February newsletter by Leonora Merry

Social Market Foundation | Newsletter February 2012 | Page 1

Newsletter: February 2012 Welcome to the February newsletter With the recent Moody’s downgrade of UK debt and the continuing Eurozone debt crisis, the Government’s economic strategy is under renewed scrutiny as the Budget approaches. Many of the big questions of 2011 remain unresolved. How can we kick start a slowing economy without spooking the debt markets? How do we stave oﬀ an impending jobs crisis? Where will further austerity measures fall? George Osborne’s Budget next month comes at a crucial time in the economic debate. In this context Ian Mulheirn looks at the various parties’ approaches to growth on page 2. He introduces the SMF’s plan for a £50bn stimulus without adding to the deﬁcit based on bringing forward the £15bn savings that the Government has to make by 2017.

Page 8 of this newsletter has details of our upcoming events, including a major half-day conference on the rehabilitation revolution next month with Prisons Minister Crispin Blunt, and our continuing Chalk + Talk programme with respected academics including Kathy Sylva, Avner Oﬀer and Ha Joon Chang. The newsletter has details of two new publications: Osborne’s Choice, which was launched earlier this week with coverage in the Financial Times, BBC Today Programme, Daily Telegraph, Independent, Daily Mail and more; and A Better Beginning, on childcare costs, which received coverage in The Times, BBC, Financial Times, Guardian, and the Daily Telegraph

With the debate over childcare costs continuing, Ryan Shorthouse explains the SMF’s model for a National Childcare Contribution scheme to help parents with childcare without costing the Government extra money.

Last month we launched our Market Square blog, on our new-look website. A preview of the Market Square is contained on page 6, and you can sign up to receive posts online at www.smf.co.uk/marketsquare. Why not join in the debate?

As unemployment continues to rise and concern grows over the UK’s skills deﬁcit, John Springford looks on page 8 at why smart enterprise policy should invest in people and not in places.

Finally, we’re currently looking for sponsors for a number of highly topical policy proposals, including work on Surestart, and access to higher education. Please contact Nigel Keohane for more information on nkeohane@smf.co.uk.

Contents Director’s note: Osborne’s alternative Ian Muheirn

Vince Cable talks to the SMF on reforming executive pay

The Market Square

Solving the childcare funding trap Ryan Shorthouse

Forthcoming SMF events

SMF publication: A Better Beginning

Smart enterprise policy should focus on people not places: John Springford

www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

Social Market Foundation | Newsletter February 2012 | Page 2

Director’s note

Director’s Note: Osborne’s alternative Ian Muheirn Ian Mulheirn So now it seems everyone is calling for a fiscal growth strategy. Conservative backbenchers are pushing tax breaks for entrepreneurs; Ed Balls wants a reversal of last year’s VAT cut; and the Lib Dems are agitating for the acceleration of the £10,000 personal allowance manifesto pledge, in pursuit of growth. It’s welcome to see people across the political spectrum starting to take the growth agenda more seriously. But it’s not for nothing that the Chancellor points out the perils of a loss of deficit-cutting credibility if he goes borrowing more. You can make a good case for a discretionary fiscal stimulus, but you must also acknowledge that the risks involved for UK government debt are unknowable and the consequences potentially catastrophic.

This £50bn boost would have an impact twice as great as the VAT cut plan That’s why the SMF has published a plan to boost growth while sticking to the government’s deﬁcit reduction plan. How is that possible? Well, not all government spending and tax measures have an equal impact on economic output. Low growth measures, like tax breaks to encourage rich people to save, cost government money and drain the

economy of demand at a time when those with the capacity to do so should be encouraged to sustain their consumption. Infrastructure spending, on the other hand, has a strong positive impact on output. The government has to find an additional £15bn of annual spending cuts or tax rises by 2016. And with an election looking, the longer it waits to distribute the pain, the more its deficit cutting credibility will fall into doubt. That’s why the Chancellor should make the cuts now from low-growth areas, and recycle the money into high-impact spending for the next four years. This £50bn boost would have an impact twice as great as the VAT cut plan, and three times as large as an unfunded version of the Lib Dem personal allowance plan. But more than that, it would do so without adding a penny to the deficit, while all the other proposals would add billions. If I were a holder of UK government debt, or an unemployed person, I know which plan I’d want the chancellor to go with.

