There has been little joy for savers since the financial crisis. Interest rates were already stuck at historically low levels before Bank of England policymakers responded to the EU referendum result by lowering them further. Many consumer savings products adjusted accordingly, reducing already meagre returns on the money that people had put away. Last week it was the turn of National Savings & Investments to react, announcing that the number of high-value Premium Bond prizes would be cut. This environment makes it harder for the government to address the UK’s chronically weak savings performance. But it needs to think carefully about the consequences of its ideas for solutions.
There has been a lot of new policy to encourage saving in recent years. Employers now have to provide and automatically enrol their employees into a workplace pension scheme. There has been a massive increase in the tax-free generosity of ISAs. Products that shield peer-to-peer lending income from tax and that boost the deposits of first-time homebuyers were launched. A “market leading” savings bond for those over the age of 16 will soon be available.
Specific age-cohorts have also been recognised. The over-65s were offered so-called “pensioner bonds” at attractive interest rates. The soon-to-be launched Lifetime ISA will see the government topping up the savings of the under-40s to support either a home purchase or a retirement income.
On an individual basis, these interventions are part sensible policy and part political sweetener. But there are legitimate concerns about how they interact to change savings behaviour. For instance, it has been suggested that some may use the Lifetime ISA for retirement saving instead of their workplace pension, missing out on employer pension contributions in the process. More generally, there are fears that the volume of changes to the savings system has resulted in low awareness of new products and poor knowledge of how best to use them.
One way to make sure that different savings options and incentives are understood is for them to be consistently available over time. For example, over the decades that they have been available Premium Bonds have achieved massive levels of popularity and use. Should the government want to look further at enhancing incentives to save, expanding the Premium Bond model of prize-linked savings would be a better bet than adding further confusing changes to the ISA system.
Prize-linked savings offer something different. They provide the opportunity for a person to both set money aside for the future and have a chance of grow their pot through a lottery-type mechanism. It is a system that appeals to those who prefer a small chance of winning big against seeing their savings grow incrementally by a rate of interest. It also makes saving a bit more fun, something recognised when Premium Bonds launched in 1956 with the supporting slogan, “savings with a thrill”.
Premium Bonds are held by one-fifth of UK households. This means that they are widely used, but that there is an opportunity to grow the concept. The government could look at introducing a new generation of prize-linked savings through other institutions to widen their appeal, such as through credit unions as happens in the United States, or through the Post Office. It could also look at varying the prizes that are on offer. In some other countries a mixture of cash and consumer goods can be won. For example, FirstBank in Nigeria offered TV sets and even Olympic tickets alongside cash rewards.
There are many options for how to do it. The point is that if the government is serious about getting people to save more when interest rates are low then a more ambitious prize-linked savings scheme could be the way to do it.
The publication of a green paper last week provided the first comprehensive description of the government’s thinking on its industrial strategy. The strategy is built around ten areas of policy that influence productivity performance and economic growth. Most of the chosen policy areas are unsurprising, and include staple economic policy topics such as infrastructure, skills and international trade. But some parts of the strategy are new and thought-provoking. Of particular note are the ideas around how sectors should organise themselves to engage with government and how “missing” institutions (trade bodies, financial networks etc.) could hinder the development of industries or places. Greater detail of how these chosen areas of focus will translate into practical policy can be expected following the responses to the green paper. With this in mind, it is worth reflecting on what is good and what is not-so-good about the first version of the strategy.
One of the positive features of the green paper is that it gives a full and correct diagnosis of the economy’s weaknesses whilst also recognising its strengths. Although an obvious thing to say, any industrial strategy should ask how it can address economic failings as well as build on the things that bring economic success. To give a simple example, when discussing international trade it would be incomplete to reference the UK’s sluggish exporting performance without recognising its accomplishments in attracting inward investment.
