James Vitali is a Research Fellow at Policy Exchange.
As we have asked the state to do more and provide more, we have simultaneously expected that individuals, households and smaller, more intimate forms of community do and provide less.
The conservative intuition is that this has been a degenerative trend. Of course, there are the pragmatic and practical dilemmas that this dynamic throws up when it interacts with demographic change.
But there is a principled reason why this development should be regretted too. Conservatives believe in “subsidiarity”, that society works best when decision-making occurs at the most proximate, most human level possible. Of course, some goods cannot but be provided by the state. But a strong base of individuals and families that are invested in their local communities is the prerequisite for durable, robust societies more generally.
It follows then, that if we want the state to do less – if we want to reduce “demand” for it – then we must enable individuals and households to do more. And perhaps the most important means by which people can live self-sufficient, independent lives is a good, dignified, and well-paid job.
Unfortunately, the discourse on providing “good jobs” has become associated implicitly with further statism. In both the US and the UK, some are arguing that delivering good jobs means arbitrarily raising salaries, either via further increases to the minimum wage or via sector pay boards, as advocated by Michael Lind.
Of course, we all want to see real wages – which have been stagnant in the UK for the last two decades – rise. But pushing up wages without fundamental improvements in productivity will simply create inflationary pressures or displace jobs. In both scenarios, this will lead to more, not less demand on the state.
There is only one way that the state can simultaneously support rising wages and pare back the demand on its resources, and that is to help raise productivity. If we can create a positive feedback loop, where productivity gains are pushing up salaries at a faster rate than prices, then we can pull more people out of in-work benefits, and thus reduce pressures on the public purse. This is the only route to prosperity which avoids both an inflationary trap and the ratchet of every higher taxation.
The prize on offer is potentially huge, since the Government is currently subsidising our low productivity by billions of pounds each year through income support. The proportion of people receiving benefits who are employed has grown precipitously since the 1990s.
Last year, some 2.3 million people in jobs were claiming Universal Credit. Itemised data on Universal Credit payment is complex, but if we were to assume that annual income support through UC totalled somewhere in the region of £4400 annually per person (the rate of income support for someone over the age of 25 under the legacy benefit scheme), there are potential savings of over £10 billion to be had for the Treasury each year by moving working people out of benefits. And that’s excluding the savings that would derive from lifting people out of other benefits (like housing allowance) – or the wider economic benefits from improved productivity.
So how can we boost productivity, raise earnings and reduce benefit dependency? Here are three areas to think about.
Skills
First, we need to help British workers access the skills that employers need. Augmenting the skills and training of our workforce will enhance labour productivity, which is absolutely key if we want sustainable increases in salaries. How the Government supports upskilling is thus of the utmost importance.
As Policy Exchange’s Reforming the Apprenticeship Levy found, however, the UK is an international outlier in not tying the process for assessing skill shortages to the skills funding system. As a result, the allocation of government spending is deeply wasteful. Whilst spending on technical qualifications and apprenticeships, for example, has languished, subsidies on higher education totalled over £10 billion in 2021-2022, more than triple the Apprenticeship Budget.
Of course, education is about more than merely preparing our young people to be members of the workforce. But responsible fiscal policy must ask whether it is justifiable to use taxpayer money to subsidise degrees of dubious value, whilst skills of vital importance to employers go underfunded.
Planning
Production and the supply-side Skills can only get us so far, though, and it is apparent that, in certain sectors, the wage premium for skilled workers is falling. We urgently need to support our country’s production capacity, and as I have argued elsewhere, the most effective thing we could do to this end is planning reform – for both housing and infrastructure.
We need to move to a system that is less discretionary and provides greater certainty – for local residents, local authorities, businesses and developers alike. Establishing a windfarm (even when it is popular with and directly benefits local residents), building new homes in areas of high demand, delivering new laboratory infrastructure or manufacturing capacity – all these things are incredibly hard to do at the moment because the labyrinthine system currently creates powerful incentives and mechanisms for interest groups to block development.
And these things are the result of political choices that are in the gift of the Government. Making it easier to plan, build and produce will reduce costs for businesses, and every pound not spent on the bureaucracies associated with the planning process is a pound that can be spent on investment and wages instead.
