A speech by the Rt Hon Iain Duncan Smith MP.
It’s a pleasure to be here to give the second Leonard Steinberg Memorial Lecture.
I knew Leonard personally. He was a remarkable man.
In his inaugural speech in the House of Lords, he described his life as follows:
“I was born in Belfast into a Jewish middle-class family. When I grew up … I joined the Ulster Unionist Party; when I emigrated to Manchester, I became a member of the Conservative Party…. Along the way, I became a bookmaker and an ardent Zionist. Therefore, [you] can well imagine the heavy burden that I have had to bear.”
Though said in a deadpan manner, it was true - Leonard was different in almost every way.
But instead of sitting back and saying that he couldn’t succeed in such an environment, with his background, it drove him on.
Against the odds - and even in the face of death threats - he became a successful businessman, a public-spirited citizen, and a great philanthropist - and I am proud to say my good friend.
Leonard embodied the principle that life is not what is given to you, but what you make of it and what you leave behind for others.
How we apply that principle in reforming our welfare system and renewing our society is the topic of my lecture tonight.
I note that this week marks the two year anniversary of the formation of the Coalition government.
I don’t intend to use this evening for an in depth analysis of that period.
But I do want to spend some time reflecting on the particular challenges which we face in my area of interest - the welfare system…
…as well as explaining how we are dealing with that challenge.
My lecture - you might be relieved to hear - will not be primarily a technical one.
The real purpose of this speech is to set out my mission in the job.
Put simply, what we need to achieve in the coming years is not political and technocratic welfare reform, but internal and external cultural change.
By this I mean cultural change both within society, and within government itself.
To explain what I mean let me start by taking you back to the early 1940s, when Beveridge was laying out his vision for the modern welfare state.
Beveridge was driven by a desire to slay the ‘five giants’ that he identified in society at the time: Want, disease, ignorance, squalor and idleness.
But he was also clear about the risks that were attached to this laudable cause.
He warned that:
“The danger of providing benefits, which are both adequate in amount and indefinite in duration, is that men as creatures who adapt themselves to circumstances, may settle down to them.”
And he was clear that the system should not be allowed to “stifle incentive, opportunity, or responsibility”.
In other words he was focussed on the kind of culture that the welfare system could underpin.
Would it be one that fostered a society where people took responsibility for themselves and their families, and treated welfare as a temporary safety net in times of need…
…or one that conditioned people to grow dependent on state support, and in turn treat it as a long-term crutch?
His fear was that if the balance was wrong it would lead to the creation of a semi-permanent underclass.
I wonder what he would think now…
Let me just give you a flavour of some of the figures we were confronted with when we came into office:
- 5 million people on out of work benefits
- 1 million there for a decade or more
- 1 in every 5 households with no one working
- And almost 2 million children growing up in workless households
So this was the first cultural challenge we faced - entrenched and intergenerational worklessness and welfare dependency.
And before you protest that this was just a product of the recession, remember that there were over 4 million people on out of work benefits throughout the years of growth.
Under the previous Government employment rose by some 2.5 million, yet more than half of that was accounted for by foreign nationals.
And I’m not just talking about computer scientists or smart bankers - I’m referring to the low-skilled jobs.
To be clear I am not trying to make a point about immigration - rather the facts serve to remind us that we had a huge challenge with our workforce at home.
Put simply, it was a question of supply and demand.
Large numbers were on out of work benefits, yet many were unwilling or unable to take advantage of the job opportunities being created.
It became increasingly apparent that while we had a modern economy, transformed under Mrs Thatcher…
…the nature of one section of society was left lagging behind.
Broken welfare system
The problem was that while our economy was subject to a fundamental overhaul, our systems of social support received little more than a patch-up job.
It was an incredibly reactive process - a new challenge would emerge in the system and governments would respond by tweaking things…
…adding new rules, new supplements, even new benefits.
But it was all built on a creaking edifice, and the result was a system of monstrous complexity.
More than 30 different benefits, complicated by additions within each benefit.
This was then compounded by the fact that when an individual started work part time, they found it impossible to calculate if they would be better off or not.
Some of their benefits were withdrawn at 40% as they moved into work, some at 65%, some at 100%…
…some net, some gross…
…some were only available at 16 hours, some at 24, some at 30.
Feed all of that into a complicated computer system - because no normal person can calculate what it all means for their income - and you find that something extremely damaging happens…
People on low wages lose up to 96 pence in every pound they earn as they increase their hours in work.
In other words for every extra pound they earn, 4 pence goes in their pocket and the rest goes back to government in tax and benefit withdrawals.
So suddenly you have a system that is incomprehensible to those that use it, except for one thing that seems clear - it’s not worth the risk of working.
Debt and consumption
And so what did we find as a result?
Even in the decade before the recession, while growth was booming, jobs were being created, and welfare bills should have been falling, spending on working age welfare actually increased by some 35%.
