Speech

Social Investment Conference

This speech was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

A speech by the Rt Hon Iain Duncan Smith MP, Secretary of State.

Introduction

I was here in Madrid last July to give a speech about the welfare reforms we are bringing in in the UK.

My reforms are about trying to change a culture of worklessness and dependency which has been on the rise in the UK and across Europe.  

I am not simply talking about unemployment as a result of the economic downturn.

I am talking about structural welfare dependency and inactivity - people stuck on out of work benefits for many years, even while growth was booming.

The purpose of reform is to restore the economic balance between work and worklessness.

To do this we are going to simplify the system - replacing a confusing array of benefits with a single payment, which we have called the “Universal Credit”.

Having done this we can then - through this system - enable people to keep more of their money as they move into work, ensuring that work pays more than being on benefit.

This is about changing a culture - restoring the understanding that there has to be a link between success and hard work, and restoring the belief that work is both necessary and worthwhile.

Our Welfare Reform Act also contains reforms to single parent support and sickness and disability benefits, reconnecting those who have been written off back into the world of employment.

In doing this we are making good progress.

And now we are also set to make significant changes to our state pension system, introducing a much simpler payment that will provide a clear foundation for saving.

Europe

I would - in passing - like to take this opportunity to point out that this task of reform is not being made easier by a number of rulings on social security that have emerged from Brussels in recent months.

For example, the European Commission has stipulated that we have to pay benefits to migrants almost as soon as they arrive from another EU country. 

We believe that workers should be able to move freely in Europe - but we do not believe that inactive migrants should be able to shop around for the best benefits. 

At the same time, the European Court has ruled that we need to pay benefits to people for decades after they have left the UK.

And on pensions, we are currently facing the prospect of EU legislation which could add hugely to the cost of providing occupational pensions.

These rules seem to be imposed with little or no regard for their effects on national reform programmes or - indeed - national sovereignty.

I know we will each have our own views on these issues, but I hope that both the UK and Spain can work together to ensure that the EU remains true to its original purpose, and does not extend to areas never intended to be within its reach.

Stable finances

Whilst on the subject of Europe, I would like to take this opportunity to compliment the new Spanish Government for what I believe are bold and necessary steps to stabilise this economy…

…as well as undertaking reforms to the labour market.

These are steps that I believe will pay dividends in the long-term.

I know our two countries have worked closely together in the past to share our experiences of reform, and I hope we can continue to grow that relationship in the future.

Social reform

Of course Spain is not alone in its attempts to stabilise the public finances.

This is a task that we are firmly focussed on in the UK as well, and while there are - of course - difficult decisions to be made, I am convinced that we are following the right path.

A sound economy is - after all - the foundation of prosperity and social harmony.

However, a sound economy requires a properly structured social settlement.

We cannot leave social reform until another time.

That idea is not just irresponsible - it is incoherent, for without it, economic reform cannot endure.

For example, if you fail to build a welfare system that makes work pay and supports people into work, you pay the price further down the line in unaffordable welfare bills.

Yet I fear that this is exactly the kind of short-sighted approach has taken root in government - not just in the UK but across much of the world.

In the last three decades or so most countries in the Western World have modernised their economies - freeing up markets, and moving power away from the state and handing it back to individuals.  

Yet we seemed to forget about the need for accompanying social reform, assuming that the renewed economy alone would do the trick of creating a more prosperous and more cohesive nation. 

That isn’t to say that governments didn’t spend more money on the social side of things.

But there was a fundamental flaw in the way that money was spent.

While plenty of cash was poured in to funding social programmes, hardly any attention was given to the result at the other end.

In other words, too little attention was given to the impact that the spending was having on people’s lives.

Poverty

In the UK this process has been driven by the common discourse around poverty, which has focussed overwhelmingly on how many people are sitting below or above the relative income poverty line.

If a family has less than 60% of the median income in the UK it is said to be poor, if it has 60% or more it is not.

So guess what comes next - if you have a family who sit one pound below the poverty line you can do a magical thing.

Give them one pound more, say through increased benefit payments, and you can apparently change everything - you are said to have pulled them out of poverty.

Simple, isn’t it?

Except until you actually look at the families in question and ask whether their lives have really changed because of the extra pound a week.

Too often you will find that the money has had little or no impact at all, because you haven’t tackled the reason that someone finds themselves on a low income in the first place.

It may even make things worse.

For example, if you have a family in poverty where the parents are suffering from a drug addiction, simply giving more money to the parents may do little more than feed their addiction, leaving the dependents locked into a cycle of poverty.

A failure to understand their condition only leads to wasted money and damaged lives.

