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Elizabeth Truss and Lucy Parsons: Moving from a "why bother" to a "can do" economy

Lucy_parsons Elizabeth_truss

Elizabeth Truss is Deputy Director at Reform and Lucy Parsons is Economics Researcher at Reform. Reform’s full report “Shifting the unequal state: from public apathy to personal capability” is available here.

There is much political concern about the parlous state of Britain’s social mobility. However little acknowledged is the role successive governments have had in enforcing and embedding the divide, through public spending programmes and a failure to enact effective education reform.

Reform’s latest report finds that while the UK is no longer the “sick man” of Europe, it could be called Europe’s “divided society” and lays significant blame at the doors of government.

The social costs of low social mobility and persistent poverty have been well covered. Less so the economic cost of wasted talent that afflicts the UK’s economy. Reform’s research suggests that there is an economic cost of up to £1,300 per household or £32bn, an amount that dwarfs the worst impact of removal of the 10p tax rate which is £232 per year. This is the cost of the UK population having skills levels that are worse than key competitor nations, namely France, Germany and the US.

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. Michael Gove remarked on this in a recent speech where he referred to the schools system as an “Opportunity Block”.

Britain delivers some of the best elite education and the worst basic education in the OECD. If you are bright and poor, you can expect to be overtaken by somebody of lower intelligence but more money by the age of seven.  It is instructive that the cohorts born between 1958 and 1970 suffered from the greatest decrease in mobility, those who went to school at the time of changes brought into the education system in the 1960s. 

Increased centralisation and focus on results has had unintended consequences. More “teaching to test” had 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. 

This failure to achieve the most basic level in skills is exacerbated by an economy that has high taxes and excessive public spending. It is not surprising that many think “why bother” about a promotion or a new job faced with ever higher levels of income tax and steep marginal rates to leave the benefits system. (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.)

There are mobility blocks at every key point in the income scale, whether entering work or reaching the higher rate tax band which now comes very close to average earnings. People are also less likely to invest in their own education and capability in the UK (half the rate of the OECD).

A new approach is required that does not simply advocate increased public spending as the way of righting social wrongs.

Firstly, people must be able to drive the delivery of public services much more directly. For example, high social mobility countries in Scandinavia have reformed education systems in which the taxpayer funds both private and public schools.  British education policy on the other hand has only increased the divide between the two.

Secondly a lower tax economy is vital to free individual initiative. Lower government intervention and taxation would create a “capability margin”, meaning the resources available for individuals to invest in themselves. This is the amount available to individuals over and above their day-to-day living costs.  This margin is vital for investment in new skills.

These changes are critical to move the UK from a “why bother” to a “can do” economy.


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