

What is a fit for purpose association, and how big and how professional should it be?  And, in a world of localism and bespoke personalised services will less  really be more?

10. Can we have some political certainty, please?

Why is housing (and social housing in particular) so marked down in Whitehall? Is it because the policy is divided up between so many departments, with HMT and DWP focused on the benefit bill and CLG and BiS on supply?  No.10 are only interested in the popular politics of housing, which means pandering to the housing have’s– after all what Prime Minister wants to pledge lower house prices or tax home owners (much better to tax the poor). However, the growth of ‘generation rent’ and price volatility throws a big spanner in the works.

The intransigence towards housing policy probably explains why we have had 15 housing ministers in 15 years.  Will we get another 20 before 2033!

Surely it is time for a more adult conversation with the public on housing and housing subsidy, and (god forbid!) a cross-party consensus on more affordable homes of all types.  Alas, I fear common sense will be sacrificed on the voting alter.  If so, be prepared.  Tomorrow’s housing policies may include a new right to buy for the sector; new incentives/regulations to force associations to sweat their assets; new forms of subsidy (perhaps through a dedicated housing bank); and rent reforms. The next election may decide whether we have more support for the sector, or a lot less.

Conclusion

The sector has a fantastic survival instinct, and although life is going to get harder and a lot more complex housing associations aren’t going away anytime soon.  They will be here in 2033, but in what form? Certainly, tomorrow’s housing association will have to be more resilient and adapt to a more pressured market economy. But hopefully they will hold true to their values and continue to offer what others can’t.

This article first appeared on Hot House

 

Predistribution offers Labour a new and radical way forward

Article by Paul Hackett, Director of the Smith Institute, this article originally appeared on the New Statesman’s ‘Staggers’ blog.

Ed Miliband may have at last found his intellectual mojo in the American “predistribution theory”, which talks about fair wages, trade unions and the power balance at the workplace.  Whilist it might be hard to imagine Labour supporters chanting  …..”what do we want – more predistribution! And, when do we want it? – well, preferably a decade ago when real wages started to fall”,the speech Miliband gave to the Policy Network conference could mark the start of something new and radical.  At the very least, a speech by a Labour leader about social justice at the workplace and the need to address in-work poverty through wage bargaining, rather than relying on hand-outs from the state, brings joy to those think-tankers on the centre-left who have been pointing out for sometime that the way forward must be to put more money in people’s pockets.

The fast track to jobs and growth is by boosting real incomes through higher wages, with wealth distribution recalibrated away from the top 1% who have secured more than their fair share of productivity gains.  The Smith Institute’s evaluation of anti-poverty policies shows that efforts by all governments since 1980 (including New Labour) to reduce poverty and inequality were undermined by deregulation of the labour market.

Successive Conservative governments transformed the world of work through the erosion of employment protection rights, tight restrictions on trade unions, the abolition of wage floors (like the Fair Wages Resolution and wages councils), lower taxes for the better off, a deliberate effort to shift the balance of power at work in favour of employers and abandoning the commitment to full employment.  All of which had a disastrous impact on those on low and middle incomes.

Apart from the significant achievement of the National Minimum Wage, New Labour left much of the post-Thatcher settlement on the workplace intact. Miliband is right to say that there was too much reliance on tax credits to tackle inequality.  The history of New Labour’s efforts to reduce poverty and increase pay show that wages stagnated for the “squeezed middle” even at a time of economic growth, rising tax credits and near full employment.

Whilst all the talk has been about falling real wages and outrageous executive pay, little attention has been given to what we are going to do about it. Beecroft and ever more deregulation is the Tory response. Labour has opposed this, but without really setting out its own prescription. Part of the solution has to be reconnecting social and labour market policies. What we know is that policies that ensure a more equal distribution of rewards are most effective when they work in parallel with labour market institutions (notably, trade unions) that achieve a fairer distribution of incomes before the intervention of the tax and benefit system.