Another positive of the document is that there is no pretence that the industrial strategy’s interventions will see immediate results, with the message instead being that policy certainty and long-term commitment to the strategy are necessary to make a difference. This is common sense and undoubtedly the right approach, but the political cycle will make it hard to achieve. Policy long-termism requires future governments to accept the strategy and continue with it, but new administrations have a tendency to rip-up policy constructs that have not been designed by them. This is something that deserves more attention as the strategy develops.
Despite being a consultation, the strategy did present a package of existing action and new announcements to match to each of its ten areas of policy focus. The list of existing action serves as a reminder that although the industrial strategy provides a coherent narrative and logical approach to intervention, much was already being done to try and address the issues holding back the economy. The list of new policy measures were sensible but also relatively small scale, such as the revamp of technical education and the use of HMRC data to better identify and target potential exporters. Although this collection of existing and new policy presents a picture of definitive action, the number of open or not yet started reviews referenced by the green paper suggests that there is a lot more to come. The topics of the reviews range from the provision of patient capital to business energy costs, and from entrepreneurship to the business expertise of local government. These reviews will hopefully mean a better understanding of economic problems as well as mean better policy.
Some of the new ideas in the strategy provided a good indication of the government’s philosophy on intervention. This is certainly true of the new “sector deals” that are being proposed – essentially, a challenge to any sector or industry to coalesce behind strong leadership and dictate the relationship it has with government. It is a move reminiscent of the devolution process, where local areas were challenged to come to government with a united vision of what powers they would like decentralised to them. The strategy also states that in proposing a sector deal there has to be due explanation of how the sector fits with the vision of an open, competitive, innovative economy and be based on long-term thinking. Within these parameters there is a real opportunity for established industries to reinvent their relationship with government and for new industries to create a relationship. It will be interesting to see which sectors respond to the government’s challenge.
The one criticism that could be levelled at the green paper is that it is potentially too safe. True, not every new policy has to be radical and there is significant merit in iterative development of interventions. However, some discussion of alternative policy direction is merited. For example, the strategy talks about young people, education choices and careers advice. There are ideas out there to completely reform the job centre and create youth employment centres that are dedicated to the career paths and training of those aged 16-24. Another example of a big idea is Lord Heseltine’s suggestion that there should be an enhanced role for Chambers of Commerce to provide business support, even arguing that this could include compulsory membership. This is something that could have been discussed in the context of the green paper’s arguments about missing institutions.
In summary, the green paper identifies the right problems, raises some interesting ideas and does present a coherent picture of what the government is trying to do with economic intervention. It is, however, short on big ideas that could radically alter how state intervention works and short on detail about how it could be made truly long-term. That said, the strategy is only at the discussion phase and there is time to think about both of these issues and address them.
In the coming weeks the government will publish a discussion paper outlining some of the policy direction behind its industrial strategy. Up until this point the only hints as to what it will include have been the occasional speech and select committee hearing. From these, we have learned that the new strategy will favour policy that is localist, cross-sector and long-term in nature. But while we await more detail of this approach it is worth picking up on something else that Greg Clark - the Secretary of State responsible for creating this new model of intervention - has said. Responding to a question about how metrics would be used to evaluate the success of the industrial strategy he explained that he did not want to establish targets just for the sake of it.
At this early stage of policy development it is entirely sensible to resist the tendency of politicians to announce that they intend to reach an ambitious target. These targets can take different forms, such as the number of people affected by an initiative, or the amount of money that is to be spent or saved; they are almost always a round number and almost always have a set date by which they will be achieved. David Cameron's administration had an aspiration to export £1 trillion of goods and services by 2020, a commitment to create 3 million apprenticeships by 2020 and a manifesto pledge to reach a fiscal surplus by 2018-19. Looking back further, the famous New Labour "pledge card" in 1997 outlined how it would cut class sizes to below 30 for 5, 6 and 7 year olds and get 250,000 under-25s off benefits and into work. This list could go on and on.