Unsustainable approach

And this obsession with inputs has infected whole social programmes, with an entire lobbying industry dedicated to putting pressure on government to prove how much it cares about the most vulnerable by spending more and more.

The media has played its part here as well, fuelling a simplistic narrative which says that “more money equals good”, “less money equals cuts…which equals bad”.

I believe that the internal contradictions of this approach made it inherently unstable, and it was destined to end in a crash.

What do I mean by the internal contradictions?

First, it was unaffordable.

It may not have caused the financial crisis, but it put us in a terrible position when the storm hit - take the fact that the UK had the highest structural deficit in the G7 even before the crisis began.  

If you just look at spending on welfare benefits you can see that it increased by a staggering 35% in real terms in the decade before the recession - a decade of rising employment.

But - and this is the second key contradiction - the spending didn’t seem to be solving our society’s deep social problems.

Even when huge numbers of jobs were being created - with employment up by some 3 million in the decade before the recession - we were continuing to pay for more than 4 million people to sit on out of work benefits.

In fact more than half of the rise in employment under the previous Government was accounted for by foreign nationals - businesses were forced to look elsewhere because they couldn’t find what they needed at home.

I understand this is an issue that may have some relevance here in Spain too, where some analyses suggest that around half of the jobs created in the lead-up to the recession were occupied by immigrants.

So rather than tackling the problem of welfare dependency and worklessness at its source - asking why those on benefits weren’t able to take advantage of the job opportunities being created - the UK Government did what government does best and just kept paying out.

This brings me back to the point I made earlier - we reformed our economy and we created more jobs…

…but we didn’t have the society to match, so we plastered over the problem by paying people to sit on benefits while we imported labour from abroad.

And this wasn’t only about welfare.

We saw spending on social programmes rising almost across the board, yet the statistics on social breakdown continued to appal:

  • levels of family breakdown were high and rising
  • we had one of the highest teenage pregnancy rates in Western Europe
  • and around a million children were growing up in households with parents addicted to drugs or alcohol.

I note that here in Spain unemployment remained stubbornly above or around 8%, even during the boom years…

…and that even when long term unemployment reached its lowest point, it still accounted for around 1 in 4 of all those unemployed.

So my contention is that in the UK - and perhaps in other countries too - we have seen a growing underclass at the same time as a massive growth in public spending.

The question we need to ask is: “why didn’t all the money change things?”

Treating symptoms

The problem is that when you have a social policy that is conditioned to focus on how much money is spent, rather than the impact it has, three things are liable to happen.

First, there is a tendency to treat the symptoms of social problems rather than the causes.

But treating symptoms is hugely expensive, partly because they tend to persist over time unless a cure can be found.

Funding programmes that don’t work

Second, not enough attention is given to funding programmes that actually work.

Because the big publicity wins for government come from spending the money, and not necessarily from how it is spent, there simply isn’t enough energy devoted to establishing which programmes have the potential to really change lives.

Lack of spending commitment

And third, there is a lack of commitment in spending.

If all that matters is how much money is going in, then funds can be changed and moved at a whim.

This is a problem that has hit many excellent charities down the years, as grants are given and taken away depending on the political expediencies of the time.

Change

You might ask how we found ourselves in this destructive cycle.

It wouldn’t be right to point the finger at any one government or group.

This “poverty of social policy” is deeply embedded in the culture and institutions of modern policy-making across the Western world.

The challenge is how we change it, and I want to use the rest of my time to touch on the ways we are doing this in the UK at the moment.

Treating causes not symptoms

To start, we are trying to change the whole culture of government so that we steer focus and spending away from inputs and symptoms and towards outcomes and root causes.

We published a new Child Poverty Strategy last year - and a Social Justice Strategy this year - which set out our commitment to expand the debate around poverty so it is not focussed on the income poverty target alone, but considers a whole range of factors in determining whether someone is poor.

Payment by results

But we won’t be able to change our dysfunctional culture on paper - real change comes through reforming institutions.

This reform is no less radical than Universal Credit - it is called the “payment by results” system.

In the past governments lavished money on programmes they hoped would succeed.

As a result, taxpayers carried the risk when they failed.

The history of such programmes is of great hope followed by embarrassing failure.

Payment by results programmes are government-funded but delivered by a range of non-government providers - drawn from the private and voluntary sectors as well as the public sector - and these providers are paid for the results they achieve.

The most significant example in the UK at the moment is what we call the Work Programme.

When people have been out of work and on benefits for a year - or for less time in certain cases - they are referred to an organisation in their local area that can offer intensive and tailored support to get them back to work.

