Debt-trapped UK pays its price
Back in the 1970s, businesses avoided the UK because of its high taxes, high strike rates and low productivity. We were losing more than 20 million working days a year to labour disputes, and had a lower rate of productivity growth than any other country in the G7.
Most commentators felt that there was little that could be done and decline was inevitable. Yet when we look back at what was achieved under (former Prime Minister) Margaret Thatcher in a few short yet turbulent years, it serves as a reminder that nothing is inevitable and that people can change, as governments do.
After some radical reforms, strikes declined, productivity improved and as tax rates came down, companies started to invest in the UK once again.
Britain was back in business.
These reforms laid the foundation for an unprecedented period of growth, with soaring income and confidence for 63 uninterrupted, consecutive quarters.
We had an economy where growth was driven by productivity increases, underscored by good housekeeping.
Sadly, the last government took this improving economy and fell back on an unsustainable formula, growth fuelled by debt and consumption beyond our means.
By 2009, we were harshly reminded that many of the gains in the last decade were built on sand.
We cannot say that the warning signs were not there.
Personal debt had boomed in the years leading up to the recession, rising from around £700bn in the early 2000s to £1.3 trillion in 2007.
In its 2007 Report, the Centre for Social Justice (a UK based think tank) warned that these levels of debt were unsustainable.
A few months later, Northern Rock (a British Bank) went to the wall.
Although we talk a great deal about the banks when we speak of debt, it is worth reminding ourselves that the poorest in the society suffer the most when debt gets out of control. Inability to pay can often lead to violence in many of the most difficult communities.
But it was not only the British public who spent beyond their means.
The government was at it as well. Prior to recession, the UK had one of the largest structural deficits in the industrialised world. It now has an enormous deficit, adding every day to its outstanding debt.
We are paying £120 million a day, just servicing the interest payments; money that cannot be spent on British schools, British hospitals or British roads.
This is why, it is vital to get the deficit under control; a process, which is already underway, and one that has allowed us to maintain low borrowing costs despite an unprecedented budget shortfall.
This is a painful economic legacy, and one that we will be dealing with for many years to come.
But these figures are not just about a broken economy. They indicate that we had lost direction with a culture of recklessness and irresponsibility; a culture of live now, pay later.
Where once families worked hard and saved hard to buy the things they needed, they now look to unsecured credit and payday loans.
Where once people put money aside and built up assets to provide for their retirement, we now have seven million people not saving enough for their old age.
And while there have always been fiscally irresponsible governments, the way spending was let rip in the course of the last decade was unprecedented.
This culture of recklessness has contributed to the deprivation and breakdown we see across swathes of our society today.
Some of them are as follows:
1. pockets of worklessness and dependency, often persisting through generations of the same family
2. More than four million people on out-of-work benefits, many for 10 years or more; one of the highest levels of unsecured personal debt in Western Europe
3. The highest teenage pregnancy rates in Western Europe; Over a million children growing up in households with parents who are addicted to drugs or alcohol
4. And the worst thing of all, this was before the recession had even started.
We had an entrenched culture of social breakdown even while the economy was growing.
I understand we were not alone in this; as the Social Development Ministry statistics indicate, even before the downturn in New Zealand when many firms were reporting serious difficulty in finding workers at all skills levels, 10% of the working age population were on welfare.
We saw similar trends in the UK labour market.
Though employment levels rose by some three million in the decade leading up to the recession, foreign nationals accounted for more than half of the rise.
It was not as if there were not enough people to do the jobs in the UK.
We had over four million people sitting on out-of-work benefits over this period, rising to five million by the end of the recession, some of who were genuinely sick or disabled, but capable of working.
One million have been out of work for 10 years or more.
We have to tackle the problem from the other end – looking at the root causes of our broken society rather than treating the symptoms alone.
This was a challenge I was determined to face when I established the Centre for Social Justice.
Rather than focusing on the symptoms of poverty and social breakdown, we were determined to unearth the root causes.
We commissioned two reports into social breakdown, “Breakdown Britain” and “Breakthrough Britain.”
They determined five pathways to poverty, namely, family breakdown, poor education, debt, addiction and welfare dependency and worklessness. These pathways to poverty feed on each other in powerful ways, and can push families into a damaging downward spiral.
Take family breakdown, where evidence that those growing up in a broken home are 75% more likely to fail at school, 70% more likely to become addicted to drugs, and 50% more likely to have an alcohol problem or addiction.
Instead of investing in fundamental changes to the system, changes which may have taken a number of years to bear fruit, Governments resorted to reactive but eye-catching tweaks around the edges.
These tweaks were expensive and often ineffective, but because they were funded by debt, it was possible to push the burden of them further down the line, onto the next generation.
A prime example is the system of tax credits introduced by the previous Government, ostensibly with the goal of making work pay.
In fact, more often than not, these tax credits made things more confusing for claimants, and created perverse incentives which encouraged work at just 16 hours, no more and no less.
But they played another role as well. Because there was a child element, paid in and out of work, tax credits became a useful tool for tweaking child poverty rates.
Add a few more pounds to tax credits at the annual budget and you could triumphantly announce that you had pulled thousands of children out of poverty.
But had this changed anyone’s life?
Had it made it any more likely that these children would go on to succeed in school, hold down a job, or form a stable and loving relationship?
In the case of a family troubled by addiction you may only have made things worse, with more money simply fuelling the families’ problems.
And because you have not made a permanent change in their life, you will find that before long, they will have cycled back below the poverty line, and you are back where you started.
(to be continued)
Rt Hon Iain Duncan Smith is UK Secretary of State for Work and Pensions and Founder of the London based ‘Centre for Social Justice, a Centre-Right think Tank. The above is the first in a series of two parts of a slightly modified version of his speech delivered at the Maxim Institute Annual Sir John Graham Lecture in Auckland on July 22, 2011. The next part will appear in our September 1 issue.