A speech by the Secretary of State, Rt Hon Owen Paterson MP. Delivered at Queen's University Belfast, 27the February.
CREATING A DYNAMIC ECONOMY
- PROMOTING ENTERPRISE, REFORMING WELFARE -
Introduction
This evening, I want to talk about economic and welfare reform – two sides of the same coin.
I want to reiterate the absolute necessity of deficit reduction as an essential precondition for economic recovery.
I want to explain why rebalancing the economy is such an overwhelming priority, particularly here in Northern Ireland.
I want to re-state this Government’s commitment to business and private enterprise...
And why it is essential that we reform our broken welfare system.
Deficit reduction
This Government came to power in May 2010 with one great priority…
…to deal with the largest budget deficit in our country’s peacetime history.
As a result of that deficit the United Kingdom is currently borrowing £242,000 a minute.
For every £4 spent by government, £1 is borrowed.
And we are currently paying well over £120 million a day in interest.
That is dead money that will never be spent on a single hospital, school or university here in the UK.
It is, of course, easy to blame all this on the bankers…
…the bonus culture that led to unacceptable risks, huge over-borrowing and in turn massive bailouts by the taxpayer.
Yet in reality the banks made an already bad situation worse, assisted by Gordon Brown’s catastrophic regulatory reforms of banking, which allowed them to behave like casinos.
What really got us into this mess was years of government, in a boom, simply borrowing and spending money it didn’t have and could not afford.
The fact that our national debt has now hit £1 trillion is evidence of that.
And let’s remember this fact.
Government does not have any money of its own.
It only has what it takes from people in taxes and what it borrows on the markets.
We cannot go on spending money we do not have.
And we all know that in a dynamic global economy punitive rates of taxation drive away the businesses and entrepreneurs who generate wealth…
…while excessive borrowing is simply taxation deferred.
Ultimately, the longer you put off the problem the worse it becomes.
And in our case delay would simply mean offloading the debts of this generation onto our children and grandchildren.
I see nothing remotely progressive, kind or moral in that.
As a result of the Government’s deficit reduction plan we have gained the confidence of the global markets, just as other countries have lost it.
Our borrowing costs have fallen to record lows, showing that the UK is seen as a safe haven in the global debt storm.
That in turn saves money for every taxpayer, family and business throughout the UK, including here in Northern Ireland.
Even a 1 per cent rise in interest rates would add £10 billion to household mortgage bills which would hit a typical family by £1,000 a year.
The alternative proposed by our opponents – more borrowing and more spending – would undermine our credit rating, put pressure on interest rates, choke off growth and stifle recovery.
And the negative outlook issued by the one of the ratings agencies recently should serve as a wake-up call to anyone who thinks there is an easier alternative to what we are doing.
So we must stick to the course the Prime Minister and the Chancellor have set, because the only plan B on offer is bankruptcy.
Rebalancing the economy
Of course the banking crisis threw into sharp focus another pressing need for the UK economy – rebalancing.
We are worryingly over-reliant on financial services…
…vital as it is to protect the City of London and retain our position as a world leader in a sector worth billions to our economy…
We must do more to promote a dynamic, vibrant private sector that drives economic growth.
For the past decade the economy has been too dependent on government spending and unsustainable debt.
It is shocking that almost half the new jobs created in the UK economy were dependent on public spending.
And here in Northern Ireland, according to one survey, public spending accounts for the equivalent of around 77.6 per cent of GDP.
As one local economist put it recently, Northern Ireland’s economy is structurally dependent on the public sector.
We all understand the reasons for that.
But it is unsustainable in the long term.
I’ve said many times that re-balancing the economy here could take up to 25 years.
But it has to be our priority…
…not by taking a axe to the public sector
…but by creating the conditions that enable the private sector to grow. Only then will the public sector shrink relative to the size of the rest of the economy.
A Pro-Business Government
Ultimately it is not the State that creates sustainable employment.
It’s business people – entrepreneurs and risk takers.
Not ministers and civil servants sitting behind desks picking winners and issuing directives.
So we need to promote an enterprise culture across the United Kingdom.