Creating targets can be a positive addition to the policy debate if they are set in the right context. Firstly, they can provide a clear indication of a government's ambitions and priorities. As Sir Nicholas Macpherson, the former Permanent Secretary to the Treasury, noted of George Osborne's surplus target, "I’ve only had four years in 31 at the Treasury when there has been a surplus. If you don’t aim to get the surplus, you’ll never get there". Secondly, they can create focus on solving a particular problem. The collective talents of civil servants, industry, think tankers, rep bodies and academics will have a specific policy question to put their minds to, potentially reaching new answers in the process. Thirdly, they can provide accountability. Take the Conservative's failure to reduce net migration to below 100,000 as an example - migration is a big issue for the public and the 100,000 figure has meant senior politicians being held to account on that issue.
Despite these positives, if the consequences of targets are not thought through, or are simply arbitrarily set, they can act to restrict the flexibility and effectiveness of policy. An example would be the last Labour administration setting a child poverty reduction target predicated upon narrowing relative income levels, with the best policy lever to achieve it being to ratchet-up the value of Tax Credits. This approach was expensive, some would argue ill-conceived, and meant that the ability to focus money on the root causes of child poverty was hampered. A closer look at the net migration target offers another example of the undesirable policy outcomes of a target. EU membership means that no policy lever is available to stop EU citizens coming to live and work in the UK, hence other groups, such non-EU students, facing more stringent migration controls. This is potentially damaging to both universities and to the economy.
It is also worth mentioning one specific additional point related to the setting of targets, which is that there has to be the ability to robustly measure success against them. This is not always the case. For example, the government has said that it wants to build one million homes in England over the course of this Parliament. And yet the Home Builders Federation has convincingly argued that the house building statistics being used to measure success against this target are methodologically flawed, underestimating the supply of new build homes by around 30,000 each year.
It is clear that the new industrial strategy will take some time to be fully configured – the discussion paper soon to be published by the government may be followed by a White Paper at some point later in the year. There is nothing wrong with this type of slow and steady policy development, especially given that the stated aim of Greg Clark's is to build something that will last for decades. So far, the temptation to create an arbitrary set of targets against which to measure success seems to have been avoided. This is a good thing and should only change if the government is confident that setting targets will not negatively skew the policy response to important economic issues.
This post was originally published on the website ConservativeHome.
When the Conservative-led coalition took office in 2010 public trust in the welfare system had been falling for years. There was a feeling that what was meant to be a safety net in times of need had morphed into something that encouraged the wrong type of behaviour and that could be abused by too many people. By the time of the 2015 General Election benefit rules, eligibility and payment levels had undergone a dramatic – and often controversial – transformation, contributing billions towards reducing the deficit in the process. From a political perspective it is without doubt that on polling day the Conservatives owned the agenda, with the Labour Party nowhere near convincing people that they were serious about reform. But just eighteen months on from leading the debate, and after some infighting and big policy u-turns, it is now time for the Tories to renew their narrative and policy approach on welfare.
For a new approach to be successful requires an understanding of how the old approach came unstuck. The problems started in January 2014 when George Osborne made a speech, arguing that a further £12 billion of welfare savings were needed to support deficit reduction. He reasoned that if savings were not found from welfare it would mean either raising taxes or deeper cuts to the budgets of already under strain government departments. The £12 billion figure found its way into the Conservative manifesto, but with no detail of how the savings would be achieved other than making clear that pensioner benefits would be protected.
