Social Market Foundation March 2013 Newsletter by Leonora Merry

Social Market Foundation | Newsletter March 2013 | Page 1

Newsletter: March 2013 Welcome to the March newsletter As the dust settles on last week’s Budget, this newsletter brings you the latest commentary and analysis from the SMF, as well as information about our recent publications, forthcoming events and details of our 2013 Party Conference programme. This week Ian Mulheirn wrote a lead essay for The Political Quarterly, prompting a debate in the pages of the respected journal which asked: Are we all Social Marketeers now? An extract of Ian’s essay, which examines the social market approach and how it can provide a framework for thinking about some of the biggest public policy questions of the day, is on page 2. The conundrum of achieving economic growth and reinvigorating the UK’s manufacturing base in the context of government efforts to clamp down on immigration is the focus of the SMF’s latest report, which looks at the STEM skills gap. On page 4, the report’s author Senior Economist Nida Broughton examines what our findings mean for Government policy and how it can boost the numbers of home-grown science graduates. With the UK economy’s prospects for growth revised down once again last week, there is no shortage of ideas for getting the economy growing. Our popular “Gordian knot” growth map, which seeks to bring some clarity to this flurry of ideas, is explained by Ian Mulheirn on page 5. Take a look and follow the link to our website, where you can vote on your preferred approach.

Just before the Budget, the Government announced its long awaited proposals on helping parents with the cost of childcare. While its proposed scheme will make a real difference to some, there are many unanswered questions about the plan. Researcher Ryan Shorthouse examines them on page 8. The SMF’s analysis of the Budget was reported in a wide range of national and specialist media. The full response, which explores the public borrowing figures, infrastructure announcement, housing plan and welfare squeeze , is on pages 11 and 12. Page 7 of this newsletter contains details of forthcoming events, including our Political Quarterly debate on the social market, a breakfast discussion on apprenticeships, and our next Chalk + Talk, with Nobel prizewinning economist Professor Christopher Pissarides. Earlier in the month we launched our party conference themes guide, which outlines the hot topics we would like to cover at this year’s party conferences. Find out more and how to get involved with our programme on page 10. Details of our latest publications, including research on dementia diagnosis can be found on page 9. Finally, the latest from our marketsquare blog can be found on page 13 of this newsletter.

Contents The Social Market After the Crash Ian Mulheirn

The UK is not ready for a rebalanced economy Nida Broughton

Unloosing the Gordian Knot of Growth Ian Mulheirn

Forthcoming SMF events

Childcare: the good, the bad, the uncertain Ryan Shorthouse

Recent publications

Party Conferences 2013

Budget 2013: SMF response

The Market Square

www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

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The Social Market After the Crash Ian Mulheirn Director The latest edition of The Political Quarterly features a series of essays on the social market entitled Are we all Social Marketeers now? The series begins with an essay by SMF Director Ian Mulheirn, and includes a response from The Political Quarterly Co-Editor Michael Jacobs and a rejoinder by Ian Mulheirn. These will form the basis of a debate, The Social Market and its Discontents, chaired by the Guardian’s Polly Toynbee, which will take place at the Institute for Government on 15 April. Further information is available on page 6. Below is an extract from Ian Mulheirn’s essay, which kicks off the debate. The year 1989 was a revolutionary one, not least for the global economy. The collapse of the planned economies gave stimulus to the attempt to marry social justice with market economics. The market system had for several decades been demonstrably better than planned economies at boosting living standards by the time the latter collapsed. The central questions for the UK after the end of state socialism were about the appropriate role of the market in the public realm; how to promote social mobility, limit income inequality and expand individual freedom concurrently; and the regulatory and monetary apparatus needed to stop macroeconomic failures leading to volatile swings between inflation and unemployment. It was in this context that the Social Market Foundation was born, its purpose to promote a social market approach to these questions.

By using price to balance supply and demand, wellfunctioning markets ensure that resources are put to their most productive use. In healthy markets, competition between providers pushes prices towards the costs of production to the benefit of the consumer. But these ‘static’ benefits of competition are only one half of the story—and arguably the less important half. Over time, market competition leads to innovation to make new and better goods and services that improve our lives. And the genius of the market is not some abstract political idea, but simply the manifestation of individuals expressing their own preferences in what they choose to do and consume.