We need to foster an environment that encourages wealth creation.
We need to dispel the false idea that the state should be the sole, or indeed best, provider of each and every public service and that the answer to every known problem is to spend yet more public money.
As the great TE Utley – a man with a profound affection for and interest in Northern Ireland – once put it:
The notion that compassion is something which can be delegated to the State is one of the cruellest fallacies of collectivism. No democratic government is likely to show more compassion than is felt by the people over whom it rules; but a people can easily lose the capacity for compassion if it is constantly taught that the State is the repository of its conscience’.
That to me expresses perfectly the Conservative idea of society.
We believe in society; it’s just not the same thing as the State.
And we need to end the anti-business culture that’s held us back for too long, by backing business to the hilt.
That’s why the Government is cutting corporation tax from 28 to 23 per cent to give the UK the most competitive business taxes of any major economy.
It’s why we’re scrapping needless red tape and regulations that would have cost businesses over £350 million a year.
It’s why on coming to power we stopped the planned increase in employer National Insurance Contributions – the Jobs Tax – and why we are introducing a £20 billion National Loan Guarantee Scheme to help get cheaper loans to business.
It’s why we’ve introduced the Regional Growth Fund with extra money for devolved administrations and the new Enterprise Allowance to help unemployed people start their own businesses.
It’s why in England we’ve introduced enterprise zones with money for devolved administrations if they want to follow suit.
And it’s why we are determined to reform the employment tribunal system to help businesses create jobs, because a dynamic economy requires a dynamic and flexible labour market.
Since the election, half a million new private sector jobs have been created, but we need to create many more and to do that, we must make the UK the easiest place in Europe to employ people.
In the past year businesses have invested over £119 billion – up £3 billion on the previous year.
But we know that more needs to be done, both here and the eurozone, where the continued failure to deal with the debt crisis is having such a damaging impact on our own recovery.
Otherwise the whole of the EU risks being left behind by growing economies like China, India, Brazil and Turkey.
In the UK we are taking the bold steps necessary to get our economy back on track.
As the Prime Minister has made clear, the need for equally bold action across the EU is just as strong.
Northern Ireland and Corporation Tax
Here in Northern Ireland many of the policy areas to develop the economy are in local hands.
And I applaud the work of Executive ministers on their efforts to rebalance the economy by promoting local businesses and attracting inward investment in these difficult times.
But there’s a role for national government too.
I’ve spent over four and a half years visiting businesses across Northern Ireland.
As I’ve said many times we have some absolutely world-class companies.
We just don’t have enough of them.
Northern Ireland has two challenges unique within the UK – the economic legacy of the troubles and a land border with a country that has a significantly lower rate of corporation tax.
That’s why at the last election my party promised a consultation paper looking at potential mechanisms for devolving corporation tax to the Executive and Assembly here.
That became a Coalition commitment which we delivered last year.
The consultation that followed was dynamic, led to the formation of a new grouping, Grow NI, and generated over 700 responses, the vast majority in favour of devolving corporation tax.
But the consultation also left some key questions unanswered.
What exactly would be the cost to the block grant?
What administrative changes would be required if a separate rate here were to be introduced?
And how exactly would Westminster legislate for it; could it be done through the annual finance bill or would it need a stand alone Bill?
Any responsible government needs satisfactory answers to these before deciding in principle whether or not to proceed.
That’s why we’ve set up the ministerial working group chaired by Exchequer Secretary, David Gauke, and including Executive Ministers and me.
Not as a delaying tactic or because I’ve suddenly gone cold on the idea.
But simply because we have to get it right.
So officials are working intensively and our next ministerial meeting will take place on 7 March.
We hope to complete our work by the summer.
The Prime Minister recently described Britain as a country with enterprise running through its veins.
Well if it’s true of GB it should apply equally to Northern Ireland.
Until recently we were renowned for innovation and enterprise.
There’s John Dunlop who invented the pneumatic tyre, Harry Ferguson who invented the modern tractor, and Harland and Wolff who built the world’s greatest ships.
