February newsletter

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Social Market Foundation | Newsletter February 2012 | Page 1

Newsletter: February 2012

With the recent Moody’s downgrade of UK debt and thecontinuing Eurozone debt crisis, the Government’seconomic strategy is under renewed scrutiny as theBudget approaches. Many of the big questions of 2011remain unresolved. How can we kick start a slowingeconomy without spooking the debt markets? How do westave off an impending jobs crisis? Where will furtherausterity measures fall?

George Osborne’s Budget next month comes at a crucialtime in the economic debate. In this context Ian Mulheirnlooks at the various parties’ approaches to growth on page2. He introduces the SMF’s plan for a £50bn stimuluswithout adding to the deficit based on bringing forward the£15bn savings that the Government has to make by 2017.

With the debate over childcare costs continuing, RyanShorthouse explains the SMF’s model for a NationalChildcare Contribution scheme to help parents withchildcare without costing the Government extra money.

As unemployment continues to rise and concern grows overthe UK’s skills deficit, John Springford looks on page 8 at whysmart enterprise policy should invest in people and not inplaces.

Page 8 of this newsletter has details of our upcoming events,including a major half-day conference on the rehabilitationrevolution next month with Prisons Minister Crispin Blunt,and our continuing Chalk + Talk programme with respectedacademics including Kathy Sylva, Avner Offer and HaJoon Chang.

The newsletter has details of two new publications:Osborne’s Choice, which was launched earlier this weekwith coverage in the Financial Times, BBC Today Programme,Daily Telegraph, Independent, Daily Mail and more; and ABetter Beginning, on childcare costs, which receivedcoverage in The Times, BBC, Financial Times, Guardian, andthe Daily Telegraph

Last month we launched our Market Square blog, on ournew-look website. A preview of the Market Square iscontained on page 6, and you can sign up to receive postsonline at www.smf.co.uk/marketsquare. Why not join in thedebate?

Finally, we’re currently looking for sponsors for a number ofhighly topical policy proposals, including work on Surestart,and access to higher education. Please contact NigelKeohane for more information on [email protected].

Contents

Director’s note: Osborne’s alternativeIan Muheirn 2

Solving the childcare funding trapRyan Shorthouse 3

SMF publication: A Better Beginning 4

Vince Cable talks to the SMFon reforming executive pay 5

The Market Square 6

Forthcoming SMF events 7

Smart enterprise policy should focuson people not places: John Springford 8

Welcome to the February newsletter

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Director’s noteIan Muheirn

So now it seems everyone is calling for a fiscal growthstrategy. Conservative backbenchers are pushing tax breaksfor entrepreneurs; Ed Balls wants a reversal of last year’s VATcut; and the Lib Dems are agitating for the acceleration ofthe £10,000 personal allowance manifesto pledge, in pursuitof growth.

It’s welcome to see people across the political spectrumstarting to take the growth agenda more seriously. But it’snot for nothing that the Chancellor points out the perils of aloss of deficit-cutting credibility if he goes borrowing more.You can make a good case for a discretionary fiscal stimulus,but you must also acknowledge that the risks involved forUK government debt are unknowable and theconsequences potentially catastrophic.

This £50bn boost would have an impacttwice as great as the VAT cut planThat’s why the SMF has published a plan to boost growthwhile sticking to the government’s deficit reduction plan.How is that possible? Well, not all government spendingand tax measures have an equal impact on economicoutput. Low growth measures, like tax breaks to encouragerich people to save, cost government money and drain the

economy of demand at a time when those with thecapacity to do so should be encouraged to sustain theirconsumption. Infrastructure spending, on the other hand,has a strong positive impact on output.

The government has to find an additional £15bn of annualspending cuts or tax rises by 2016. And with an electionlooking, the longer it waits to distribute the pain, the moreits deficit cutting credibility will fall into doubt. That’s whythe Chancellor should make the cuts now from low-growthareas, and recycle the money into high-impact spending forthe next four years.

This £50bn boost would have an impact twice as great asthe VAT cut plan, and three times as large as an unfundedversion of the Lib Dem personalallowance plan. But more than that,it would do so without adding apenny to the deficit, while all theother proposals would add billions.