...the genius of the market is not some abstract political idea, but simply the manifestation of individuals expressing their own preferences...

In the wake of the 2008 financial crash, a similarly profound crisis, this time of the market economy, has reignited those debates. Now, as then, the social market framework offers the most cogent analysis of recent events and the most helpful guide for future policy.

In valuing these intrinsic benefits of economic liberty, the social market approach shares much of the reasoning behind John Tomasi's concept of ‘free market fairness’. It seems unjustifiable that those concerned with social justice should be compelled to relegate economic liberty to a subordinate role.

The social market approach to public policy starts from an appreciation of the basic superiority of the market mechanism over planning when it comes to allocating resources, combined with caution about its limitations. As John Kay has put it, ‘markets work: not perfectly, and not everywhere’.

All of this has a bearing on the social market approach to public policy. First, it implies a presumption that markets are to be nurtured not only in the private sphere, but also in the delivery of public services and goods—provided that they are well designed. This is a principle on which the UK's more successful reforming administrations of

www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

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recent years, from both left and right, would agree. Second, it entails a degree of caution about — although not outright opposition to — the use of taxation for the purposes of redistribution, which distorts the work and investment choices of both net contributors and net recipients. On this view, the market is emphatically not the goose that lays the golden egg of tax revenue, which can then be redistributed to achieve some higher—and centrally planned—purpose, as social democrats would have it. Instead it should be seen as an end in itself, representing the intrinsic good of economic freedom. The corollary of that observation is that the legitimacy of redistribution depends largely upon the ends to which it is put. Where it can increase choices and opportunity for everyone, such as through investment in opportunityenhancing public services, the case is strongest.

It seems unjustifiable that those concerned with social justice should be compelled to relegate economic liberty to a subordinate role. The social marketeer is therefore not a free marketeer but sees an important range of roles for the state, and displays a healthy scepticism about the free market for three reasons: first, because market failures are pervasive. Problems such as the externality of carbon emissions causing global warming, or the information failures that led to the collapse of the UK banking system, can be a serious threat not only to our prosperity but also to life and limb. Government has a role in correcting such failures through policy action where the costs of doing so are outweighed by the benefits. While this argument is theoretically well-worn, many of those who claim to agree often dismiss the role of regulation even in the face of egregious market failures.

backgrounds through subsidised loans and bursaries, to prevent unequal labour-market outcomes in one generation unfairly distributing opportunity to privileged young people in the next.

...a social marketeer cannot stand idly by in the face of recession and mass unemployment on the grounds that the market will selfcorrect in time The third reason for caution is that markets do not necessarily create the conditions needed to originate and sustain them. Social institutions such as the rule of law are essential ingredients of the trust that underpins a flourishing market. Meanwhile, beyond the barren and rational world of Homo economicus, the political sustainability of the market economy depends crucially on its legitimacy: the market economy's outcomes must be generally considered to be ‘fair’ if it is to be considered acceptable to citizens. Frustratingly vague as that concept may seem, it implies a clear rationale for government action to provide what Robert Skidelsky, in his 1989 founding paper for the Social Market Foundation, described as ‘social goods’. The most important of these, he argued, were steadiness of employment, ‘fair equality of opportunity’, and wide dispersal of property. Hence a social marketeer, suspicious of government intervention, cannot stand idly by in the face of recession and mass unemployment on the grounds that the market will selfcorrect in time.

Over the past 23 years we have seen policy that adheres to these principles and policy that does not. But no political party has had a monopoly on the social market approach—even though that is the thread that binds the most successful ones together. Nor has any Second, while the market is itself a manifestation of administration taken full advantage of it as a way to look individual freedom, it can result in outcomes so unequal at the world. as to restrict that freedom only to the better-off. Here the The big policy challenges for this social market diverges from Tomasi's insistence that there Parliament are effective public service is no role for institutions designed to reduce inequalities reform, the challenge of delivering between groups. The issue of higher-education funding investment-led growth and the need provides a good example. It is right to charge students a to ensure that the financial sector proportion of the cost of their university tuition, both to never again threatens the stability of avoid burdening non-graduate taxpayers with a the market economy. In each of these disproportionate share of the costs and for efficiency areas, the same social-market reasons. Nevertheless, the state must retain a role in principles hold the keys to success. facilitating access for those from low-income Read Ian’s full essay online at:

http://onlinelibrary.wiley.com/doi/10.1111/j.1467-923X.2013.12000.x/full www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