Even during the troubles we had great success stories like FG Wilson and great entrepreneurs like Allen McClay.
And today we have world class companies like Wrightbus, Norbrook and Randox.
So I see no reason why, given the right business environment, we cannot once again become an economic powerhouse.
Promoting Private Enterprise
I say all of this as somebody who is convinced that capitalism is the best system for producing wealth and creating prosperity.
In the famous words of Churchill:
‘Some people see private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon’.
I agree completely with the great man.
Yet I would go further and state that liberal capitalism is the only truly moral means of achieving those objectives.
It is the only system consistent with civil and political liberty, and public good.
The alternatives, depending to a greater or lesser degree on the concentration of power in the hands of the State, are in my view ultimately incompatible with this.
This does not mean that the state can detach itself altogether.
Where there is excess or abuse, we will step in as we have over executive pay and through our bank levy that will raise £2.6 billion a year over this Parliament.
And we are reforming the banking system to ensure that the mistakes of the past cannot be repeated.
But I firmly believe that at a time when, largely due to the banking crisis, we see anti-capitalist protests at St Paul’s Cathedral and elsewhere, we need to be robust in reminding people of the benefits of capitalism and the free-market economy.
Put simply, no other system in human history has produced more prosperity for more people consistent with the maintenance of liberty and order.
Welfare Reform
Support for welfare
But of course capitalism is not perfect.
It produces inequalities.
Left entirely to its own devices it can not only produce great wealth, but also great disparities in wealth.
As far back as the 1840s, looking at the social consequences of the industrial revolution, Disraeli wrote about the ‘two nations – the rich and the poor’.
So although the poorer in a capitalist society are always better off than otherwise,
in the interests of a stable society, Conservatives have always warned against and sought to mitigate the unbridled excesses of the market.
As a Conservative I believe that the State does have a positive duty to intervene, in order to help the most vulnerable in society.
Hence my support for a welfare system financed out of taxation.
It has been a vital safety net for millions of people.
A Broken System
Yet today our welfare system is broken.
As a result, throughout the United Kingdom we see…
…around five million people currently on out of work benefits, one million of them for a decade or more
Almost two million children are living in households where nobody works, 65,000 of them in Northern Ireland…
And there are more than 10,000 households across the UK where no one has ever worked.
Economic and Social Cost
The economic and social costs of this are enormous.
The UK Government spends almost £100 billion annually on working age benefits and tax credits – an amount that rocketed by almost 25 per cent in real terms during the decade before the economic downturn.
Here in Northern Ireland we will spend almost £1.5 billion on out of work benefits this year.
And the money has to come from somewhere.
So every working family in the UK is currently paying £3,000 a year simply to support the benefits system.
The entrenched poverty and ingrained, long-term worklessness we see in too many parts of the UK cannot simply be put down to the present state of the economy.
Even during the boom years, with employment levels up by some 2 million, nearly half the rise in employment in the UK was accounted for by foreign nationals.
Meanwhile in Northern Ireland 200,000 people are stuck on out of work benefits unable or unwilling to take advantage of the job opportunities that are being created.
Or take those who are just parked on disability benefits without regular checks to see if their condition has changed.
Across the UK, some 900,000 people have been on incapacity benefits for a decade or more.
In Northern Ireland 1 in 10 of the population claims Disability Living Allowance – double the UK average.
That can’t just be down to the legacy of the troubles; the number of people claiming DLA has actually increased by 25 per cent since 2002.
As a constituency MP I constantly see people who want to work but who would be worse off if they actually took a job.
Some claimants face losing as much as 96p in every pound they earn through tax and benefit withdrawals.
Would any of us here be willing to accept 96 per cent tax rates?
Yet this is what we are asking of some of the poorest members of society.
To me, this points to a system that is failing and which in far too many cases discourages work and simply parks people on benefits.
There is nothing remotely fair, moral or progressive about any of this.
It’s bad for benefit recipients, bad for communities and bad for society as a whole.
And, as the Centre for Social Justice has shown, it frequently leads to higher levels of debt, family breakdown, alcohol and drug addiction - and crime.