If I were a holder of UK governmentdebt, or an unemployed person, Iknow which plan I’d want thechancellor to go with.

Director’s Note:Director’s Note:Director’s Note: Osborne’s alternativeOsborne’s alternativeOsborne’s alternativeIan MulheirnIan MulheirnIan Mulheirn

SMF publicationOsborne's Choice: combining fiscal credibility and growth

By Ian Mulheirn. With contributions from Gavyn Davies, Richard Lambert,Evan Davis, Dan Corry and Gerald Holtham

This paper argues that the Chancellor should bring forward the unidentified £15bn ofausterity measures that have to be made in the next parliament, and spend the extra£50bn this would save over four years to stimulate the economy and cut unemploymentthrough investing in infrastructure.

http://www.smf.co.uk/research/economic-policy/osborne-s-choice-combining-fiscal-credibility-and-growth/

http://www.smf.co.uk/

http://twitter.com/#!/smfthinktank



http://www.smf.co.uk/research/economic-policy/osborne-s-choice-combining-fiscal-credibility-and-growth/




Earlier this month we launched an innovative idea to helpparents better afford the high cost of childcare. We’reproposing a National Childcare Contribution Scheme(NCCS) which will enable parents to spread their childcarecosts over a longer period of time. Parents who opt into thescheme would be given financial support from governmentfor their childcare costs, which they would then pay backthrough a small contribution from the main earner’s salaryeach month.

55% of parents with children underthe age of five think childcare istoo expensive.

Childcare costs put an intense squeeze on families’ incomesfor a relatively short period of time. Those high costs canmean that it’s simply not viable for parents to go to work. Aquarter of parents in severe poverty report that, followingthe cut in the childcare element of the Working Tax Credit inApril 2011, they have left work because the cost of childcareis too high. Polling by YouGov for this report found that 55per cent of parents with children under the age of five thinkchildcare is too expensive.

What’s more, the problem is getting worse. In SMF’sprevious report, The Parent Trap, we found that low-incomefamilies are likely to pay 62 per cent more in today’s moneyfrom their own pocket in 2015-16 compared to 2006-07because of a combination of reduced public support andrising prices.

So what should be done? Those of us who are passionateabout formal childcare – who know its incredible value toparental employment and children’s development – couldkeep asking for more money from government.

However, public money is tight and government has tofinance a whole array of other commitments. We have toface the reality that in the foreseeable future parents andthe sector just aren’t going to get the level of funding theyneed from the public purse to make childcare truly high-quality and affordable for all.

A creative solution is urgently needed to help families tobetter manage the costs themselves. The NCCS providesthat solution. Under the scheme, parents will be able toaccess financial support from government, capped at£10,000 in total, to pay for childcare for any of their childrenunder school-age.

This assistance would be in addition to the existinggovernment support available for childcare. The moneyfrom government would be delivered to a smart card whichparents could use at any formal childcare provider. Liabilityfor subsequent repayments from earnings would sit withthe main earner in the family, who would contribute 6 percent of their gross income above the income tax personalallowance. These contributions end when the main earnerhas contributed in full the value of the support they drewdown, or after 20 years, whichever is first.

We want formal childcare to be auniversal, high-quality part ofBritain’s education system

Under our scheme, government would recoup the money itgives out through subsequent parental contributions.Consequently, the initial outlay would not count as currentspending, with all the problems that would cause for agovernment seeking to tackle the yawning deficit. Somelow earners may not repay in full what they initially received,

Solving the childcare funding trapSolving the childcare funding trapSolving the childcare funding trapRyan ShorthouseRyan ShorthouseRyan Shorthouse

http://www.smf.co.uk







but this shortfall would be covered by applying a modestinterest rate to the total amount that parents draw downfrom the system. So, overall, the scheme would not cost thegovernment money.

The initial outlay need not countas current spending

The idea seems to fit with parents’ needs. When YouGovasked parents what they thought of the proposal, 57 percent of those who expressed an opinion said it was a goodidea. Over a quarter of all parents said they would be likelyto use the scheme.

Many parents, of course, will continue to look after theirchildren at home. Others will prefer to use informalchildcare. But it is encouraging that a quarter of parentswho currently do not use formal childcare, and 28 per centof those using informal care such as grandparents, said theywould use the scheme, which would mean a shift to the useof formal childcare. So the scheme would likely increasedemand for formal childcare, raising take-up to for thebenefit of children, parents and society.