And this wasn’t just about welfare - in healthcare, in crime, in education, Government paid out to manage and maintain social problems rather than tackling them at their root.
This then is the second cultural challenge I want to touch on tonight - understanding how we, as a society, got to a place where we were unable to pay our way, with an economy built on debt and consumption.
I think the problem lies, to a large extent, with the culture of government spending which has developed.
This is a culture marked by an obsession with inputs - with pouring money into social programmes - so that governments are seen to be doing something.
Of course big spending is attractive because it brings big media headlines.
But my concern is that no one asks what will come out at the other end - in other words what impact the spending will have on people’s lives.
Let me give you the example of the approach to child poverty which has predominated in recent years, which has frequently focussed on the task of moving people from just below the poverty line, to just above it.
Some £150 billion was spent on tax credits for families and children between 2004 and 2010, much of it in pursuit of this ambition.
Some people were indeed moved over the poverty line - and in government and amongst lobby groups that was seen as a cause for great celebration.
Yet I am concerned that these celebrations may have been premature.
Moving someone from one pound below the poverty line to one pound above it might be enough to hit a target.
But what about the people stuck at the very bottom?
There are people who weren’t even touched by this poverty drive - for example many of those trapped far below the line on less than 40% of the median income.
But - equally importantly - when you do lift someone above the 60% relative income line, do you really have any idea what impact it actually has on their life?
Do we have any idea what kind of sustainable change has been achieved?
Because if it hasn’t made a sustainable change you won’t be celebrating for long - the family you have moved over the line are liable to fall back again if you haven’t tackled the real reason they find themselves on a low income in the first place.
Let me give you the example of a family with seriously drug addicted parents - simply giving more money to the parents may do little more than feed their addiction, leaving them and their children locked into a cycle of poverty.
But invest the same money in targeting the root causes of poverty, intervene early, and you can make a more sustainable change…
…AND one that is likely to be more affordable in the long term, as you put people back on the path to independence and reduce the churn in the system.
But too often reductions in poverty have been achieved simply through out of work welfare transfers.
That is what I mean when I speak about inputs versus outcomes - we have become comfortable with the idea of measuring the money we put in, but without really caring to ask what that money achieves in terms of life change at the other end.
In many ways the problem I’ve touched on here is also relevant to our pension system.
Runaway government spending is a symptom of a wider problem - it is symptomatic of a society built on debt and consumption, rather than saving and investment.
We now know that some 7 million people in our country aren’t saving enough for their retirement.
Because saving simply isn’t seen to pay.
This is the problem we currently face with the means-test.
There are honest and hard-working people on low wages who work all their lives and pay in to the system, only to find that when they reach retirement their neighbour - who has never worked - can receive the same level of support through claiming for Pension Credit.
What kind of message does that send out?
It tells people on low incomes that it’s not worth saving - it’s not even worth working. Just sit back and wait for the government to pay out when you retire.
Over the years we seem to have become addicted to debt instead - in the lead-up to the recession we accumulated one of the highest rates of personal debt in the whole of Western Europe, around £1.3 trillion even before the recession started.
We embraced a culture of ‘live now, pay later’ and looked to future generations to pick up the bill.
The fact is that debt fuelled booms feel good while they last, but like all addictions the detox is long and painful.
So we are now faced with a fundamental challenge.
Millions of people stuck out of work on benefits.
Millions not saving nearly enough for their retirement.
And politicians - of all hues - addicted to spending levels as a measurement of success, rather than life change as a measurement of success.
Three areas ripe for reform - but how do you reform when there is no money?
The answer - you change the way you reform.
Not just cheese-slicing, but recalibrating whole systems so that you change behaviours, and change the culture that allowed spending to get out of control in the first place.
This is absolutely critical, and I want to take a moment to explain why.
When welfare spending balloons - as it has done - the temptation for successive governments has been to squeeze it back down again.
But - rather like a balloon - when you squeeze it at one end it will tend to grow at the other.
So whilst savings must be made, they must also be sustainable.
Otherwise, once the public finances are back in order, and the economy grows again, so the bidding war starts once more.
Lobby groups put pressure on government to spend more.
Government in turn dip its hands into all of your pockets to buy media headlines, and the vicious cycle continues.
Structural change - leading to cultural change - is the key to this dilemma.
In other words you have to tackle the demand itself, changing the effects of welfare by changing the incentives in the system.
Let me explain what I mean by this.
My belief is that everyone in the welfare system should be on a journey - it should be taking them somewhere, helping them move from dependence to independence.
So if you are looking for work the system should make work worthwhile and it should both support and encourage you.
If you are a lone parent the system should support you with your caring responsibilities while your child is young, but it should also keep you in touch with the world of work and ensure at the earliest that you move back to the world of work.
