Shifting the unequal state: from public apathy to personal capability

The UK’s problem of low social mobility is accepted across the political spectrum. In the 1970s the UK’s industrial and economic performance resulted in the moniker the “sick man of Europe”. In this decade, high inequality and low social mobility are more prevalent in the UK than in many other European countries suggesting that the UK might now be called the “divided society” of Europe.

The UK’s economy of the past thirty years has been a success story, with a wide range of new opportunities. Greater globalisation and technological advance has increased the return to skills. But not everyone has been able to benefit from this growth. The result is a “why bother” economy in which a significant number of people are not empowered or in possession of the capability to succeed. This trend will accelerate in the future with considerably fewer low skilled jobs being required. People with motivation and well-developed personal skills will continue to become more successful whilst there is a danger others will be left behind.

The damage caused by poor social mobility is twofold. For individuals, it limits opportunities and levels of earnings. The lifetime earnings premium for graduates compared to those with no skills is over £400,000. For the economy, it represents a loss in income, investment, entrepreneurship and innovation. If the UK had the skill levels and productivity of the USA, for example, the benefit to the economy would be £32 billion per year (a gain of £1,289 per household).

The UK’s dismal record in educating and motivating the poorest in society (whilst having some of the best elite education in the world) has been a central cause of low social mobility. The UK will not make progress until this problem is resolved. Strikingly, the countries with high social mobility – the Scandinavian countries – also contain some of the most reformed education systems. There is no barrier between state and independent schools since government funds pupils in both sectors according to parental choice.

The proportion of the adult population with only basic skills in the UK is higher than key competitors. To improve this, in-work training and personal investment in skills will be critical as 75 per cent of the 2020 workforce is already over 16. But past OECD research has shown that only 19 per cent of adults in the UK contributed any of their own funding towards education and training, compared to 29 per cent in the US, and an OECD average of 37 per cent.

Successive governments have sought to address the problems of poverty and social mobility through increased spending on poverty relief and public services. This well intentioned approach has failed to recognise the dynamic at the heart of social mobility in the new environment: the crucial role that the individual plays in improving their own capability.

Transfer payments have created a poverty trap both of finance (the UK has the highest marginal effective tax rates in the EU) and complexity. Public service performance is skewed towards the more affluent. An ever greater central grip on education (and major increases in spending) has not ended the massive disparity between elite and inner-city education. The rising burden of taxation, in particular on incomes, has “crowded out” individuals’ motivation to improve their own capability. For example, the higher rate tax rate now falls so close to average earnings that it acts as a “mobility block”.

A new approach is required. This approach would start from the point of raising individual capability to release talent rather than the current course of paying people to be poor.

It would seek to transform the UK from a “why bother” to a “can do” economy by rebalancing the roles of the government and the individual. The tax and benefits system needs to change to incentivise work at all levels. Individuals should be able to attain a level of income that motivates them and enables them to invest in their own capability. Public service delivery should be driven by consumers. Critically an open education system is required that ends the rigidity between the private and public sectors.

At present public expenditure is described as investment while personal consumption is seen as likely to be frittered away. The focus should change to a new key concept of the “capability margin” – i.e. the amount available to individuals over and above their day to day living costs. This margin is vital for investment in new skills.

A key challenge is that of moving towards lower tax economy where people can have an enhanced capability margin. The debate so far has been about tax cuts, meaning the pruning of specific taxes. A different approach would focus on the cultivation of a lower tax economy rather than a few cuts with the secateurs. Without such a move the UK will be increasingly out of line with international practice. Successful tax systems will fit the new global labour market where workers face much greater competition and need stronger work incentives and motivation.

A move to a lower intervention and a lower tax economy would not only empower individuals to invest in their own capability but also free up previously closed arenas for social entrepreneurship and philanthropy.