Almost immediately after it created the NHS, the postwar Labour government began grappling with its rising cost. Its solution was the imposition of prescription fees. Dilemmas over the cost and benefit of different social policies remain today.
Demographic changes such as an ageing population, and other factors such as a growing understanding of the social benefits of investing in early years and the government’s increasing emphasis on high rather than minimum standards, point towards different patterns of spending. Tough choices lie ahead. Even assuming decent economic growth, the competition for resources between different age groups will be intense.
One danger is that the vocal and electoral strength of pensioners may obscure the case for investment in younger people. The wealth generated by the economy today gives rise to the tax receipts that pay the costs of both yesterday’s workers (pensioners) and those of tomorrow (children). In general, the larger the number of people in work, the more we can afford both improved pensions and investment in other programmes such as education and health.
The problem is that fertility rates are falling and life expectancy is increasing. As a result, between 2002 and 2014 the number of pensioners will increase by fourteen percent, while the working-age population will rise by around five percent. So, if the population projections are to be believed, there won’t be fewer workers to support the dependent population, but the size of the workforce will be smaller relative to the number of pensioners.
This means that before the nation can afford to pay itself more in wages, salaries and dividends or any government can contemplate increasing spending on other programmes, including pensions, the burden of current pension and other social expenditure will have to be borne by fewer people.
So, what is to be done? If the aim of a Labour government is to create
a fairer society, it must ensure fairness within generations, including between poorer and wealthier pensioners. But it also needs to provide social mobility, so that children born to all parents have more equal chances throughout life.
This means spending more on children and relatively less on pensions. It almost certainly means more means testing – targeting resources on those who need them most. Means testing still evokes memories of nineteenth century welfare or of Thatcherite attempts to reduce the welfare state to a barely adequate safety net.
Surely the pension and other credits are more than this? They do extend means testing more centrally into welfare provision, but they aim also to provide a level of decency to which previous attempts at targeting have rarely aspired. However, increasing support for the poorest pensioners can undermine incentives for all to save. The more extravagant claims ministers make for public pensions, the less likely it is that people will invest in their own pensions.
To counter this, the government has to be bolder in the coming years – communicating the politically unpalatable message that the affluent retirement to which people aspire is more a responsibility of workers and their companies than it is of the state. The case for compulsory employer and employee contributions to pensions is surely clear, but their implementation will require more hard choices and will bring a good deal of political controversy.
Beyond pensions, a balance needs to be struck between the existing employed workforce, increasing participation by those not currently in work, and encouraging economic migration to the UK (from countries where fertility rates are rising rapidly).
Looking first at the existing situation, most of the workforce is already in the labour market. While only one in ten people now leave school without a qualification (down from around a half for those leaving school in 1946), functional illiteracy is still a major issue in our workplaces. The vulnerability of less skilled workers and the massive human and economic cost that arises from unemployment necessitate investment in improving their adaptability and employability.
For young people, the biggest gain – and one that will not come cheap – is likely to arise from structural changes in education of the kind outlined by the former Ofsted head Mike Tomlinson, who suggests replacing A-levels with a baccalaureate exam. If Labour in 2004 can set us on course to do what it failed to do in 1945 – and create a system of exams in which there is parity of esteem between the academic, vocational and technical – it will have put our society on course for both greater prosperity and, quite probably, equality as well.
The problem is that all of these priorities – pensions, support for the labour force and school education – will need to compete for resources with what recent research shows may be one of the highest priorities for improving social equality in the UK: investment in early years education and family support. In the long run, both the Labour pledge to eradicate child poverty and the introduction of the working families tax credit will have a major impact. But money alone is not the issue. If disadvantage is to be countered effectively, investment is also needed in parenting and childcare.
Here, at least, we can see the possibility of a win-win situation. If more support for parents enables working-age women to return sooner to the labour market, while also benefiting children through high-quality support, everyone is better off. Tax credits, more high-quality childcare, active support for children and their parents – including longer maternity and paternity leave – will all have a role to play. But all require resources from a stretched working-age population.
Which brings us back to the start. One of the toughest choices is whether or not to accept the inevitable and import labour through managed economic migration to boost the size of the working age population. Managed migration makes sense. But it raises challenges too. The fears of ordinary people need to be managed rather than denied. The New Labour tent needs very clearly to include those parts of the country where minorities settle in very localised communities. Here civic leaders need tools with which to develop a local politics based on mutual opportunity and trust. Government needs to ensure its programmes offer the right support at the right time. Our recent history has been the opposite, with enfeebled local leaders bereft of leverage and a distant government leaving a vacuum filled by the BNP.
Welfare policies almost always involve tough choices. A third Labour term will be no exception. A careful balancing act will be needed between different investment needs and in ensuring that the public and private sectors bear the right balance of responsibility and risk. Above all, Labour needs to be wary of the danger of being trapped in a bidding war for the votes of pensioners with Tories who are resigned to not winning and Liberal Democrats promising the earth without a plan for paying for it. In the short term this means tough choices over migration and spending on children. In the long term it will mean a fairer social democracy.