This scheme has an added benefit which could correctsome problems with the current childcare market. It willbolster demand by making childcare much more affordable.This will increase the amount and reliability of revenuecoming into the sector, allowing providers – who currentlyface limited profitability because they operate in fragile,localised markets - to invest much more in the quality ofstaff and the flexibility and sustainability of provision.

The SMF wants formal childcare tobe a universal, high-quality part ofBritain’s education system. Doingthis is the key to making work payand boosting social mobility. Withpublic money tight, the NationalChildcare Contribution Schemeoffers a real hope of giving allchildren a better beginning.

Ryan Shorthouse is a Researcher at the SMF

SMF publicationA Better Beginning: Easing the cost of childcare

Ryan Shorthouse, Jeff Masters and Ian Mulheirn

This paper proposes an entirely new policy - a National Childcare Contribution Scheme – to helpparents manage the high costs of childcare over a number of years. In straightened times, thisinnovative proposal offers the only route to the universal, high-quality childcare service Britaindesperately needs.

Order a hard copy now for £15 from the SMF’s website at or download a PDF

Chart: Profile of childcare costs for an example household

http://www.smf.co.uk/research/category-two/a-better-beginning-easing-the-cost-of-childcare/

http://www.smf.co.uk/research/welfare-reform/a-better-beginning-easing-the-cost-of-childcare/a-better-beginning-easing-the-cost-of-childcare/

http://www.smf.co.uk/research/category-two/a-better-beginning-easing-the-cost-of-childcare/




Vince Cable talks to the SMF onVince Cable talks to the SMF onVince Cable talks to the SMF onreforming executive payreforming executive payreforming executive pay

Rt Hon Vince Cable, Secretary of State for BusinessInnovation and Skills, gave a speech to the Social MarketFoundation in January outlining his plans for reformingexecutive pay.

At an event sponsored by ACCA at the British Academy inLondon, Vince Cable explained the Government's proposedmeasures to tackle excessive executive pay on four fronts: toboost transparency; give shareholders more effectivecontrol; increase the diversity of remuneration committees;and encourage major businesses and investors to lead byexample.

Vince Cable said: "There is now broad consensus across themain political parties and many business and investorgroups in support of 'responsible capitalism'. This precludeslavish payouts for failure or mediocrity, and addresseswidening inequalities in remuneration.

"There is also a common understanding that Britain’srecovery from its profound economic crisis must be led bysuccessful private enterprise and that entrepreneurs andgood managers will expect competitive rewards. Thedebate on executive pay has to reconcile these twoobjectives".

Dr Cable explained that the Government's role in reformingexecutive pay should be to be "pro-market but not naivelyfree market".

The Secretary of State said: "I do not want to see privatesector salaries being set in Whitehall, but I do accept thebusiness view that Government has a legitimate role infinding answers to what is a market failure."

Specific proposals for tackling excessive executive payincluded:

Boards and their remuneration committees will haveto explain why they have used specific benchmarksand how they have taken employee earnings intoaccount in setting pay

Companies will have to explain how they haveconsulted and taken into account the views ofemployees

Companies will have to open up the performancecriteria for bonuses

Companies will be mandated to produce adistribution statement outlining how executive paycompares with other dispersals

Binding shareholder votes on the future pay policy forthe Board, including a statement of howshareholders' views have been taken into account

A requirement to get binding shareholder approvalfor more than a year's salary and contracts givingnotice periods longer than a year.

Shareholders will get a vote on how the company hasimplemented the approved pay policy in thepreceding year.

Two directors on every board who are new and havenot previously served on boards.

Adopting Lord Davies' recommendations designed toboost the proportion of women on boards




The Market SquareThe Market SquareThe Market Squarewww.smf.co.uk/marketsquarewww.smf.co.uk/marketsquarewww.smf.co.uk/marketsquare

A market square is a social hub where people come together totrade goods and chew the fat.

The SMF's Market Square is an ideas exchange, where the SMFteam blog about the latest issues and test out new thinking.

Get involved in the discussion by commenting on posts, votingon our ideas, and sharing through social media.