That provider then has two years to help the person back into employment, and it’s up to them how they do it - there’s no top-down instruction from Government.  

At the start of the programme they will be paid a small amount of money for taking the person on, but the vast majority of their fee will only be paid when they find that person a job, and then…

…and this is the really important bit…

…they get the biggest payments when that person stays in work for 6 months, a year, 18 months, and up to 2 years in some cases.

It is not enough to just help someone into work.

If they 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.

That’s why the Work Programme providers are incentivised to help people stay in work until they get that habit.

Payments are also higher for those groups who face the biggest barriers to work.

For example, a provider can earn £4,400 for getting someone who is on unemployment benefit back into work, but they can earn almost £14,000 - or over 16,500 Euros - if they help someone who had previously been on disability benefits and keep them in work for two years.

These payments are funded from the savings made when the individual comes off benefits.

Importantly, the contracts that Government has in place with the Work Programme providers are for 7 years, meaning that providers can plan ahead without the fear of funding being cut off without good cause.  

And because we are paying for results we will only pay for what works, therefore hugely reducing the risk on the taxpayer.

Social investment

Payment by results works best when the timescales for success are short and the metrics relatively straightforward.

But beyond payments 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.”

In some cases the return will come from supporting a social enterprise which has profitable revenue streams.

However some of the most interesting recent projects have involved government money as well, with investors paying up front to fund the delivery of social programmes, and then government paying for the returns, funded by the reduced costs of social breakdown.

This is the model being used in the Social Impact Bond project in Peterborough in the UK, where investors are paying charities to run rehabilitation programmes with prisoners.

If reoffending falls by 7.5% then the investors will receive a 7.5% return - paid for by government out of the reduced costs.

But such bonds require that the programmes have a real chance of success.

They need to be proven to be effective.

And that is why we have agreed to establish an independent foundation that will accredit programmes of work and provide a rigorous assessment of their likely social returns.

Huge potential

This social investment 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 on top of that provided by government or pure philanthropy alone.

Second, it brings a whole new level of discipline and rigour to this funding because people are investing their own money in expectation of a return - money that could otherwise be reaping a profit elsewhere.

But third - and perhaps most importantly - social investment could be a powerful tool for building a more cohesive society.

The gap between the top and bottom of society is in many cases larger than it has ever been.

We have a group of skilled professionals and wealth creators at the top of society who have little or no connection to those at the bottom.

We have created an underclass.

Yet in so many cases what divides the two is little more than a different upbringing, or a different start in life.  

I believe social investment is our best hope for tying not just the wealth but also the skills of those at the top of society back into our most disadvantaged communities._ _ 

Big Society Capital

But if we want this market to be transformative it has to grow - and grow substantially.

Last week our Prime Minister launched something called Big Society Capital.

This is a new fund, capitalised with £600 million from dormant bank accounts as well as from our four largest high street banks…

…and its sole mission is to grow a new social investment market so that it is easier for charities, social enterprises and community groups to access affordable finance.

Our Chancellor also announced at the UK’s recent Budget that our Treasury will conduct a review into the financial barriers to social enterprise.

Through all of this we are trying to send out a clear message: “we want to support those who want to put money into social investment”.

This use of private money has the capacity to change the way we fund programmes that change lives, rather than using limited amounts of government money to gain a few media headlines.

If we can build this market I believe we can bring a whole new level of rigour to charitable giving - ensuring that spending has a demonstrable purpose

…and that each pound goes towards changing lives.

Conclusion

Our failure to make each pound count has cost us again and again over the years.

As a society we’ve become too comfortable with the idea that a certain portion of people will be out of work, on benefits, not playing a productive role.

Businesses have assumed that this didn’t affect them - they could just bring in workers from abroad to do the jobs they needed.

People in work didn’t think it affected them either - as long as these pockets of deprivation were out of sight and out of mind it didn’t need to be their problem.

But actually we all pay - we pay in higher taxes to support people for the long-term on welfare…

…we pay in lower productivity, as potentially productive people sit idle…

…and we pay in a fundamentally divided society.  

So I repeat my message from the beginning - the economy and society go hand in hand.

You cannot reform one without reforming the other.

And where one is broken, it tends to drag the other down too.

The path to change will not be an easy one.

It will require government to completely change the way it thinks about spending - rejecting the old mantra…

…”More spending equals good, and less spending equals bad”…

…and opening up a whole new dimension - one focussed solely on the impact that spending has.

In other words, whether it actually works.

But the prize for doing so could be immense.

Sound public finances and a modern economy, matched by a more prosperous and cohesive society.

If we get it right, it could just turn out to be the smartest decision we ever made.