SMF publication Osborne's Choice: combining ﬁscal credibility and growth By Ian Mulheirn. With contributions from Gavyn Davies, Richard Lambert, Evan Davis, Dan Corry and Gerald Holtham This paper argues that the Chancellor should bring forward the unidentiﬁed £15bn of austerity measures that have to be made in the next parliament, and spend the extra £50bn this would save over four years to stimulate the economy and cut unemployment through investing in infrastructure.

www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

Social Market Foundation | Newsletter February 2012 | Page 3

Solving the childcare funding trap Ryan Shorthouse Earlier this month we launched an innovative idea to help parents better aﬀord the high cost of childcare. We’re proposing a National Childcare Contribution Scheme (NCCS) which will enable parents to spread their childcare costs over a longer period of time. Parents who opt into the scheme would be given ﬁnancial support from government for their childcare costs, which they would then pay back through a small contribution from the main earner’s salary each month.

55% of parents with children under the age of ﬁve think childcare is too expensive. Childcare costs put an intense squeeze on families’ incomes for a relatively short period of time. Those high costs can mean that it’s simply not viable for parents to go to work. A quarter of parents in severe poverty report that, following the cut in the childcare element of the Working Tax Credit in April 2011, they have left work because the cost of childcare is too high. Polling by YouGov for this report found that 55 per cent of parents with children under the age of ﬁve think childcare is too expensive. What’s more, the problem is getting worse. In SMF’s previous report, The Parent Trap, we found that low-income families are likely to pay 62 per cent more in today’s money from their own pocket in 2015-16 compared to 2006-07 because of a combination of reduced public support and rising prices. So what should be done? Those of us who are passionate about formal childcare – who know its incredible value to parental employment and children’s development – could keep asking for more money from government.

However, public money is tight and government has to finance a whole array of other commitments. We have to face the reality that in the foreseeable future parents and the sector just aren’t going to get the level of funding they need from the public purse to make childcare truly highquality and affordable for all. A creative solution is urgently needed to help families to better manage the costs themselves. The NCCS provides that solution. Under the scheme, parents will be able to access financial support from government, capped at £10,000 in total, to pay for childcare for any of their children under school-age. This assistance would be in addition to the existing government support available for childcare. The money from government would be delivered to a smart card which parents could use at any formal childcare provider. Liability for subsequent repayments from earnings would sit with the main earner in the family, who would contribute 6 per cent of their gross income above the income tax personal allowance. These contributions end when the main earner has contributed in full the value of the support they drew down, or after 20 years, whichever is first.

We want formal childcare to be a universal, high-quality part of Britain’s education system Under our scheme, government would recoup the money it gives out through subsequent parental contributions. Consequently, the initial outlay would not count as current spending, with all the problems that would cause for a government seeking to tackle the yawning deﬁcit. Some low earners may not repay in full what they initially received,

www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

Social Market Foundation | Newsletter February 2012 | Page 4

but this shortfall would be covered by applying a modest interest rate to the total amount that parents draw down from the system. So, overall, the scheme would not cost the government money.

The initial outlay need not count as current spending The idea seems to ﬁt with parents’ needs. When YouGov asked parents what they thought of the proposal, 57 per cent of those who expressed an opinion said it was a good idea. Over a quarter of all parents said they would be likely to use the scheme. Chart: Proﬁle of childcare costs for an example household

Many parents, of course, will continue to look after their children at home. Others will prefer to use informal childcare. But it is encouraging that a quarter of parents who currently do not use formal childcare, and 28 per cent of those using informal care such as grandparents, said they would use the scheme, which would mean a shift to the use of formal childcare. So the scheme would likely increase demand for formal childcare, raising take-up to for the benefit of children, parents and society. This scheme has an added benefit which could correct some problems with the current childcare market. It will bolster demand by making childcare much more affordable. This will increase the amount and reliability of revenue coming into the sector, allowing providers – who currently face limited profitability because they operate in fragile, localised markets - to invest much more in the quality of staff and the flexibility and sustainability of provision. The SMF wants formal childcare to be a universal, high-quality part of Britain’s education system. Doing this is the key to making work pay and boosting social mobility. With public money tight, the National Childcare Contribution Scheme offers a real hope of giving all children a better beginning.

Ryan Shorthouse is a Researcher at the SMF

SMF publication A Better Beginning: Easing the cost of childcare Ryan Shorthouse, Jeﬀ Masters and Ian Mulheirn This paper proposes an entirely new policy - a National Childcare Contribution Scheme – to help parents manage the high costs of childcare over a number of years. In straightened times, this innovative proposal oﬀers the only route to the universal, high-quality childcare service Britain desperately needs. Order a hard copy now for £15 from the SMF’s website at or download a PDF

www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

Social Market Foundation | Newsletter February 2012 | Page 5

Vince Cable talks to the SMF on reforming executive pay Rt Hon Vince Cable, Secretary of State for Business Innovation and Skills, gave a speech to the Social Market Foundation in January outlining his plans for reforming executive pay. At an event sponsored by ACCA at the British Academy in London, Vince Cable explained the Government's proposed measures to tackle excessive executive pay on four fronts: to boost transparency; give shareholders more eﬀective control; increase the diversity of remuneration committees; and encourage major businesses and investors to lead by example.