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The UK is not ready for a rebalanced economy Nida Broughton Senior Economist UK economic output is flatlining, with GDP still below where it was at the start of 2008. Projections of future growth look anaemic and last week the Office for Budget Responsibility halved its official forecast for 2013 to 0.6%. Commentators on all sides of the political divide recognise that the economy desperately needs growth. The Government’s plan for growth involves rebalancing the economy, to rely less on financial services and more on manufacturing. In outlining his vision for British industry, Vince Cable highlighted sectors including green energy, life sciences and aerospace. All well and good. But a new SMF report, In the Balance, finds that the UK workforce isn’t ready for the rebalanced economy. There are already insufficient numbers of people in the UK with skills in science, technology, engineering and maths (STEM), and many of those who do qualify in STEM subjects are in demand across other sectors. Based on estimates of demand for STEM graduates by the Royal Academy of Engineering, we estimate that there is currently an annual shortfall of 40,000 UK graduates.

On current trends, we can’t fill demand for STEM graduates from home-grown talent alone So on current trends, we can’t fill demand for STEM graduates from home-grown talent alone. In the past, migration has filled skills shortages in the UK. But at the moment, the Government has a target to reduce net migration to ‘tens of thousands’ by the end of the parliament, a pledge that David Cameron was at pains to reiterate in his recent speech on immigration. This means that it is vital that we raise the supply of home-grown talent if the STEM sectors aren’t to suffer, let alone if we want an economy that’s built around high value-adding STEM industries.

There are certainly things we can do to expand the number of STEM graduates. There has rightly been significant attention on the benefits that apprenticeships can bring to the sector, for example. But our analysis shows that there are no quick and easy wins: by GCSE and A-level it is often too late to get more young people into the sector. Much is made of the gender gap in STEM: we estimate that eliminating under-achievement in science GCSE among boys and tackling low science A-level take-up among girls in England and Wales might add 7,000 to 8,000 graduates per year. A welcome development, but nowhere near enough to close the STEM skills deficit. Instead, policy needs to focus on improving science teaching and achievement much earlier in the education system.

...policy needs to focus on improving science teaching... In the short-term, it is hard to see how the Government can achieve its planned reshaping of the economy without substantial levels of high-skilled migration, as Nick Clegg emphasised in his immigration speech last week. In the longer-term, if the Government wants its vision to become reality, it needs to act now to eliminate the long-standing home-grown STEM skills deficit, and ensure that the UK’s young people are equipped with the skills they need to access high-productivity jobs in the future. Removing these shackles on the STEM industries will be vital to the success of the Government’s aim to rebalance the economy for future growth.

Download a copy of In the Balance: The STEM human capital crunch at

http://www.smf.co.uk/research www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

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Unloosing the Gordian Knot of Growth: What should George Osborne do next? Ian Mulheirn "Turn him to any cause of policy, The Gordian Knot of it he will unloose" Shakespeare, Henry V, Act 1 Scene 1. 45–47

economy’; while others of us think that this would actually damage demand, and instead propose axing low growth measures to fund infrastructure investment.

In a pre-budget Newsnight interview I was asked what the Chancellor could do to get the economy growing. Inevitably, any nuance was stripped out of my answer to set up a simple dichotomy between me as a fiscal activist, and City AM’s Allister Heath as a supply-sider.

Among the ‘supply pessimists’, the economy’s problems aren’t amenable to quick fixes. On this view there are deep-seated problems with our economy that require reform if we’re to get growth going in the long-run. Supply pessimists also come in different flavours: those like Adrian Beecroft - who think that deregulating the labour market and cutting taxes will solve the problem, those – like Nick Boles - who argue for planning liberalisation, and those who think that zombie companies and households are preventing the normal process of reallocating capital to more productive uses. There are also some more fatalistic supply pessimists who think that unwinding the economy’s debt problems will just take time.

