To welcome the new ministers of Theresa May's government to office, IPPR presents a series of memos to the incoming heads of some key departments, setting out our views on the vital issues they face and reviewing the policy prescriptions available to them.
More memos will be published over the coming days; click on the links below to navigate between them.
- Damian Green, Secretary of State for Work and Pensions
- Liz Truss, Lord Chancellor and Secretary of State for Justice
- Chris Grayling, Secretary of State for Transport
- Greg Clark, Secretary of State for Energy, Business and Industrial Strategy
- Amber Rudd, Secretary of State for the Home Department
- Philip Hammond, Chancellor of the Exchequer
Secretary of State for Work and Pensions
Dear Secretary of State,
You will be at the helm of the Department for Work and Pensions in circumstances few would have predicted a few weeks ago: a worsening labour market and the prospect of a recession. Adjusting your department to this new reality should be your top priority.
Two things will be key. First, learning lessons from the last recession. Although unemployment is unlikely to rise as high as it did after 2008, the uncertainty caused by the UK’s negotiations with the EU will last longer, and job insecurity is likely to be more widespread as a result.
Government must do more than it did last time around to anticipate and respond to large-scale job losses, including making redundancy retraining widely available for affected workers.
Secondly, you will need to decide whether the new programme your department is introducing to support the long-term unemployed will cope in the event of higher unemployment. The Work and Health programme was designed for a buoyant jobs market, and is a budget version of its predecessor. It also stands to lose vital EU funding after 2018.
With trials of the new programme due to start shortly, now is the time to move to a more flexible design. You must start lobbying the Treasury now for more funding for both these priorities in the next autumn statement.
Beyond this, you must navigate some tough decisions on social security spending, which have huge implications for the ‘ordinary working class families’ that Theresa May has committed her government to helping, as well as a growing number of middle-income families whose incomes have been shored up by rising benefit payments.
At the moment, many of these families stand to lose up to £3,000 per year as they transition to universal credit before 2019/20 – a move that could make last year’s political battle over planned cuts to tax credits look like a playground scuffle.
You should consider two things if you are to have a hope of limiting spending while heeding Theresa May’s commitment.
The first is the balance of spending cuts between the generations, which even Iain Duncan Smith had grown to find indefensible by the time he resigned his post. You could start by restricting universal benefits for older people or re-examining the triple lock on pensions. This could release resources to reduce the unacceptable cuts to universal credit for low income families, or extend childcare for families with young children.
The second is making a priority of tackling the structural drivers of higher spending (such as rising rents, inadequate childcare, low skills and worklessness among those with a disability or health condition) over often haphazard and punitive spending cuts. You cannot deliver this alone, but your department’s role must be to lead strategic efforts across government to achieve these objectives.
All of this must be done while seeing through the largest reform to working-age benefits in a generation, delivering the government's life chances agenda and preparing the UK’s labour market to become less reliant on EU migrant workers. This is a tough brief, no doubt, and one that encompasses perhaps the biggest test of the bold commitments Theresa May made outside of Downing Street this week about how she intends to change Britain.
(Read more about IPPR’s work on work and skills)
Lord Chancellor and Secretary of State for Justice
Dear Secretary of State,
The previous justice secretary, Michael Gove, demonstrated that a strong political case can be made for reducing the prison population. But he didn’t have time to implement many reforms or bring about change on the ground. Your challenge, therefore, is to finish the job.
We think you should focus on these five priorities:
- Push through legislation to enable more ‘reform prisons’: Our prisons are run in almost identical ways, following rigid national contracts and models. We need much more innovation in the way prisons are run, allowing them to link up with local charities and try new ways to educate offenders, treat mental health problems, and find offenders jobs and training. The government is preparing legislation to give prison governors much more autonomy over how their prisons are run – and it is essential that this comes into effect.
- Devolve more powers over criminal justice: Many people end up in prison as a result of drug abuse, child abuse, exclusion from school, homelessness and mental health problems. Locally run services which address these problems can hold the key to reduce re-offending. If city mayors controlled the budgets for the prison system they would have both the financial incentive and the resources to invest in these sorts of preventative services - which stop offenders ending up in prison in the first place. The government has already promised to devolve the prison budget to Greater Manchester. You should now expand this to other areas, with Greater London first on the list.