There’s unlikely to be a sudden increase in welfare payments, even under Labour. All political parties agree that the resources available for redistribution will be limited in the immediate future in order to tackle the deficit.  Redistribution remains essential if we are to narrow the wealth divide, but it is only possible now with a shift towards a fairer wage distribution –  and that entails a new contract between employees, unions and employers. Predistribution is about pay, but it is also about Miliband’s concept of responsible capitalism.

The solutions are in, many ways, not new but need to be recast for today’s economy. There has to be more transparency in executive pay with an explicit obligation to publish the details of all directors pay packages in the annual reports of listed companies. Listed companies should also record the ratio of high pay to low pay, the distribution of pay across different levels of earnings and the number of workers in receipt of the minimum wage.

Whilst the minimum wage has made a difference for millions, unscrupulous employers continue to short change their staff. Ensuring that the minimum wage is effectively enforced and is fixed at the highest possible level before any negative employment effects appear should also be part of the solution.

Any future Labour government should also seek to reintroduce labour clauses in public contracts. This will not only increase the pay of those working in the public sector (or “para-state”) but also set a benchmark for pay in the private sector.  There may also be role for wages councils, which set wage floors, and place peer pressure on employers to act fairly. The development, in partnership with employers, of programmes focused on raising skill levels, boosting productivity and improving the overall quality of employment at the bottom of the labour market will also help those on lower income.

And last (and not least) as we approach the TUC’s conference, any programme to ensure fair initial distribution of rewards most seriously look at collective bargaining and how workers can have greater power at the workplace. For too long there has been an imbalance of power in favour of owners over workers. This is not a small challenge given low levels of union membership density in the private sector, but there are other models including European Works Councils which can act as bulwark against excessive executive pay.

The challenge for Miliband and the Labour movement must be to turn predistribution theory into predistribution practice, which will inevitably mean new popular workplace policies and facing down the vested interests of big business, the right-wing media, and the Tory neo-liberals.  There are obvious political risks with this sort agenda, but the prize of a more equal society is never going to handed to Labour on a plate

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.

 

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.

It is in-work poverty, not unemployment, that is pushing the Housing Benefit bill up.

by  Paul Hackett (Director, the Smith Institute)  and Sean Kippin (Events and Communications Manager) 

The Prime Minister’s announcement, that he plans to restrict Housing Benefit to the over-25s has, understandably generated a great deal of media attention. It is a policy which delights his party’s grass roots, and dismays the British centre-left in equal measure. The proposals are being sold to the public on two grounds; the first is that it will help to end what the Prime Minister sees as an ‘entitlement culture’, which perpetuates worklessness and engrains benefit dependency. The second is on the grounds of reducing Government expenditure in a costly policy area.

But do these two claims add up? George Eaton of the New Statesman has pointed out that only one in eight claimants are actually unemployed. This ties in with research that the Smith Institute has been carrying out on the relationship between poverty, work and welfare. What is more likely to push people onto benfits is a sluggish economic recovery, when five people are chasing every vacancy (this figure is as high as 7.8: 1 in the North East).

On the second claim, our research shows that welfare changes are actually pushing the Housing Benefit bill up by an extra £1bn per year, with those in low-paid work driving the changes. A full 95% of new claimants between the period May 2010 to February 2011 are in work, with a 7500 increase in claimants (with a £34 million bill attached) February of this year alone. The upshot of this is that the Government will struggle to achieve any intended savings in this area, especially if real wages keep falling.

Our research on in-work poverty has reached some alarming conclusions. The number of households with less than 60% of the median income has risen from 2.3m in 1996/7 to 3.3m in 2009/10. This can be attributed to real-terms wages failing to rise in line with the economy’s wider productivity during the boom years. Now the economy is in recession, and more people are pushed into part-time and temporary work, things are getting tougher still for those earners at the bottom.

The Government have redesigned a welfare programme that rests on the assumption that work will be sufficient to lift people out of poverty and that people become poor because of their lifestyle choices. Our research shows that people on low incomes are finding work, but can’t earn enough to lift themselves out of poverty

Click here to see a briefing note on in-work poverty and housing benefit by the Director of the Smith Institute, Paul Hackett.