That got me thinking about the range of opinion in the growth debate. Despite the Prime Minister’s mantra that ‘there is no alternative’, there is no shortage of ideas about how to get growth going. But while wonks get lost arguing between a plethora of arcane growth plans, it’s all but impossible for the informed onlooker to pick their way through the maze. So we thought it might be useful to map out the options for the Government as it tries to revive the economy. The flow diagram on the next page (and available via our website) sets out the main arguments and options as we see them, and some of the main proponents of each viewpoint. The map starts with what seems to be a fundamental fracture line in the debate: between those who think there’s a demand problem in the economy that is amenable to some form of stimulus, and those who think the real problems are on the supply side, requiring microeconomic policy reforms. Within the ‘demand pessimists’ half, the options for boosting demand revolve around monetary activism, fiscal activism, off balance sheet manoeuvres, and those who agree that there’s a demand problem but think that government doing anything about it would be unwise. Within each approach there are a range of different prescriptions, from Jonathan Portes’s version of Plan B, to Adair Turner’s Helicopter Money. Some - like Liam Fox on the Conservative right - argue that public spending should be cut to finance tax cuts to ‘kick-start the

This is a work in progress and we’re keen to hear both whether people think the map is accurate, (and whether we’re fairly ascribing views to different commentators) and where different people think the policy emphasis should be. To that end we’ve designed a simple poll on our website for you to express your view. Now clearly most people think there are problems that could usefully be addressed in a number of these areas. The SMF, for example, would advocate a cocktail of nimby-slaying, investment switching, more activist monetary policy and a dose of Plan B (provided you’ve proven your credentials by doing some unpopular cuts-funded stimulus first). But for the sake of simplicity, you’re only allowed to vote once. The question is “Given the Government’s current policy stance, where do you think the emphasis should be?”

Look at the Gordian Knot of Growth on our website and vote for your favoured approach in our poll

http://www.smf.co.uk/marketsquare/posts-by-ian-mulheirn/unloosing-gordian-knot-growth/ www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

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Look at the Gordian Knot of Growth on our website and vote for your favoured approach in our poll http://www.smf.co.uk/marketsquare/posts-by-ian-mulheirn/unloosing-gordian-knot-growth/

Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

www.smf.co.uk â&#x201D;&#x201A;@smfthinktank

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Forthcoming SMF events The Social Market and its Discontents Institute for Government, 2 Carlton Gardens, London, SW1Y 5AA | 6:00 pm - 8:00 pm In this Political Quarterly debate, Ian Mulheirn and Michael Jacobs will discuss whether or not the social market offers the right framework for addressing the big public policy challenges of the day. Speakers: Ian Mulheirn, SMF Director; Michael Jacobs, Co-Editor The Political Quarterly; Polly Toynbee, The Guardian (Chair)

What makes a good apprenticeship? Committee Room 7, House of Commons | 8.30 am - 9.30 am (please allow 15 minutes to get through security) This breakfast discussion will focus on what a quality apprenticeship scheme should look like and what policy can do to foster them. Speakers: Charlotte Leslie MP, Co-Chair, Associate Parliamentary Skills Group, Kindly supported by Lord Young of Norwood Green, Clare Harbord, Director of Corporate Communications, Heathrow Airport Limited, Ian Mulheirn, SMF Director (Chair)

SMF Chalk + Talk: Professor Christopher Pissarides SMF, 11 Tufton Street, SW1P 3QB | 12.30pm Professor Christopher Pissarides, Winner of the Nobel Prize for Economics and Norman Sosnow Professor of Economics at the London School of Economics, will discuss unemployment and the labour market.

For more information and booking, please visit

www.smf.co.uk/events or contact Lisa Perrin on 0207 227 4404 www.smf.co.uk â&#x201D;&#x201A;@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

Kindly supported by

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Childcare: the good, the bad, the uncertain Ryan Shorthouse Researcher Just before last week’s Budget, the Government unveiled its long-awaited proposals to help parents manage the cost of childcare: a new childcare voucher scheme, which will replace existing employer-supported vouchers from 2015.

more, the scheme will eventually be extended to parents with children under the age of 12, which will require additional funding.

