Hearing 3

Fabian Society Commission on Future Spending Choices

Hearing 3: ‘Predistribution: can economic reform reduce demand for public spending?’

8th January 2012

Witnesses

  • Paul Gregg (University of Bath)
  • Sonia Sodha (Dartington Social Research Unit)
  • Donald Hirsch (Centre for Research in Social Policy Loughborough University)

Key questions for this hearing include:

  • In which areas are government reform and intervention required for the economy to be more balanced and stable?
  • Are there opportunities to reduce demand for public spending?
  • How long would gains made by mitigating the need for redistributive transfers take to materialise?

Summary

The third hearing of the Fabian Society’s Commission on Future Spending Choices opened with a presentation from Sonia Sodha which looked in term at the economic reforms required to improve the ‘predistribution’ of resources and then the potential benefits of greater preventative spending on social programmes.

Here predistribution was defined as economic reform designed to reduce public spending on measures such as tax credits and benefits. It refers to living standards and wage distribution prior to the work done by the State’s redistributive tools and can be thought of as operating through three levers: industrial policy; skills and productivity increases; and a more equal distribution of economic power.

Referring to the ‘new’ inequality between median income and high earners which characterises the UK, Sodha argued that one of the central challenges for predistribution is how to encourage growth which promotes prosperity in certain sections of the labour market. In particular, the mid-skill jobs ‘hollowed out’ over recent decades by the combined forces of globalisation and technological advancement.

Sodha argued that there were few obvious opportunities for savings from ‘predistribution’ policies, but that they were important as a complement to spending measures (a view the other speakers shared). She was more optimistic about the potential of well-evidenced preventative social spending, although she highlighted significant barriers before real financial savings could be realised as a result of earlier interventions.

Encouraging reform and skill development in sections of the UK labour market was also the focus of the hearing’s second witness, Paul Gregg. Asking whether it was possible for predistribution to improve the endowments with which people enter the labour market, Gregg pointed to the rich policy landscape of this agenda while underscoring the scale of challenge involved in changing the current trajectories of issues such as educational attainment and skills acquisition.

For Gregg the more transformational and more challenging policy ideas relevant to predistribution involve changing labour markets such that marginal groups are engaged in employment. This requires departing from the UK’s focus on flexibility by requiring employers to make jobs work for traditionally marginalised groups. This approach must go hand in hand with actions to prevent turnover in the low-pay, low-skill sector by offering real opportunities for workplace progression, and tackling the ‘long tail’ of educational underachievement in schools.

Although these policy prescriptions are achievable, along with other speakers at the hearing Paul Gregg noted that they are politically and culturally difficult and would require real changes in the way UK employment practices have been structured in the past. He also commented that achieving a given set of outcomes through predistribution would require the transfer of large resources than is entailed by traditional redistribution through the tax-benefit system because reforms cannot be targeted tightly. Policy makers would need to reassure themselves that a large change in the distribution of wages would not be associated with other negative economic externalities.

Donald Hirsch’s contribution to this hearing began by questioning the extent to which predistribution is really ‘prior’ to redistribution in any substantive way. Hirsch proposed that we understand predistribution as a concerned with human endowments and the distribution of economic power something an active state needs to promote alongside a tax-benefit system. The distribution of skills and power is therefore more properly part of what we think of as redistribution. He agreed with previous speakers that any approach under the name predistribution must complement rather than replace existing spending measures.

In the context of the UK’s current economic position Hirsch argued that predistributive measures would be necessary not just to reduce the deficit, but also to prevent its wage distribution getting worse. They are essential for spending to stand still, rather than a means to reduce spending. All the speakers used the analogy of running up a ‘down escalator’ and therefore agreed that predistribution and redistribution were ‘both/and’ not ‘either/or’.

The end of Hirsch’s presentation focused on whether the UK could promote closer engagement between employers and employees, returning to some of the themes around skills and education underscored in evidence given earlier in the morning. Despite a good track record in other areas of policy, on this issue Hirsch suggested Labour’s instinct has been deregulatory, leading to little improvement at the low-wage end of the UK’s labour market, for example service sectors such as hospitality. He argued that a massive change in policy thinking and employer practice would be needed to transform this disposable view of labour which encourages turnover and blocks skill acquisition.