Added to this, the welfare system has become mind bogglingly complex and confusing.
There are now over 30 different benefits, paid by separate departments and split between out-of-work benefits and tax credits.
So is it any wonder that some people are put off moving into work for fear of losing out?
None of this was intended by Beveridge when he set out his blueprint for the welfare state in 1942.
He was clear that the system should not be allowed to ‘stifle incentive, opportunity or responsibility’.
Yet that is a warning that successive governments, of both main parties, have failed to heed.
As a result the public have become disillusioned with a system that often seems more concerned with propping up people on benefits than helping them to change their lives.
In a fair society, there should be a link between what you put in and what you take out.
Principles of reform
Successive governments have embarked on piecemeal reforms of the welfare system.
The previous government shifted billions of pounds around the tax and benefits system in an attempt to address poverty, all of it well intentioned.
Yet it had the perverse effect of trapping thousands of families on benefits, while income inequality increased to its highest-ever level.
The reality is that no amount of tinkering can deal with a system that is now so obviously failing the very people it was set up to help.
Only a root and branch reform will do; and that’s why the Coalition has embarked on the most radical shake up of welfare for sixty years.
We came into office committed to building a new welfare contract with the people of the United Kingdom based on clear principles.
First, for those who are able to work, the contract has a simple message.
We will make work pay.
And if you take steps with us to find and stay in employment you will receive our support in return.
Second, we will continue to protect the most vulnerable.
Those who are too sick or disabled to work will always receive support from the State, as they should.
Third, we will deliver to the UK taxpayer a fairer system. Fair to those on benefits and fair to those who pay for them.
Let me briefly take each of these in turn.
Universal Credit
First, we will replace all income related out of work benefits and tax credits with a single Universal Credit.
It will be delivered by one department and it will be withdrawn at a clear and consistent rate as people move into work.
Crucially, the maximum withdrawal rate will be reduced so that people know that if they move into work it will pay to do so.
Unlike the current system it will ensure that people are consistently and transparently better-off for each hour they work and for every pound they earn.
We estimate that the introduction of the Universal Credit will pull around 550,000 adults and 350,000 children out of poverty…
…and 80 per cent of the gains from this reform will go to those in the bottom 40 per cent of the income distribution.
So this is a progressive reform.
It will also massively simplify the system.
At the same time a strengthened conditionality regime and robust set of sanctions will make it clear that claimants are also expected to do their bit.
So this is not only about increasing financial support, but also taking a much more dynamic approach to supporting claimants back to work.
People in work tend to live longer and are better able to provide for their children.
So there’s a moral imperative to what we are doing.
Disability Benefits
That also includes disabled people.
We need a much more positive and proactive approach to disability, breaking a culture which sees people as fundamentally static.
Thats why we are reforming the Disability Living Allowance, introducing a simpler system based on clearer and more regular assessments.
And it’s why we are reassessing all claimants on Incapacity Benefit, enabling us to build up a much more accurate picture of who needs unconditional support and who could be helped to move into work.
These reforms are not about reducing or removing benefits from those who are genuinely in need of support.
They are about looking more carefully at how a condition affects someone’s life…
…and ensuring that, where they can, people are encouraged to move towards financial independence.
Fairness to taxpayers
We also need to be fair to hard pressed taxpayers, by ending the something for nothing culture that has grown in recent years.
So the Government will also introduce a welfare cap.
It is simply not fair that households on out-of-work benefits should receive a greater income from the state than the average working household receives in wages.
So a cap, linked to average weekly earnings, will limit the amount of benefits a household can receive to a maximum of £26,000.
That’s the equivalent of a gross salary of £35,000 at a time when here in Northern Ireland the median full-time public sector salary is nearly £29,000 and in the private sector it’s just over £20,000.
Where are the jobs?
Of course we often hear it said that our plans won’t work because there are no jobs around.
I do not for one second underestimate how difficult things are at the moment.
I see it here in Northern Ireland and in my own constituency in England.
Unemployment is an incredibly difficult time for everyone affected.
And I also know that competition for jobs is extremely tough.
That’s why the Government will do everything it can to help people back into work.