This proposal is welcome news for many middle- and high-income parents who will have children under the age of five when the scheme begins: polling by YouGov for the SMF that just as many these parents said they found it difficult to pay for childcare as parents on the lowest incomes.

There are several groups of losers from this package. One -earner couple families will not be eligible for support, whereas they are under the current scheme. Ditto parents with children aged between 5 and 16. Also, how many couples benefiting twice from existing employersupported vouchers will lose out from the new per child rule? Finally, the new voucher provides a maximum 20% of your overall costs. In the old scheme, basic rate taxpayers received 31% on £55 a week vouchers; so this existing scheme provides more support than the new voucher if your typical costs are low. How many people will fall into these different groups is unclear.

The new scheme could be more generous for the majority of claimants than the current employersupported voucher scheme, which will be phased out: it provides up to £1,200 a year per child whereas the existing scheme enabled basic-rate taxpayers to claim £887 a year per person. Access to the new scheme will also be less arbitrary than the current system. At present, parents can only benefit if their employer offered the scheme: and fewer than 5% of employers do. Another improvement is that the financial support on offer to a family rises with each extra child whereas the existing scheme enables both parents to claim, meaning couples benefited above single parents with the same number of children. So there are a number of improvements in the new scheme. But there are still a number of questions that need answering. Five big issues are:

1. Where is the money coming from to pay for it all? The new voucher scheme costs £1.4bn a year. £600 million is coming from the existing voucher scheme. But this is only an estimate: as businesses don’t have to report how many people are using the scheme, it’s not possible to quantify the exact costs. Also, it is unclear where the remaining £750 million is coming from. What’s

2. How many losers are there?

3. How fair is it? Financial support is available to very high-income households. For example, two parents earning £140,000 each could benefit from this scheme. As the FT’s Elizabeth Rigby has noted, the new scheme will see higher-rate taxpayers get the proportion of their costs covered as basic-rate taxpayers; under the current scheme, basic-rate taxpayers receive more. Is this a good use of public money? Indeed, many low-income parents saw a cut in their childcare support through the tax credit system from 80 to 70% of their weekly costs in April 2011. Many households on Universal Credit will not benefit from the proposed uprating of the childcare element of the Universal Credit to 85%. Is it right to offer very high-income households more as households on the very lowest incomes saw their childcare cut?

4. Will it inflate costs? Several commentators, including Nick Pearce at the IPPR, have raised concerns that this could inflate prices, as in the long-term middle- and high-income parents will

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carry on being willing to pay for the same shortfall between the ticket price and their subsidy. As we explained in A Better Beginning, in a mature market where parents have real choice, this shouldn’t be the case. And this subsidy should strengthen demand. But we are not sure how mature the market is and how it will react to this subsidy. At least with our proposed loans scheme, parents would be ultimately using their own – rather than government – money, and this could control prices.

at £150,000 for the vouchers, as well as the eligibility of the new UC support for those above the personal allowance, could be hellish to administer. Ironically, the Government has designed an almost universal scheme with the administrative complexity of means-testing.

There’s much to welcome about this new package, not least that it will have a much wider reach than the current voucher scheme. But its remains to be seen whether this will 5. What will the administrative costs be? be an effective solution for helping a Means-testing typically causes complexity, making the majority of parents better afford the administration of such a scheme expensive, as well as high cost of childcare. vulnerable to costly fraud and error. The cut off for parents

Recent publications In the Balance: The STEM human capital crunch By Nida Broughton

This report quantifies the mismatch between future employment requirements and the supply of domestic skills in the science, technology, engineering and maths (STEM) industries, in the context of political pressure to reduce migration. It finds that a huge increase in take-up of science subjects in Britain’s schools is needed to foster an adequate supply of home-grown STEM skills Download a copy at www.smf.co.uk/research

A Future State of Mind: Facing up to the dementia challenge By Nida Broughton, Nigel Keohane and Ryan Shorthouse

This report draws on in-depth interviews with people with Alzheimer's and their carers and a wealth of research to identify the barriers to early diagnosis, from a patient and professional perspective. New policies are proposed to better incentivise the health system to diagnose dementia earlier. Download a copy at www.smf.co.uk/research www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

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Party Conferences 2013 With the general election on the horizon and the next spending review just around the corner, the 2013 party conferences will be a crucial time in the political calendar. The conferences will be an opportune time not only to debate progress towards the bold pledges made at the last election to reform public services and tackle the deficit, but also to participate in new debates and discussions as all parties begin to formulate their manifestos for 2015. Building on the continued success of our previous conference programmes, we are now seeking sponsors to work with us at the Conservative, Labour and Liberal Democrat conferences this autumn. Our 2013 fringe programme will tackle issues ranging from growth and industrial policy, to education and welfare reform.