The lack of specifics about what the £12 billion would entail was subject to some criticism at the time. Some may have believed that this didn’t matter, as those defending the commitment sounded tough on welfare and the public generally like politicians sounding tough on welfare. But it did eventually matter, as there is much greater nuance to public opinion. The British Social Attitudes Survey tells us that there is support for less spending on unemployment benefits and a belief that working couples without children should look after themselves rather than have their wages topped-up by the state. When it comes to benefits for disabled people who cannot work and for working parents on low incomes there is public support for more spending. Yet even these statements cannot be taken at face value. While some are straightforward value judgements, the average person answering these questions is, understandably, unlikely to have a complete grasp of the ins and outs of benefit expenditure. Indeed, other polling tells us that there is a tendency to vastly overestimate how much is spent on unemployment benefits and how many claims are fraudulent. In short, the great majority of people are unlikely to have understood what £12 billion worth of cuts meant in practice for the parts of the welfare system that they had sympathy for.
The unexpected Conservative majority meant that the detail of the £12 billion commitment had to be revealed in the Budget that followed the election. Other than the big savings realised from simply freezing the level of benefit payments, it was the low-income wage top-ups of Tax Credits and their successor scheme, Universal Credit, that were going to take the biggest hit. It resulted in some Conservative backbenchers rebelling and the Lords rejecting the changes. The Tax Credit part of the policy was reversed four months later. History would repeat itself around Budget 2016, this time with an attempt to save £4 billion through changing how a disability benefit was awarded. Some backbenchers again openly criticised the move, which was this time accompanied by the resignation of Iain Duncan Smith as Secretary of State. This policy was also scrapped. There was plenty of opposition to the Government’s remaining welfare reforms, but attention in the summer turned to the EU referendum and fallout from the leave vote. Now, we are beginning to see focus return to welfare.
There has certainly been speculation about how welfare policy will feature in tomorrow’s Autumn Statement. Some have argued that it should be used to reverse planned cuts to Universal Credit – a legacy of that £12 billion commitment – as they are not compatible with the new Prime Minister’s support for those people who are “just about managing”. Others have pointed to the fact that the Treasury’s cap on welfare expenditure, imposed only a couple of years ago, has been breached since November 2015. With it being made clear that there will be no new cuts to benefits and that the public finances are deteriorating, it does not seem like the Chancellor has much room to address these issues.
It is important to say here that the welfare reforms made between David Cameron taking office and Theresa May taking over had many successes, many failures and the jury is still out on some. The point is that from 2014 onwards the mood of the public and of some Conservative MPs on welfare reform was badly misjudged and led to some significant mistakes. The new Secretary of State for Work and Pensions, Damian Green, has begun to outline the direction that he wants his department to go in. Over the coming weeks and months he has a big opportunity to set out a new narrative and new policy direction on welfare.
A new narrative should have as its mantra that the UK’s welfare system is a two-way street. Jobseeker’s Allowance claimants should make the maximum effort to find work, but the Government should ensure that there is sufficient investment in high quality, personalised employment support to help them. A person making contributions throughout their working life should expect a decent State Pension in retirement, but they should also accept that the Government cannot continue to promise an unsustainable uprating of it. Recipients of welfare are asked to adapt to changes to the rules and eligibility of their payments, but the Government should do better at consulting, testing, communicating and implementing the changes that it wants to make. There are many more examples.
A new approach to policy should focus upon managing costs, enhanced devolution of responsibility and greater use of technology. There should be no more new cuts to the working-age welfare budget without addressing the cost of ring-fenced pensioner benefits. Whilst there are obvious political difficulties, changing eligibility for future claimants rather than current ones is an option worth looking at. Devolution of powers to local authorities has massive potential to improve how welfare is being delivered. One example is a wider roll-out of youth employment centres that operate under local control to support young people into work. Technology can revolutionise public services and the Government should look at how it can help deliver policy innovations. For instance, online accounts could be used to realise a 21st Century version of contributory welfare.
Welfare reform is made harder if some in your own party and the public lose faith in the rationale for doing it, but a coherent new approach that both can buy into should make it much easier.
Steve Hughes had his latest research published today. Welfare, Work and Young People looks at how devolved control of the jobcentre could result in better employment support for 16-24 year olds. It also makes recommendations on the design of the new Youth Obligation and the National Citizen Service. You can find the report here.