Reform Bulletin

21 April 2008

Bulletin - 21 April 2008

Shifting the unequal state: From public apathy to personal capability

Reform today publishes its latest report on social mobility. Shifting the unequal state: From public apathy to personal capability is available at www.reform.co.uk.

The report argues that the economic cost of low social mobility in the UK is £1,300 per family. Successive governments have restricted opportunity and reinforced privilege through higher spending on benefits and public services. A new and co-ordinated policy approach across government is needed to empower individuals and increase their ability to invest in themselves.

While the UK is no longer the “sick man” of Europe, it could be called Europe’s “divided society”. Other European countries have seen significant improvements since the fall in social mobility in the 1960s and 1970s, but in the UK it has remained static. Globalisation and technological advance have meant that education and skills have become vital for workers to be able to share in the growing prosperity. But top-down programmes implemented by successive governments have focused on direct intervention in individuals’ lives, and have largely failed to take advantage of the increased return to skills:

- Public services are biased towards the affluent who are better able to shape the nature of public spending to their own advantage.

- The complex system of benefits and high marginal tax rates is reducing incentives to increase work hours and earnings, and to come off benefits.

- Increases in the tax burden are disproportionately falling on incomes and the upper rate threshold is a key “mobility block” discouraging people from taking more responsibility at a managerial and professional level.

- Increased central direction of state education has perpetuated inequity in attainment and preserved the divide between elite and inner city education.

The unintended consequence has been a “why bother” economy in which a significant proportion of the adult population have neither the capability nor the motivation to succeed. The result is not only a negative social impact but a large economic cost stemming from lost income, investment, entrepreneurship and innovation. If the UK had the skills levels of the US, for example, the benefit to the economy would be £32 billion per year, or £1,300 per family. For comparison, the maximum loss for an individual from the abolition of the 10p tax rate is £232 per year.

Education and skills have become increasingly important for successful employment and will be even more important in the future. But a school leaver from a poor background does only half as well as the average 16-year-old. Past OECD research has shown that only 19 per cent of adults in the UK paid towards their own education and training, compared to an OECD average of 37 per cent.

Underlying child poverty (net of transfers) has risen. The total number of children who were either in low income despite tax credits, or would have been in low income but for the credits, has increased from 2.4 million to 3.0 million.

The withdrawal of means-tested benefits means that some gain only 11p for every additional £1 earned. 1,875,000 people face marginal effective tax rates of over 60 per cent in 2008-09 compared to 760,000 people in 1997-98.

The report concludes that a new approach is needed to remove these blocks on mobility, starting from the point of raising personal capability to release talent rather than paying people to be poor. It would move the UK from a “why bother” to a “can do” economy.

The key determinants of future success will be motivation and attitude as much as hard skills. Radical education reform is needed – the high social mobility countries in Scandinavia provide a better model of decentralised education systems based on choice and diversity. A comprehensive review of the complex tax and benefits system is needed to shift the focus to incentivising work rather than trapping people with high marginal tax rates. A move towards lower government intervention and taxes would enable the development of the “capability margin” – the resources available to individuals to invest in themselves.

The report’s findings will be discussed tomorrow at a lunchtime seminar at St Stephen’s Club sponsored by the Institute of Chartered Accountants in England and Wales. The panel will include David Laws MP, Nick Bosanquet, Professor of Health Policy at Imperial College London and Consultant Director of Reform and David Walker, Editor of the Guardian’s Public Magazine. To reserve a place, please email Anna Calvert on anna.calvert@reform.co.uk.

In an article on Conservative home, Elizabeth Truss, Reform’s Deputy Director, and Lucy Parsons, Reform’s Economics Research Officer, write:

- “Some present poor social mobility as an inevitable result of globalisation, reducing the lot of the unskilled. However other countries have managed to turn new jobs to their advantage and used globalisation to widen opportunity – France, Ireland, Sweden and the Netherlands have increased social fluidity - in the UK it has stagnated. The primary reason for the UK’s poor performance is the divisive nature of the education system. Increased centralisation and focus on results has had unintended consequences. More “teaching to test” has led to a failure to develop a rounder education that children need to succeed. I met a head teacher this week in Hackney who told me that some pupils arriving at the school were unable to use a knife and fork. A focus on what is important has been lost. This is at a time when the skills required to get a job are no longer just the “hard skills” but also how you present yourself, your motivation and your flexibility.”

A leader in the Telegraph, says:

"As a nation, we are now owned and run by the government machine to an extent far greater than any in our history. Millions are now dependent on the state for employment; millions more for the degrading substitute of benefits. And, as a new report from the think tank Reform concludes, the fatter the client state becomes, the less well it works, and the more it lets down those who have been obliged to grow up in its thrall. The "why bother" society identified in the study is the result of poor education and a misconceived welfare structure that discourages personal responsibility and hope; and it is not just the young unemployed who have been corrupted by this culture.”

The paper is also reported by the Daily Mail.

For more information, please contact Lucy Parsons at Reform.