If you are sick but able to work in time the system should support you, stay with you as your condition improves and make sure you can take the opportunities to work when you are able.
What we will not do is put anyone on benefits and then forget about them, as was so frequently the case for those on Incapacity Benefits.
But if a journey for people is our purpose, we have to recognise that our current welfare system is not fit to provide it.
That’s why we are redesigning it almost from scratch - making the journey more attractive, smoother, quicker, more supportive.
And we will do so in a way that brings welfare spending back under control….
….whilst changing lives at the same time.
In other words we reduce the effective demand on the system by changing people’s incentives.
In the words of Beveridge, now is “a time for revolutions, not for patching”.
But if we are to build a new journey, we have to recognise a simple fact.
Not everyone is starting from the same place.
There is no point assuming - for example - that everyone understands the intrinsic benefits of work…
…the feelings of self-worth, or the opportunity to build self-esteem.
If you are dealing with someone from a family where no one has ever held work, or no one in their circle of peers has ever held work, there is no point in simply lecturing them about the moral purpose of work, or in just wielding a bigger and bigger stick.
Politicians have tried this tactic over and over again - and to limited effect.
What you must tackle is the biggest demotivating factor that many people face - the fact that the complexity of the system and the way it is set up creates the clear perception that work simply does not pay.
Thus, after generations in key communities, worklessness has become ingrained into everyday life.
The cultural pressure to conform with this lifestyle is enormous, underscored by the easy perception that taking a job is a mug’s game.
It is this factor which can stop someone’s journey back to work in its tracks.
Changing this is what the Universal Credit and the Work Programme are all about.
Universal Credit is a new system we are introducing from next year, which will replace all work-related benefits and tax credits with a single, simple, payment.
It will be withdrawn at a single, constant rate, so that people know exactly how much better off they will be for each extra hour they work.
And this rate will be significantly lower than the current average, meaning that work will pay for everyone, and at each and every hour.
This requires investment up front - we are spending some £2 billion to get it right.**
But if we do so, and start reaping the effects of cultural change, it will save government huge amounts down the line, as workless households become working households.
But Universal Credit alone is not enough.
When you are dealing with people who are a long way from the workplace, who do not have many skills, and do not have the work habit, you need to provide a system that supports them and helps them to get work-ready.
That’s what we are doing with the Work Programme, and we have asked some of the best organisations in the private and voluntary sectors to deliver it for us.
They are tasked with getting people back to work, and then helping to keep them there.
They are given complete freedom to deliver support - I don’t tell them how to do it, and nor does the Minister for Employment.
This is about trusting that these organisations are best placed to know what works.
Universal Credit and the Work Programme are two sides of the same coin.
Either without the other would not have the same impact.
Together, they will become formidable tools for taking people on this journey.
Of course we need that warning of benefits being removed if some of the unemployed don’t try, but imagine how much more effective that becomes when the majority are motivated to succeed.
And what about the other areas where we are making savings?
Again - the journey is key.
Let me give you a couple of examples.
We are making savings in Housing Benefit, but this is in part about removing a major stumbling block as people try to move back to work.
Under the system we inherited some people on Housing Benefit were living in areas with incredibly high rents - it was actually possible for families to claim over £100,000 a year for help with housing costs in certain cases.
Think about what this means for someone who is considering taking a job.
There’s a good chance they won’t, because they will fear losing their home as their Housing Benefit is tapered away - they cannot take that positive step.
That is why we have capped the amount of Housing Benefit that a household can receive.
And take our reforms to Incapacity Benefit.
Again, this is about moving people who can work back towards work…
…but it is also about staying with those who cannot work at the moment - not parking them for years without being seen, as under the previous system.
And we are plotting out a journey in our pensions system as well - except here we are looking to set people on a journey to a decent and sustainable retirement, whilst also reducing the pressure on the public purse.
The solution here is to get people saving - and to get them started early.
The first battle is to make saving the norm - that’s why we are pushing ahead with plans to automatically enrol all of those without pension coverage into pension schemes.
But that still leaves us with the problem of the means test that I mentioned earlier.
So the second thing we are doing is pushing ahead with plans to radically simplify the State Pension system - creating a ‘single tier’ pension which is set above the level of the means-test, so that people know that it makes sense to save.
This is cultural change._ _
The renewal of a welfare system that is seen as a means of temporary support - the beginning of a journey back to independence.
As Leonard once said:
“Our culture should allow us to make choices, not to be told what to do.”
Yet there is one final piece to the puzzle.
I have covered what I call external cultural change, change in society at large.
But we must also achieve an internal cultural shift - changing the culture of government spending.
And it is here that I think we still have much work left to do.
We have to reject the old focus on inputs…
…the old mantra which says that ‘more spending equals good, less spending equals cuts…which equals bad’…
…and open up a whole new dimension - one focussed solely on the impact that spending has on people’s lives.