Dr Cable explained that the Government's role in reforming executive pay should be to be "pro-market but not naively free market". The Secretary of State said: "I do not want to see private sector salaries being set in Whitehall, but I do accept the business view that Government has a legitimate role in ﬁnding answers to what is a market failure." Speciﬁc proposals for tackling excessive executive pay included: 

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Vince Cable said: "There is now broad consensus across the main political parties and many business and investor groups in support of 'responsible capitalism'. This precludes lavish payouts for failure or mediocrity, and addresses widening inequalities in remuneration. "There is also a common understanding that Britain’s recovery from its profound economic crisis must be led by successful private enterprise and that entrepreneurs and good managers will expect competitive rewards. The debate on executive pay has to reconcile these two objectives".

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Boards and their remuneration committees will have to explain why they have used speciﬁc benchmarks and how they have taken employee earnings into account in setting pay Companies will have to explain how they have consulted and taken into account the views of employees Companies will have to open up the performance criteria for bonuses Companies will be mandated to produce a distribution statement outlining how executive pay compares with other dispersals Binding shareholder votes on the future pay policy for the Board, including a statement of how shareholders' views have been taken into account A requirement to get binding shareholder approval for more than a year's salary and contracts giving notice periods longer than a year. Shareholders will get a vote on how the company has implemented the approved pay policy in the preceding year. Two directors on every board who are new and have not previously served on boards. Adopting Lord Davies' recommendations designed to boost the proportion of women on boards

www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

Social Market Foundation | Newsletter February 2012 | Page 6

The Market Square www.smf.co.uk/marketsquare A market square is a social hub where people come together to trade goods and chew the fat.

all its state school students at CCD, it would achieve the same results on average.

The SMF's Market Square is an ideas exchange, where the SMF team blog about the latest issues and test out new thinking.

The data underlying this chart may exaggerate the gap between state and private school students’ performance at degree level. State school students may disproportionately take easier degrees than private school students. But it seems unlikely that this bias is so large that it drowns out all of the diﬀerence.

Get involved in the discussion by commenting on posts, voting on our ideas, and sharing through social media.

University access: Dumbing up? John Springford Some are unhappy about the prospect of OFFA, the equal access body for higher education, making universities accept more state school students. Why? Because they argue universities will be made to take poorer quality students. So this will lead to ‘levelling down’, with more equal intakes but poorer overall outcomes. Levelling down would indeed be a concern. But their fears are unfounded, as we can see from the chart below. It shows the proportion of university students who got a 2:1 or ﬁrst by the grades they got at A-Level. State educated pupils do a lot better given their A -level result – the gap in the proportion getting good degrees is between 3 and 10%, depending on what A-levels the students achieved. So OFFA can make top universities take many more state school

So OFFA should get universities to take more state school students. But two questions spring immediately to mind. Why don’t universities favour the state educated already, if they tend to do better? And why do state school kids do better? Universities find it difficult to appraise quality on admission – predicted A-level grades loom large. Academics have less and less time to run a thorough application process. The more resources the application process uses, the less cash they have for other priorities. The Research Assessment Exercise encourages them to focus on research, rather than undergraduate administration. And they don’t suffer any financial penalty if their degree outcomes are poor – although they do suffer reputational damage. For this reason it is rational for them to focus on A-levels. But why don’t privately educated children do better? Private schools are notoriously good at getting children into university. Exam results are better on average. They offer interview practice and more help with applications. But once at university, this help disappears, so private school students revert to their inherent ability. The gap that opened up between state and privately educated students in secondary education closes at university. It is rational for universities to choose on this basis, given that they have limited information. But this suggests OFFA might be doing them a favour by making them choose more state-educated applicants.

Also on the Market Square: Cross party ﬁscal incontinence? Ian Mulheirn

students without damaging performance. In fact it might improve it. Even if a university still mandated that successful applicants had to have, say, three A’s at A-level, it could take a greater proportion of state school students and achieve better results. Lower down the university rankings, even bigger gains could be made. If a university took all its private school applicants at BCC, and

The SMF's childcare plan: debunking the myths Ian Mulheirn

Universities in demand? Ryan Shorthouse

The Work Programme: built on shifting sands? Ian Mulheirn

www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

Social Market Foundation | Newsletter February 2012 | Page 7

Forthcoming SMF events Chalk + Talk: Getting Britain Growing, with Tim Besley (LSE) Social Market Foundation, 11 Tufton Street, London | 12.30pm Contact: rbaker@smf.co.uk / 0207 227 4404 or visit www.smf.co.uk/events