University access: Dumbing up?John Springford

Some are unhappy about the prospect of OFFA, the equal accessbody for higher education, making universities accept more stateschool students. Why? Because they argue universities will be madeto take poorer quality students. So this will lead to ‘levelling down’,with more equal intakes but poorer overall outcomes.

Levelling down would indeed be a concern. But their fears areunfounded, as we can see from the chart below. It shows theproportion of university students who got a 2:1 or first by the gradesthey got at A-Level. State educated pupils do a lot better given their A-level result – the gap in the proportion getting good degrees isbetween 3 and 10%, depending on what A-levels the studentsachieved.So OFFA can make top universities take many more state school

students without damaging performance. In fact it might improve it.Even if a university still mandated that successful applicants had tohave, say, three A’s at A-level, it could take a greater proportion ofstate school students and achieve better results.

Lower down the university rankings, even bigger gains could bemade. If a university took all its private school applicants at BCC, and

all its state school students at CCD, it would achieve the same resultson average.

The data underlying this chart may exaggerate the gap between stateand private school students’ performance at degree level. Stateschool students may disproportionately take easier degrees thanprivate school students. But it seems unlikely that this bias is so largethat it drowns out all of the difference.

So OFFA should get universities to take more state school students.But two questions spring immediately to mind. Why don’t universitiesfavour the state educated already, if they tend to do better? And whydo state school kids do better?

Universities find it difficult to appraise quality on admission –predicted A-level grades loom large. Academics have less and lesstime to run a thorough application process. The more resources theapplication process uses, the less cash they have for other priorities.The Research Assessment Exercise encourages them to focus onresearch, rather than undergraduate administration. And they don’tsuffer any financial penalty if their degree outcomes are poor –although they do suffer reputational damage. For this reason it isrational for them to focus on A-levels.

But why don’t privately educated children do better? Private schoolsare notoriously good at getting children into university. Exam resultsare better on average. They offer interview practice and more helpwith applications. But once at university, this help disappears, soprivate school students revert to their inherent ability. The gap thatopened up between state and privately educated students insecondary education closes at university.

It is rational for universities to choose on this basis, given that theyhave limited information. But this suggests OFFA might be doingthem a favour by making them choose more state-educatedapplicants.

Also on the Market Square:

Cross party fiscal incontinence?Ian Mulheirn

The SMF's childcare plan: debunking the mythsIan Mulheirn

Universities in demand?Ryan Shorthouse

The Work Programme: built on shifting sands?Ian Mulheirn

http://www.thetimes.co.uk/tto/opinion/leaders/article3322747.ece

http://www.bbc.co.uk/news/education-14069516

http://www.smf.co.uk/index.php/marketsquare/posts-by-ian-mulheirn/cross-party-fiscal-incontinence/

http://www.smf.co.uk/index.php/marketsquare/posts-by-ian-mulheirn/the-smfs-childcare-plan-debunking-the-myths/

http://www.smf.co.uk/marketsquare/posts-by-ryan-shorthouse/universities-in-demand/

http://www.smf.co.uk/marketsquare/posts-by-ian-mulheirn/the-work-programme-built-on-shifting-sands/




Forthcoming SMF eventsForthcoming SMF eventsForthcoming SMF events

Reviewing the Rehabilitation Revolution, with Crispin Blunt MPBritish Academy, 10 Carlton House Terrace, London | 9.00am - 1.00pm

We are delighted to welcome Prisons Minister Crispin Blunt to our annual justice conference. The Minister will set out theGovernment’s thinking behind the range of different models of payment by results for offender rehabilitation currentlybeing developed by the Ministry of Justice. Throughout the morning our expert panellists will help us to explore theimpact that the new approach is having on rehabilitation interventions and outline the longer-term direction of travel forthe rehabilitation revolution.

Confirmed speakers include: Crispin Blunt MP, Minister for Prisons; Simon Israel, Home Affairs Correspondent, Channel 4News; Kevin Lockyer, Director of Services, Nacro;David Perrins, Avanta Justice; Tom Gash, Institute for Government; Arepresentative from the Peterborough project. The event will be chaired by Ian Mulheirn, Director, SMF.

