First, the good news. British cities are getting better. Output and employment levels in our major cities have both increased substantially in the last decade. And they are showing signs of population growth, after decades of decline. In short, our cities are the economic powerhouses of Britain.
But they are also home to many of our most pressing problems. Big city employment rates remain 10 to15 per cent below the UK average. Seventy-five per cent of concentrated worklessness in England is in cities and urban areas. We have a growing skills mismatch, with too many people ill-equipped for growth sector jobs. And so poverty remains concentrated in the same urban areas.
Real progress has been made in addressing these high concentrations of deprivation, inactivity and poverty. But on the ground, deprived urban areas have tended to remain deprived. People often move out when they move up. Meanwhile, too many of the poor have stayed poor. And to make matters worse, being poor is expensive – they pay more, and get less.
In the US, the Brookings Institution has just published a report on working families in Philadelphia. It shows that the poor pay more for everyday goods and services – more than better-off families pay for exactly the same products. The same thing is happening here. What should the government do about this? There are three broad entry points – policies that focus on places, products and people.
First, places. Deprived areas have seen a series of area-based initiatives (remember enterprise zones?). But their track record is not great. Even now, questions are being asked about neighbourhood renewal fund areas. We’ve seen them come and go, but with little marked improvement in outcomes for the people who live there. The problem is that area-based initiatives are too inward-looking. They breed a culture of dependency on central government funding. And they lack a strong economic dimension.
Instead we need to connect deprived neighbourhoods with their local and regional economies. The answers to their problems often lie not within them but around them. These areas need to identify their role in these wider economies. Policy interventions should be city-wide, and should treat deprived areas not in isolation but in context – especially on transport and skills. For example, how can bus services better connect residents to jobs? How can residents play their part in the city-wide labour market?
Second, products. Many people in deprived areas are locked into financial exclusion. They cannot access mainstream financial products such as bank accounts and end up paying more for cashing cheques and paying bills. Cheque-cashing services typically charge a fee of £2 plus seven per cent of the cheque’s value, taking a substantial bite out of take-home pay.
With mainstream credit unavailable or inappropriate, over 2 million people took out a home credit loan in the last 12 months, with average APR rates of 177 per cent. Other financial services can also be lacking: around half of our poorest households do not have any form of home contents insurance.
New products such as ‘basic bank accounts’ are designed to solve some of this. They provide essential financial services such as allowing people to pay their bills by direct debit, pay in cheques and cash, and receive income and benefit payments. But it is not clear that take-up of basic bank accounts has made much of a dent on the number of unbanked: barriers to opening accounts are still high, with strict identification requirements shutting out those without the right papers. A mistimed standing order, dipping the account into the red, can trigger a fine of £40. This is a risk that many cannot afford to take when 37 hours on the minimum wage brings home only £187.
The Financial Inclusion Task Force, set up in January, is keeping a close eye on this. It is charged with monitoring progress and suggesting new approaches to help the government halve the number of unbanked, and to make significant progress in two years.
Credit unions have a role to play, as do Community Development Finance Institutions. That is why the government is proposing to extend tax relief to the personal lending activities of CDFIs. But CDFIs do not yet have the capacity or volumes to trigger a step-change. A more wide-reaching solution could be to explore a British version of a Community Reinvestment Act, an American law that effectively mandates banks to provide services to low-income communities. Introduced in 1977, and revamped under Bill Clinton, the CRA is loved and loathed in equal measure. Although its impact on financial exclusion is not clear-cut, it does seem to have brought banks into areas they would otherwise not have entered – and once they are there, they soon realise they can make a profit.
The UK government knows about the CRA, but is very nervous about it. A UK version of the CRA was recommended five years ago but the setting up of universal banking services took precedence, and CRA-UK was stalled. The banks, led by Barclays and RBS, have taken their own steps to tackle financial exclusion. But these do not go far enough. Now, the National Consumer Council and others are considering a universal service obligation – along the lines of a CRA – that would mandate the banks to do more. If the Financial Inclusion Task Force finds that progress is too slow,we may see something similar to the CRA before too long.
Finally, people. Financial education is key to all this – and vital if poor people are to protect themselves from being ripped off. Basic literacy is important, but money management is a skill in itself and needs to be targeted directly. Beyond Bank Accounts, an ippr report in 2003, stressed the importance of starting early: in the long term, child trust funds can be used as a way of engaging children in financial education as they grow up, and the addition of financial literacy to the national curriculum was a helpful start.
For adults, free face-to-face money advice is now being geared up in low-income communities, but the hardest part is getting the advice where it is needed most. A class on money management, even if useful, is rarely anyone’s favourite way of spending time. The Financial Services Authority, the City regulator, has launched a national strategy for financial capability but it is so far unclear how much this will help the poorest people. The strategy is based around seven themes, but none of them makes explicit mention of financial exclusion, or the different needs of those on very low incomes. The result is that people with more complex needs may fall between the cracks.
But most of these measures are targeting the symptoms of poverty, not the cause. The underlying problem is market-based. Poor people are excluded from the markets that most of us use. For them, the market is broken.
We need to make these markets work for low-income people. Financial markets should be obliged to provide services and products that meet the needs of those on low-incomes. Labour markets need to function better, to equip them with the skills to access good-paying jobs. And investment markets need to recognise the assets and opportunities of deprived areas – which often have strategic locations and untapped demand.