Reviewing the Rehabilitation Revolution, with Crispin Blunt MP British Academy, 10 Carlton House Terrace, London | 9.00am - 1.00pm We are delighted to welcome Prisons Minister Crispin Blunt to our annual justice conference. The Minister will set out the Government’s thinking behind the range of different models of payment by results for offender rehabilitation currently being developed by the Ministry of Justice. Throughout the morning our expert panellists will help us to explore the impact that the new approach is having on rehabilitation interventions and outline the longer-term direction of travel for the rehabilitation revolution. Confirmed speakers include: Crispin Blunt MP, Minister for Prisons; Simon Israel, Home Affairs Correspondent, Channel 4 News; Kevin Lockyer, Director of Services, Nacro;David Perrins, Avanta Justice; Tom Gash, Institute for Government; A representative from the Peterborough project. The event will be chaired by Ian Mulheirn, Director, SMF. Contact: rbaker@smf.co.uk / 0207 227 4404 or visit www.smf.co.uk/events

Chalk + Talk: Early Years and Childcare, with Professor Kathy Sylva Social Market Foundation, 11 Tufton Street, London | 12.30pm Contact: rbaker@smf.co.uk / 0207 227 4404 or visit www.smf.co.uk/events

Chalk + Talk: The Economy of Obligation, with Professor Avner Oﬀer Social Market Foundation, 11 Tufton Street, London | 12.30pm Contact: rbaker@smf.co.uk / 0207 227 4404 or visit www.smf.co.uk/events

www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

Social Market Foundation | Newsletter February 2012 | Page 8

Smart enterprise policy should focus on people not places John Springford In the first chapter of a recently published pamphlet looking at business and enterprise policy under the last Government, Dermot Finch lays down a challenge for policymakers. They “must adopt more of a private enterprise approach to job creation”. This is undeniable given our straightened fiscal circumstances. But the question is: how? When looking at enterprise policy, there are two choices: a ‘place’ approach, and a ‘people’ approach. It may be tempting to take the place approach. Few would argue that regional inequality is a good thing. So why not use the government’s low cost of borrowing to join up with the private sector to invest in the regions? Surely this will boost growth and tax receipts, which allows the government to pay back the debt? And surely we have responsibility to those regions that are still struggling to find their feet in a post-industrial economy?

Focussing on ‘places’ ignores the true reasons why regions have unequal growth rates There are two reasons why this is a bad strategy. First, focussing on ‘places’ ignores the true reasons why regions have unequal growth rates. Most economic geographers ﬁnd that some regions are poorer than others primarily because of the human capital that is in the region.

People who have higher skills tend to migrate to places where they can find work, leaving people with lower skills behind. Investment does not flow into the area because the people aren’t very productive. This leads to different labour markets in different regions, with lower skilled people concentrated in certain areas. If government invests in the region and attracts the private sector, the net effect on enterprise will be very small. Firms and more skilled workers may move in, but that is just a displaced activity from another region. There’s no guarantee that the original inhabitants will be employed. The unemployment rate in the region may fall, but the people you’re trying to help aren’t any better off.

The solution lies in more investment in improving the workforce’s skills Second, government is bad at identifying good investments. Government has limited knowledge about which investment is most likely to lead to employment or wage increases. It has to rely on central planner’s tools, like statistics and planning, and these tools are always faulty. It could build a new industrial estate, but there is no guarantee that companies will use it. Instead, policymakers should deploy a ‘people’ strategy. The solution lies in more investment in improving the workforce’s skills, and ensuring that

www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

Social Market Foundation | Newsletter February 2012 | Page 9

Smart enterprise policy should focus on people not places (continued) employers want those skills. Unemployment stands at 8% and is likely to be high for many years. Even in the boom years, too many low-skilled people could not ﬁnd work. Investing in human capital is far more likely to create sustainable, private sector job creation than government-created jobs.

Labour invested heavily in human capital in the boom years, but much of it was wasted. Labour invested heavily in human capital in the boom years, but much of it was wasted. Using the Social Market Foundation’s ideas for boosting human capital through a properly funded higher education system and payment-by-results in adult skills would help. Government should extend this people approach to entrepreneurs. The UK has had a declining rate of startups, from 449,700 in 2007 to 372,400 in 2008 and 330,100 in 2009.

To encourage entrepreneurs and the self-employed, the government could oﬀer start-ups deferred payment of business taxes for three years. This would encourage new businesses to plough proﬁts back into the business, stimulating investment. The government would face more risk of businesses going bust and being unable to pay. But with small businesses struggling to get bank loans, this is exactly the sort of risk government should be shouldering. Growth comes from higher productivity. Entrepreneurial spirits are animated by making it easier to take risks. Investing in people’s human capital, and their ability to take risks is most likely to stimulate job creation and an enterprising culture. JohnSpringford is a Senior Researcher at the Social Market Foundation This is an edited version of an article published on the Labour Business website

www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB