Choosing public policies to address inequality
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Danny Alexander explains in a speech at the French economy ministry that fairness lies at the heart of the British economy recovery plan.
Good morning – and thank you for hosting me today.
I have been Chief Secretary to the Treasury for over four and a half years. It is the second most senior Ministerial post in the Treasury – responsible for all public expenditure, including spending reviews, public sector pay, and departmental expenditure negotiations.
Unsurprisingly, that means that the media was quick to call me the “axeman”!
The man who makes the cuts. Or, in economist-speak, “fiscal consolidation”.
Well, there’s been one thing spurring me on over these past four and a half years.
Fiscal consolidation is a means to an end. That end is growth and stability to provide opportunities for everyone.
Creating equality – allowing people to succeed whatever their background – is one of the fundamental qualities of a strong economy and fair society.
For too long, too many people from a background have failed to prosper. On a personal scale, it is a tragedy. And on a national scale, it is a terrible waste of talent and potential.
Our challenge, as a government, was to address that at the same time as creating financial stability and dealing with a very large budget deficit.
And in 2010, the UK was not in good shape.
On coming to power, we had to deal with the biggest budget deficit in peacetime history, and the painful effects of a financial crash, the reverberations of which affected households up and down the country.
We know, back in 2010, that our first task was to restore order in the public finances.
If you, as a country, do not take responsibility for sorting out your financial problems, then you might get away with it for a while. But it’s not a decision you can defer for ever.
Sooner or later, the market will force you to confront your finances.
And when that happens, the most disadvantaged – that is, the people you entered politics to try to help – suffer the most.
I hope I am right in saying that no politician enjoys austerity for its own sake.
But confronting unsustainable public finances is at the heart of growth.
It’s a vital precondition to growth. And it’s absolutely necessary in delivering fairness.
Because it’s only with a healthy economy that we can properly carry out the core tasks of government: providing high quality public services and driving out inequality and enhancing opportunity.
Within that context of sorting out the finances, how you consolidate really matters.
And you have to evaluate the impact of your policies, to make sure they actually are protecting the most vulnerable.
Back in 2010, I personally insisted that the government produced distributional analysis at each of our two annual fiscal events, the Autumn Statement and Budget.
This asks what the impact of our reforms has been on households. Who has benefitted? Who is contributing more? How has that helped equality?
Those reforms, I should add, include tax as well as public spending. Indeed, in every single Budget we raised revenues from the wealthiest.
Our analysis shows that we are indeed rebuilding and re-wiring the economy as fairly as possible.
Income inequality in the UK, as measured by the Gini coefficient, is lower than it was in 2010 to 2011.
Before 2010, the richest 20% in society contributed around three and a half times as much in tax as they received from public spending. Now it is around four times as much.
While last year the top 1% of taxpayers paid more than 28% of income tax revenue.
In terms of disposable income: the financial crisis hit people’s income hard. But even so, since 2007 to 2008, the average annual disposable income of the poorest fifth of households has risen by £100 in real terms.
While the richest fifth of households suffered the largest fall in real-term incomes – by over £3,000 per year.
How have we achieved this?
Well, first of all, I think it is vitally important to have a guiding principle behind all of the policies that you put in place.
Ours has been social mobility.
How do you stop disadvantage being entrenched?
How do you make sure everyone has the right opportunities in life?
How do you make sure your country can benefit from the brightest and best – no matter where they come from?
And how do you tackle the corrosive problem of young people with little education, no training, no jobs and no aspirations?
The first way we have chosen to create social mobility is through education.
All children, regardless of background, must reach their full potential – and that involves policies which support them all the way.
No child should be prevented from succeeding because of their family’s financial circumstances.
And no child must ever be allowed to think:
I come from a poor background. I can never be a success.
We know that the early years of a child’s life are the most important. Poor children are four times as likely to become poor adults compared to other children, and that is a cycle we must break.
So we have extended the 15 hours a week of free childcare given to all 3 and 4 year olds to the most disadvantaged 2 year olds.
We are increasing the childcare support for low income families to 85% under Universal Credit, alongside other welfare reforms.
Through the Early Years Pupil Premium, schools, nurseries and childminders will be given up to £300 for every 3- and 4-year-old from a low-income family to help prevent them falling behind before they have even started school.
We’ve also introduced in schools, the Pupil Premium, worth £2.5 billion this year, gives schools extra funding for pupils from the poorest families – to be spent, at the school’s discretion, to ensure that those children don’t fall behind.
We’ve introduced national scholarships to help students from low-income households afford university.
We’ve increased spending on adult apprenticeships.
So even during this period of consolidation, 300,000 fewer children are in relative income poverty, around 390,000 fewer children are growing up in workless families, and the attainment gap for deprived pupils has narrowed.
That is great news for the life chances of our future generations.
And it gives a much wider talent pool of people boosting our economy and driving growth.
The second way you improve equality is through job creation.
Work is the best route out of poverty.
And in the UK we have created an economic and financial climate that has enabled UK businesses to create over 2 million more private sector jobs.
And I want to refute the idea that they are low-rent jobs on part-time or zero-hour contracts.
Just in the last three months 90,000 full time jobs were created.
One thousand a day. And 80% of jobs created in the UK have been full time.
One thousand more people with a full-time wage. Every day.
Our above inflation National Minimum Wage increases have boosted the incomes of a million people.
And our most recent earnings figures have shown wage growth outstripping inflation – more than double for the majority who have been in the same job for over a year. And as we work to get productivity up, I am confident that we will see an era of real and significant wage increases.
The third way you improve inequality is by increasing the amount of money in the pockets of those on low or medium incomes.
Because not only does cutting day-to-day costs relieve financial pressure on our households…
It allows them to save and to invest. Maybe to start a small business.
It sends a very powerful message:
This is money which you’ve earned – use it as you see fit.
So we have increased the tax-free Personal Allowance from £6,475 in 2010, to £10,000 now, with a further rise to £10,600 this April.
What does this all mean for Britain?
The IMF have confirmed that Britain was the fastest growing economy of any major, advanced nation in 2014 – forecasting 2.6% growth last year and 2.7% this year.
That is a real vindication of the tough decisions we have made in a difficult economic climate.
But I am even prouder that we have done so in a fair, and a sustainable way – one which tackles inequality wherever it is in the system.
Our values – our policies – have made sure that fairness lies at the heart of the recovery plan for the British economy.
Because in my book, a recovery which does not address inequality is not a recovery at all.