Contact: [email protected] / 0207 227 4404 or visit www.smf.co.uk/events

Chalk + Talk: Early Years and Childcare, with Professor Kathy SylvaSocial Market Foundation, 11 Tufton Street, London | 12.30pm


Chalk + Talk: The Economy of Obligation, with Professor Avner OfferSocial Market Foundation, 11 Tufton Street, London | 12.30pm


Chalk + Talk: Getting Britain Growing, with Tim Besley (LSE)Social Market Foundation, 11 Tufton Street, London | 12.30pm





In the first chapter of a recently published pamphletlooking at business and enterprise policy under the lastGovernment, Dermot Finch lays down a challenge forpolicymakers. They “must adopt more of a privateenterprise approach to job creation”. This is undeniablegiven our straightened fiscal circumstances. But thequestion is: how?

When looking at enterprise policy, there are twochoices: a ‘place’ approach, and a ‘people’ approach.

It may be tempting to take the place approach. Fewwould argue that regional inequality is a good thing.So why not use the government’s low cost ofborrowing to join up with the private sector to investin the regions? Surely this will boost growth and taxreceipts, which allows the government to pay back thedebt? And surely we have responsibility to thoseregions that are still struggling to find their feet in apost-industrial economy?

Focussing on ‘places’ ignores thetrue reasons why regions haveunequal growth rates

There are two reasons why this is a bad strategy.

First, focussing on ‘places’ ignores the true reasons whyregions have unequal growth rates. Most economicgeographers find that some regions are poorer thanothers primarily because of the human capital that is inthe region.

People who have higher skills tend to migrate toplaces where they can find work, leaving people withlower skills behind. Investment does not flow into thearea because the people aren’t very productive. Thisleads to different labour markets in different regions,with lower skilled people concentrated in certain areas.If government invests in the region and attracts theprivate sector, the net effect on enterprise will be verysmall. Firms and more skilled workers may move in, butthat is just a displaced activity from another region.

There’s no guarantee that the original inhabitants willbe employed. The unemployment rate in the regionmay fall, but the people you’re trying to help aren’t anybetter off.

The solution lies in moreinvestment in improving theworkforce’s skills

Second, government is bad at identifying goodinvestments. Government has limited knowledgeabout which investment is most likely to lead toemployment or wage increases. It has to rely on centralplanner’s tools, like statistics and planning, and thesetools are always faulty. It could build a new industrialestate, but there is no guarantee that companies willuse it.

Instead, policymakers should deploy a ‘people’strategy. The solution lies in more investment inimproving the workforce’s skills, and ensuring that

Smart enterprise policy shouldSmart enterprise policy shouldSmart enterprise policy shouldfocus on people not placesfocus on people not placesfocus on people not places

John SpringfordJohn SpringfordJohn Springford

http://laboursbusiness.org.uk/




employers want those skills. Unemployment stands at8% and is likely to be high for many years. Even in theboom years, too many low-skilled people could notfind work. Investing in human capital is far more likelyto create sustainable, private sector job creation thangovernment-created jobs.

Labour invested heavily in humancapital in the boom years, butmuch of it was wasted.

Labour invested heavily in human capital in the boomyears, but much of it was wasted. Using the SocialMarket Foundation’s ideas for boosting human capitalthrough a properly funded higher education systemand payment-by-results in adult skills would help.

Government should extend this people approach toentrepreneurs. The UK has had a declining rate of start-ups, from 449,700 in 2007 to 372,400 in 2008 and330,100 in 2009.

To encourage entrepreneurs and the self-employed,the government could offer start-ups deferredpayment of business taxes for three years. This wouldencourage new businesses to plough profits back intothe business, stimulating investment.

The government would face more risk of businessesgoing bust and being unable to pay. But with smallbusinesses struggling to get bank loans, this is exactlythe sort of risk government should be shouldering.

Growth comes from higherproductivity. Entrepreneurialspirits are animated by makingit easier to take risks. Investing inpeople’s human capital, andtheir ability to take risks is mostlikely to stimulate job creationand an enterprising culture.

JohnSpringford is a SeniorResearcher at the Social Market Foundation

This is an edited version of an article published on theLabour Business website

Smart enterprise policy should focuson people not places (continued)

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