Core themes we are exploring this year are: Economic growth Public services and Whitehall post-spending review Health & Social Care Energy and Environment Employment Financial services Housing planning & transport Education Poverty & welfare To discuss how to work with the SMF, please contact our dedicated party conference manager, Lisa Perrin on 020 7227 4404 or lperrin@smf.co.uk.

Take a look at our Party Conference microsite at

www.smf.co.uk/events/party-conferences/party-conference-themes or download a printable PDF of the SMFâ&#x20AC;&#x2122;s 2013 Party Conference themes document. www.smf.co.uk â&#x201D;&#x201A;@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

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Budget 2013 Creative accounting, inflating the housing market, a further squeeze on welfare The SMF’s response to George Osborne’s fourth Budget focuses on the implications of the Chancellor’s announcements on public borrowing, the controversial Help to Buy housing scheme, and the further squeeze to the welfare budget. SMF analysis on the Budget was reported in the Financial Times, Guardian, Times, Telegraph, City AM, Observer, Public Finance, Public Service, and Children and Young People Now.

The falling deficit Overview: Underlying Public Sector Net Borrowing is projected to inch down by just £100m this year from last year’s £121bn. Next year it will edge down by a further £900m to £120bn, allowing the Chancellor to say that underlying borrowing is falling this year and next. Ian Mulheirn, Director of the Social Market Foundation said: “The OBR has projected that the deficit will fall by a vanishingly small amount both this year and next. This looks very much like the results of some creative accounting. Next year the deficit will only fall because of new departmental spending cuts that were spun as a switch to fund growth-boosting infrastructure. With the savings arriving next year but the investment outlay delayed to the year after, the move means that borrowing in 2013-14 might just fall. Meanwhile, for the current year, it appears that borrowing has only been managed down by the Chancellor pushing £1.6bn of spending due this year into next year – for example, by refusing to pay the bills for our membership of a few international institutions until next year. That won’t do much to convince people that the Treasury is being straight with us about the deficit. But it will rob the Opposition of a devastating attack line. ”

Infrastructure investment Overview: The Chancellor has announced new funds for infrastructure investment, with a £3bn extra to be spent on infrastructure each year from 2015. The move is funded by cuts to departmental spending, but which take effect immediately. Ian Mulheirn said: “Investment in the UK’s creaking infrastructure is desperately needed to boost growth, so while the amount may be paltry, on the face of it the Chancellor’s infrastructure bung might seem like a good thing. “But closer examination of the Budget document reveals that the plan is not quite what it seems. “First, the capital investment won’t start to take place until 2015 – by which time the economy is forecast have recovered. But the cuts to departmental spending will have already started much earlier. The net effect is that far from being a switch for growth, this aspect of the budget will withdraw demand from the economy over the next two years at just the wrong time. Meanwhile the infrastructure cavalry won’t arrive until the battle is over. “Second, it appears that there is a political motive for this manoeuvre. Front-loading extra cuts and back-loading investment mean that the Chancellor can just about claim that public borrowing is on course to fall both this year and next. This two-step has therefore saved the Chancellor from the political indignity of a deficit that rises for two years running.” www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

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Help to Buy Overview: In one of the biggest announcements in the Budget, the government has announced the extension of the First Buy equity loan scheme to all buyers, and has introduced a Government guarantee to encourage lenders to offer better access to low-deposit mortgages. This guarantee will be worth up to 15% of the value of the mortgage and available to buyers with a deposit of between 5% and 20%. Ian Mulheirn said: “The ‘Help to Buy’ scheme is ostensibly a scheme to help hard-pressed younger people to get on, and move up, the housing. But the scheme really only helps older home-owners with the tax money of the young. “That mortgage lenders have cut the availability of low loan-to-value mortgages is a sign that they think the risk of a significant house price fall is too large to want to risk their money. So now the government is stepping forward to risk our tax money instead, and perpetuate the socially damaging disequilibrium in the housing market. “Overall, the scheme will entice young people to load themselves up with debt to finance overpriced houses, keeping the housing bubble inflated with taxpayer guarantees. And if it all goes wrong and house prices fall, the young will pay twice: once for their overpriced house, and once through their taxes to pay for the losses on this unwise gamble and £12bn contingent liability. “Older, wealthy home-owners are the only winners from today’s announcement and the causes of our housing problem go unaddressed once again.”

