Conservative Chancellor George Osborne’s Budget last week, his first without the need to negotiate with the Liberal Democrats, was widely hailed as a feat of political brilliance. It has put the opposition Labour Party into disarray. At its centre was a direct attack on Britain’s working poor. Nothing could demonstrate that group’s political weakness better.
Part of the political acuity was the spread of confusion over where the budget pain was to be felt. Mr Osborne, and the Prime Minister, David Cameron, had earlier set out their intention of wooing working class voters to their party. Huge cuts to tax credits, the Budget’s centrepiece, were camouflaged by rises to the minimum wage, to be renamed “living wage”, by more than even Labour had been proposing before the election.
Britain’s tax credit system was implemented by Labour Chancellor Gordon Brown. It is designed to top up the wages of those not earning enough to meet basic needs, in particular the costs of bringing up children. Various arguments were used to justify this. It was said that companies were paying workers less because they were anticipating the effect of tax credits. The system was created by Labour so as to create a bank of dependent voters. Aspersions were cast on claimants as being shirkers, or feckless, especially poorer people who dare to have larger families (one proposal is to stop support for children after the second). It would be better to pay people more, and to tax them less, than to hand out state aid.
None of this really bears up to scrutiny. The minimum wage and higher tax thresholds are pinpricks on the wider problem for low pay. There was no sign that the public sector, for example, was going to be any more generous in its treatment of lower paid workers, many of which it pays for, directly or indirectly (through outsourcing contracts). Academic research does not support the idea that tax credits lead to lower pay – or at least, not by much. Claimants for tax credits are already working; they are very clearly not part of the army of shirkers, who, so far as they actually exist, claim direct state benefits. With an ageing population it is far from clear that the country needs fewer children with working parents – and poverty can adversely affect the progress of those children, reducing their chances of playing a full and active part in the economy.
This was nicely illustrated the Economist’s Bagehot column this week. He (Jeremy Cliffe) visited a local estate in south London (not all that far from where I live, as it happens), and talked to some of Mr Osborne’s proposed victims. He found a number of working women, with a diverse range of heritages, facing up to a difficult predicament with dignity. At the school where I am governor, such families demand increasing levels of support if their children are to keep pace with those from more fortunate families. We are lucky that the proportion of such families is manageable: but their needs will grow; our funding will not.
What our society is confronting is one of the most important issues it faces. It is the disappearance of mid-level blue and white collar jobs, and their replacement by less secure and less well-paid ones. These new jobs are overwhelmingly in service industries – carers, cleaners, call centre operatives, security guards, and so on. This change is overwhelmingly due to new technology – but it has been helped along the way by globalisation. These new jobs often do not pay enough to allow their workers to fully participate in society – especially if they have children.
But it is not at all clear what the solution is. Two traditional answers do not look promising. The first is to improve productivity. And yet in these jobs it hard to see how this can be done without increasing general alienation. In any economy some jobs lend themselves to advances in productivity (think factories) and other don’t (think hairdressers). As the former become more productive, the proportion of workers in the second group increases. This is a phenomenon known as “Baumol’s disease” by economists – and it is a large part of what is going on here. The economy is stratifying between a small number of highly productive jobs, and a large number of relatively unproductive ones. The former can lift up general levels of pay for everybody – but only so far. Improving productivity may simply help an elite of better off workers, without doing much for everybody else.
The second traditional answer is to increase job protection to improve the bargaining power of those in poorly paid jobs. This is the route favoured in such countries as France. It tends to lead to either or both of two things: higher unemployment or a growing army of temporary workers with fewer rights.
We are left with three routes that look inadequate, but must still be pursued. The first is redistribution through tax, benefits and freely available public services. Our tax credit system is a key element of this. The fact that its cost has escalated well beyond the scale originally envisaged simply shows that the problem it is trying to fix has grown. The answer is as surely to be higher taxes and not reduced benefits. The second route is universal education, and initiatives to ensure that children from poorer backgrounds get more support. This gives more people access to better paid jobs, and makes the job market less easy to stratify. Progress has been made on this, but it remains under pressure from lack of finance. The reduction of tax credits associated with children will be a step in the wrong direction.
And third is the strengthening of local communities and local economies. This may not make the economy much more productive in the traditional economic sense of creating more goods and services to consume, but it serves to humanise society and to tackle the exclusion that is the biggest cost of poverty. Tax credits have no role to play in this. They are a giant, soulless centralised system controlled by rules made by bureaucrats and politicians far, far away. They only help by improving incentives to work, and participate in communities that way, rather than dependency on straight benefits – which is corrosive of communities. But nothing the current government is doing, or the political elite is thinking about, is advancing this third, important approach. It does not follow from grand initiatives that make big political careers.
And the sad thing is to see how politically marginalised the modern working class has become. Our old picture is of white men, working in factories and belonging to unions. But this strata of working class is disappearing. Instead we have a growing army of male and female workers from diverse ethnic and cultural backgrounds. They are not unionised, and split into multiple communities. They often do not vote. The Labour Party, the traditional sponsors of the working classes, is now more interested in chasing their more engaged and better off cousins in what is left of the traditional working classes and in the middle classes (“Middle England” as I have called it). Middle England is not very sympathetic to the plight of the new working class. This has weakened the party’s opposition to Mr Osborne’s budget – though thankfully three of the four prospective leaders see that their stop-gap leader Harriet Harman has gone too far in suggesting that Labour will not oppose the cuts to tax credits.
Liberals, I believe, must stand firm behind tax credits, accepting tax rises to support them if need be. We should also support education policies to ensure the full participation of children from poorer families. But the real hope lies in reinvigorating local communities. We should remember that this is not just a middle class thing. The Liberal Democrats in particular have been forced back into a middle class ghetto, and I suspect that many find this a comfortable, if small, place to be. But the real need for liberal solutions is amongst the country’s new working class, and that is an important area for outreach, based on community politics.