Every pound for life change.
That means changing not just how much we spend, but how we spend it.
So let me return to the example of the Government’s Work Programme, where we have been pioneering the use of payment by results.
While supporting someone into work obviously has a cost attached, you find that cost is quickly outweighed by the reductions you can make to the welfare bill when you get someone back into work and paying tax.
The trick is to use these future savings to pay for the Work Programme now.
We do that by putting the onus on the 18 Prime Providers who compete to deliver the Work Programme in different parts of the country.
They raise the money to deliver the programme alongside their subcontractors - we then pay them when they deliver the results.
That means first, getting people back into work.
But from day one we’ve been clear that getting people into work - on its own - isn’t enough.
If people do not have ‘the work habit’ - in other words they are not used to the workplace, or convinced that working is right for them - the risk is that they will soon fall out of employment again.
So the providers get the biggest payouts when they keep someone in work for 6 months, one year, 18 months, or up to two years in some cases.
In so doing we remove the risk from the taxpayer, and we make sure that every pound spent is only being paid out because it has a positive impact on people’s lives.
A payment by results system works best when the timescales for success are short and the metrics relatively straightforward.
But in addition to Payment by Results there are other areas as well.
In particular, we are really trying to open up the social investment market.
I see this as a huge opportunity to get much more private money working in pursuit of the social good.
Historically it has been assumed that people could either be ‘good citizens’ and put their money into charitable works, but without expecting anything in return…
…or they could be ‘profit maximisers’, who invest their money in commercial ventures and have to forget about the social consequences.
Social investment is a way of uniting the two - it is about saying to investors:
‘You can use your money to have a positive impact on society, AND you can make a return.’
But to get this investment you need to have programmes that are tested and accredited.
That then allows you to create a social bond that people can invest money in.
That is why we have we have agreed to establish an independent foundation that will accredit programmes of work and provide a rigorous assessment of their likely social returns.
It’s why we’re testing a variety of cutting edge programmes through our Innovation Fund, which will help build the evidence base around social investment models.
And it’s why the Government has launched Big Society Capital, capitalised with £600 million, and tasked it with the sole mission of growing the social investment market.
This market may still be in its infancy, but I believe it has huge potential.
First, it has the potential to greatly increase the amount of funding available for social programmes by bringing in private investment money.
Second, it brings a whole new level of discipline and rigour.
Too often in the past good, proven programmes have been introduced by Government but haven’t worked.
This isn’t necessarily due to a problem with the programme itself - rather it is because as the programme has trickled through the system bits have been added or subtracted, modified and changed, so that in many cases the programme has been neutered.
Because when Government care more about inputs than outcomes it doesn’t have much interest in whether the programme actually works - once it is underway the nature of the programme itself becomes largely irrelevant.
But if the money follows the outcome - as it does with payment by results, or with social investment - we can bring a whole new level of fidelity to the way that civil servants, local authorities, and government at large do social programmes.
It is my personal belief that if we can truly grow the social investment market it will mark the single biggest change to the culture of spending in Government.
So the prize could be enormous if we get all of this right.
Cultural reform - of society, and of government - in a way that restores effectiveness in public spending, and restores the idea of mobility in our welfare system.
In other words it restores the idea that no matter how hard things get for you we will be there with you to help you on an upward path.
But we’ve got to lock this process in - as with the process of making savings that I spoke about earlier, it has to be done in a sustainable way or the problems will pop back up again just a few years down the line.
That means we need to change the incentives in the system.
In welfare that means understanding that work has to be seen to pay, and people have to know that there is support available for them.
In pensions it means understanding that saving has to be seen to pay, and it has to be easy for people to save.
And in government spending it means making the money follow the outcome, so that it is no longer possible to fiddle around with quality programmes or not see them through.
Through this process, and through the tool of social investment, I think we can achieve something else as well.
We can start to lock those at the top of society back into to our most disadvantaged families and communities at the bottom.
We can get our biggest and best businesspeople bringing their time and their skills to some of society’s most intractable social problems.
I hope and believe that as both a great entrepreneur and a great philanthropist this is an agenda that Leonard would have supported.
He had an instinctive sense that with wealth comes responsibility - and he invested a remarkable amount of time, effort and money in giving back to the community.
Ironically, perhaps, it has taken difficult times to create a driver for change.
When the economy was growing it was just too easy to say ‘not now, but later’.
For after all, this does involve very tough choices.
As we try to reshape our economy, and revitalise and refloat the entrepreneurial spirit that has historically characterised the citizens of this global trading nation, we must accept that we will fail unless we can lock all in society to the benefits of this change.
We must no longer allow ourselves to accept that some in society are beyond our reach.
As our economy moves into the 21st Century, these welfare reforms are about ensuring that a previously disconnected section of society gets there at the same time.