Immigration
Thirdly, Conservatives must get a grip of immigration. Throughout history, an abundant supply of cheap labour has led to suboptimal investment in both physical and human capital. Relying on cheap labour from abroad to plug our skill shortages has worked to suppress wages in certain sectors of the economy, and this has made particular demographics – particularly low skilled workers – more reliant on state support. Markets are not self-sustaining; and depend on strong communities, institutions and social fabric to work. Immigration on the scale we are currently seeing – undermines that sense of cohesion.
If we want to reduce dependency on the state through more self-sufficient households in Britain, we need to incentivise business investment with a view to the long term. And to do that, we need to take the quick fix policy option of cheap foreign labour off of the table.
Coda
A final consideration: if we really want to generate greater self-sufficiency in the labour force, we need to make it easier for workers to acquire and own capital. Conservatives have long recognised that there is a powerful connection between the ownership of property and a greater sense of personal independence, responsibility and stake in society.
But we are failing as a society to enable and incentivise workers to own capital. The Money and Pensions Service estimates that one in four people has less than £100 in savings; one in six now have no savings at all. It is these people who are most exposed in periods of economic downturn, and therefore these people who will make the most significant demands on the state’s resources in times of economic difficulty.
To this end, we should use the tax system to incentivise the expansion and take-up of worker share ownership schemes. The FTSE All Share Index has seen annual increases of 3.6 per cent per annum since 1997. Yet just 1.9 million people over the age of 16 are benefiting from employee shares. Expanding these schemes could enable millions more employees to share in the proceeds of economic growth.
Share ownership schemes offer a non-inflationary way to improve the financial resilience and self-sufficiency of UK households. But more than that, they will help to generate a wider base of property owners in the UK, which will be necessary if we are to move away from a political culture in which the state and redistribution are seen as the solution to all of our socio-economic challenges.
There is a belief that the winds of change are with the left. That greater state interventionism better reflects where the country’s intellectual currents are heading. But that is not an inevitable trajectory. We can enable people to live more prosperous, independent lives by raising savings and investment and improving productivity. Households and communities want to be more self-sufficient. The Government must champion economic policies that will enable them to do this.
James Vitali is a Research Fellow at Policy Exchange.
As we have asked the state to do more and provide more, we have simultaneously expected that individuals, households and smaller, more intimate forms of community do and provide less.
The conservative intuition is that this has been a degenerative trend. Of course, there are the pragmatic and practical dilemmas that this dynamic throws up when it interacts with demographic change.
But there is a principled reason why this development should be regretted too. Conservatives believe in “subsidiarity”, that society works best when decision-making occurs at the most proximate, most human level possible. Of course, some goods cannot but be provided by the state. But a strong base of individuals and families that are invested in their local communities is the prerequisite for durable, robust societies more generally.
It follows then, that if we want the state to do less – if we want to reduce “demand” for it – then we must enable individuals and households to do more. And perhaps the most important means by which people can live self-sufficient, independent lives is a good, dignified, and well-paid job.
Unfortunately, the discourse on providing “good jobs” has become associated implicitly with further statism. In both the US and the UK, some are arguing that delivering good jobs means arbitrarily raising salaries, either via further increases to the minimum wage or via sector pay boards, as advocated by Michael Lind.
Of course, we all want to see real wages – which have been stagnant in the UK for the last two decades – rise. But pushing up wages without fundamental improvements in productivity will simply create inflationary pressures or displace jobs. In both scenarios, this will lead to more, not less demand on the state.
There is only one way that the state can simultaneously support rising wages and pare back the demand on its resources, and that is to help raise productivity. If we can create a positive feedback loop, where productivity gains are pushing up salaries at a faster rate than prices, then we can pull more people out of in-work benefits, and thus reduce pressures on the public purse. This is the only route to prosperity which avoids both an inflationary trap and the ratchet of every higher taxation.
The prize on offer is potentially huge, since the Government is currently subsidising our low productivity by billions of pounds each year through income support. The proportion of people receiving benefits who are employed has grown precipitously since the 1990s.