Controlling welfare spending Overview: The Government announced its plans to cap a proportion of AME (social security) spending. The intention to do this was announced in Budget 2011 and means that rises in one area will force cuts in another. So if the housing benefit bill rises, say, entitlements for either housing benefit or some other benefit would have to be cut to prevent the overall social security bill from rising. Ian Mulheirn said: “The government is wisely seeking to control welfare spending in ways that ‘allow the automatic stabilisers to operate’. That means that if unemployment benefit expenditure rises because there’s a recession, they won’t force cuts to entitlements. “But what benefits does that leave inside this new ring-fence? Expenditure on some benefits are partly driven by structural factors (a housing shortage in the case of housing benefit) and partly by cyclical ones (the state of the economy and more part-time workers has increased the number of claims). So will Housing Benefit be part of the automatic stabiliser benefits that will be outside the ring-fence, or not? “Beyond that there are benefits that are almost unrelated to the economy – sickness benefits and pensions. But is it really tenable for the Government to say that sickness benefit or disability support have to be cut because an ageing population is pushing up the state pension bill? This could be politically explosive. Watch this space for the detail.”

www.smf.co.uk │@smfthinktank Social Market Foundation, 11 Tufton Street, London, SW1P 3QB

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Budget 2013: Helping parents who can’t afford to work? Ian Mulheirn | 19 March 2013 Today’s childcare announcements have been framed as essential to making it worthwhile for parents to move into work. Nick Clegg says that “many mums and dads simply can’t afford to work”. For parents in the lower half of the income distribution, it’s true that the cost of childcare makes a huge dent in the financial benefit working. So the decision to raise support for working parents on Universal Credit ‘equivalent to 85% of costs’ seems like a smart move. But what’s surprising is the cost of the Universal Credit measure. The £200m price tag is to be met from somewhere unspecified within the social security budget. That sounds like deferred pain. But it is nevertheless suspiciously cheap. Back at the 2010 Spending Review, the Chancellor decided to save around £400m per year (by 2015) by cutting the proportion of childcare costs covered for working families on tax credits from 80% to 70%. That would lead us to anticipate that this reversal to 85% would cost half as much more than the 2010 cut saved, or around £600m per year. Indeed, with the extension of support to short-hours workers, one might expect 85% coverage to cost even more. So what is making up the difference between the £200m price tag and the £600m this measure should be

costing? A line in the press release gives away the answer: the extra £200m will only go to families where all adults are taxpayers. So, because of the Coalition’s plan to have a £10k tax-free allowance by 2015, only couples on at least £20,000 – and in most cases more - will be eligible for the new support. Since around half of all lone parent claimants of the childcare element work short hours, only those on the highest hourly pay rates will be eligible for the new support. This is a strange sort of reverse means-test, in which the working poor won’t be eligible. That’s an odd choice if the aim is to encourage those with the weakest work incentives to move back into employment. It will also doubtless be hellish to administer (along with the administrative headaches of the other new scheme announced today for better-off parents), which is probably why the Treasury’s statement is unclear about how the scheme will actually work. What is clear is that the benefits system just got a whole lot more complicated.

Also on the Market Square: Unloosing the Gordian Knot of Growth - Ian Mulheirn, 20 March 2013 The myth of the "welfare scrounger" - Ian Mulheirn, 15 March 2013 It's time for some fresh thinking on childcare - Ryan Shorthouse, 7 March 2013 Why today's borrowing figures spell bad news for the Chancellor - Nida Broughton, 21 February 2013 'Red' Ed is going Yellow, but he should go Brown Ian Mulheirn, 14 February 2013

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