Yet there are still some 450,000 vacancies available at any one time across the UK.
Northern Ireland’s local Jobcentres – which only cover some of the opportunities – have taken nearly 50,000 new vacancies over the last year.
The latest labour market report shows 26,000 more people in work here than a year ago.
But remember that even when growth was booming, and employment levels were rising, millions of UK nationals were still stuck on benefits.
So there is more to this than just the state of the labour market itself.
Blaming a lack of jobs erroneously assumes that the number of jobs in the economy is static.
And it ignores the dynamic nature of welfare reform which will change lifestyles.
Universal Credit will give clear incentives for people to move into work, stay in work and progress in work.
We estimate that its introduction could reduce the number of workless households across the UK by some 300,000.
Work Programme
Yet the Government has recognised that additional support is needed both to help people prepare for work and to assist those who are able to work immediately in looking for employment.
That’s why, in GB, we have introduced the Work Programme, the largest single welfare to work initiative seen since the 1930s.
It replaces a hotchpotch of previous well meaning but ultimately failed schemes, such as the Future Jobs Fund.
By harnessing the knowledge, skills and experience of voluntary and private sector organisations, it offers providers the flexibility to decide how to deliver support.
It’s built around the needs of individuals, and focused on achieving long-term, sustainable jobs.
Of course the Work Programme does not currently apply here in Northern Ireland.
It is, however, a key element in getting people into employment and Executive ministers are discussing with the Department for Work and Pensions how it might be introduced.
Northern Ireland a special case
There are some who argue that these changes are all well and good for GB, but Northern Ireland is a special case and needs insulating from reform.
I am the last person to ignore Northern Ireland’s history or the legacy of the troubles.
But if anything I would argue that Northern Ireland is a special case precisely because the reforms are so badly needed here.
Northern Ireland has proportionately one third more households living on out of work benefits as the rest of the UK…
…meaning a greater proportion of people have been cut adrift from the jobs market altogether.
They are not stuck on the sidelines simply because of the state of the economy…
…they are there because they’ve been let down by a welfare system that has failed to promote and support work.
And of course in Northern Ireland it is among those for whom worklessness has become a way of life that paramilitaries, on both sides, continue to prey and recruit.
Working together
Let me be clear.
It’s for the Executive to bring forward legislation on welfare reform here, once the Bill currently before Parliament receives Royal Assent.
But breaking parity with GB is simply not an option, for practical and financial reasons.
There will, however, be areas where the Executive will want local flexibility to suit local circumstances.
These could include recognising different housing arrangements here and most obviously taking account of the fact that Council Tax doesn’t apply in Northern Ireland.
The UK Government is clear that it is more than prepared to do whatever it can to accommodate specific requests from the Executive.
So the Northern Ireland Office and the Department for Work and Pensions will continue to work closely and constructively with the Department for Social Development.
I invited Iain Duncan Smith here a number of times in Opposition resulting in the Centre for Social Justice publishing a comprehensive report on tackling long term social problems in Northern Ireland.
Similarly Lord Freud has been a regular visitor. He has held a number of meetings with local politicians, church leaders, charities and voluntary groups.
And I have had frequent discussions with Executive Ministers, including the First and deputy First Minsters, the latest today.
I want to help deliver the best outcome for Northern Ireland.
Conclusion
But on this I am convinced.
We cannot as a country go on increasing out of work benefits – spending up, dependency up – without ever tackling the root causes of deprivation.
That only stores up problems further down the line, with catastrophic consequences for society.
It isn’t kind, moral or progressive to park people on benefits with no support or incentive to move into work.
Yet for too long we have accepted the assumption that it is and we are now reaping the social and economic consequences.
We now have an opportunity to turn these assumptions on their head…
…to preserve unconditional support for the most vulnerable while building a simpler, clearer and fairer system based on moving people back into work and transforming their lives.
Most people want to work but they want work that is both rewarded and worthwhile.
And I firmly believe that through a combination of economic reform, a dynamic private-enterprise economy, combined with welfare reform that makes work pay, we can create a fairer and more prosperous society.