Last year, some 2.3 million people in jobs were claiming Universal Credit. Itemised data on Universal Credit payment is complex, but if we were to assume that annual income support through UC totalled somewhere in the region of £4400 annually per person (the rate of income support for someone over the age of 25 under the legacy benefit scheme), there are potential savings of over £10 billion to be had for the Treasury each year by moving working people out of benefits. And that’s excluding the savings that would derive from lifting people out of other benefits (like housing allowance) – or the wider economic benefits from improved productivity.
So how can we boost productivity, raise earnings and reduce benefit dependency? Here are three areas to think about.
Skills
First, we need to help British workers access the skills that employers need. Augmenting the skills and training of our workforce will enhance labour productivity, which is absolutely key if we want sustainable increases in salaries. How the Government supports upskilling is thus of the utmost importance.
As Policy Exchange’s Reforming the Apprenticeship Levy found, however, the UK is an international outlier in not tying the process for assessing skill shortages to the skills funding system. As a result, the allocation of government spending is deeply wasteful. Whilst spending on technical qualifications and apprenticeships, for example, has languished, subsidies on higher education totalled over £10 billion in 2021-2022, more than triple the Apprenticeship Budget.
Of course, education is about more than merely preparing our young people to be members of the workforce. But responsible fiscal policy must ask whether it is justifiable to use taxpayer money to subsidise degrees of dubious value, whilst skills of vital importance to employers go underfunded.
Planning
Production and the supply-side Skills can only get us so far, though, and it is apparent that, in certain sectors, the wage premium for skilled workers is falling. We urgently need to support our country’s production capacity, and as I have argued elsewhere, the most effective thing we could do to this end is planning reform – for both housing and infrastructure.
We need to move to a system that is less discretionary and provides greater certainty – for local residents, local authorities, businesses and developers alike. Establishing a windfarm (even when it is popular with and directly benefits local residents), building new homes in areas of high demand, delivering new laboratory infrastructure or manufacturing capacity – all these things are incredibly hard to do at the moment because the labyrinthine system currently creates powerful incentives and mechanisms for interest groups to block development.
And these things are the result of political choices that are in the gift of the Government. Making it easier to plan, build and produce will reduce costs for businesses, and every pound not spent on the bureaucracies associated with the planning process is a pound that can be spent on investment and wages instead.
Immigration
Thirdly, Conservatives must get a grip of immigration. Throughout history, an abundant supply of cheap labour has led to suboptimal investment in both physical and human capital. Relying on cheap labour from abroad to plug our skill shortages has worked to suppress wages in certain sectors of the economy, and this has made particular demographics – particularly low skilled workers – more reliant on state support. Markets are not self-sustaining; and depend on strong communities, institutions and social fabric to work. Immigration on the scale we are currently seeing – undermines that sense of cohesion.
If we want to reduce dependency on the state through more self-sufficient households in Britain, we need to incentivise business investment with a view to the long term. And to do that, we need to take the quick fix policy option of cheap foreign labour off of the table.
Coda
A final consideration: if we really want to generate greater self-sufficiency in the labour force, we need to make it easier for workers to acquire and own capital. Conservatives have long recognised that there is a powerful connection between the ownership of property and a greater sense of personal independence, responsibility and stake in society.
But we are failing as a society to enable and incentivise workers to own capital. The Money and Pensions Service estimates that one in four people has less than £100 in savings; one in six now have no savings at all. It is these people who are most exposed in periods of economic downturn, and therefore these people who will make the most significant demands on the state’s resources in times of economic difficulty.
To this end, we should use the tax system to incentivise the expansion and take-up of worker share ownership schemes. The FTSE All Share Index has seen annual increases of 3.6 per cent per annum since 1997. Yet just 1.9 million people over the age of 16 are benefiting from employee shares. Expanding these schemes could enable millions more employees to share in the proceeds of economic growth.
Share ownership schemes offer a non-inflationary way to improve the financial resilience and self-sufficiency of UK households. But more than that, they will help to generate a wider base of property owners in the UK, which will be necessary if we are to move away from a political culture in which the state and redistribution are seen as the solution to all of our socio-economic challenges.
There is a belief that the winds of change are with the left. That greater state interventionism better reflects where the country’s intellectual currents are heading. But that is not an inevitable trajectory. We can enable people to live more prosperous, independent lives by raising savings and investment and improving productivity. Households and communities want to be more self-sufficient. The Government must champion economic policies that will enable them to do this.