- Reform sentencing guidelines: It will be impossible to rehabilitate people while prisons are overcrowded and understaffed. They are dangerous, violent and depressing places. We need to learn from reforms instigated by Republicans in the US. These involved more community sentences and intensive rehabilitation programmes, accompanied by a ‘tough love’ approach to failure, where offenders who break the terms are sent back to prison. This approach has been shown to be more effective at reducing reoffending and cheaper for the public purse. You should also aim to eradicate the use of custodial sentences for women and children unless in extreme circumstances.
- Tackle housing and employment for ex-offenders: The best way to reduce re-offending is to ensure that offenders can find work and accommodation. But two years after release, only 15 per cent of offenders are in work. There is also a growing problem of homelessness: a recent inspection of Wormwood Scrubs revealed that the proportion of offenders with accommodation on release fell from 95 per cent in April 2015 to 59 per cent in October 2015. You should address these underlying problems. Your first priority should be to review the contracts signed with privately run Community Rehabilitation Companies to deliver probation services – and re-broker them where necessary. You should also use the government’s ‘soft power’ to mobilise the private and third sectors to find jobs and training for ex-offenders.
- Sell off the old prisons, but replace them with something better: The previous chancellor announced he would sell off old Victorian prisons – many of which are on prime real estate. You should use this once-in-a-generation opportunity to rethink the way that prison works. In Scandinavia, they make much better use of smaller prisons, which are integrated with local job centres, education facilities and mental health services. This means that offenders can get their lives back on track, rather than being sent to large and distant prisons where they mix with harder criminals. If this approach was applied in England, the government could sell off the majority of prison land in city centres, but retain a small amount for secure drug and mental health treatment centres, located in the communities they serve and potentially funded by housing developers as part of their planning conditions.
(Read more about IPPR's work on crime and justice.)
Secretary of State for Transport
Dear Secretary of State,
The North First path to sustained economic success
The Prime Minister’s aspiration to build a better Britain must begin with building a better North. While George Osborne’s approach to the Northern Powerhouse had some shortcomings, the priority given to transport infrastructure was key and the developments made through Transport for the North represent significant progress.
Connectivity between and within the Northern city-regions is vital for enhancing productivity, expanding local labour markets and unleashing innovation. IPPR North has calculated that if we could only halve the output gap between the North and the national average then the economy would be £34 billion better off. This means more jobs, better wages and reducing dependency on the state. But the current National Infrastructure Pipeline promises to spend over £2600 per capita on transport infrastructure in London but less than £400 per capita in the North.
Transport for the North and the National Infrastructure Commission are now identifying clear priorities but warm responses about jam tomorrow is simply not enough. As Secretary of State you can act in four ways:
- First, by the Autumn Statement, you must commit to £50 billion new capital investment in both road and rail priorities in the North. This is the only way to unlock the vital private and foreign investment that such schemes will ultimately need. Even before that, we have shown that it would cost no more than £100 million to unlock an East-West Freight Superhighway, boosting foreign trade, by making simple gauge improvements to existing lines.
- Second, you must persuade Treasury colleagues that the current method of transport appraisal and spending is not suited to driving economic growth. New forms of appraisal being developed in the North will capture wider benefits and devolving 10-year budgets will make for much more effective long-term planning.
- Thirdly, air pollution is a growing problem across the UK’s cities, in the North as throughout the country. Contrary to industry claims, the evidence shows that fumes from vehicles kill 40,000 people a year. The cost of illness and premature death to the NHS and the economy is more than £20 billion a year. The landmark 1956 Clean Air Act cleaned up the killer coal smog that blighted our big cities. Working with the new Secretary of State for the Environment, you should support a new Clean Air Act to leave a radical legacy for generations to come.
- And fourthly, you must ensure the smooth passage of the Buses Bill through parliament. Bus franchising is the single, most visible transformation in public transport that can be achieved with city mayors in the lifetime of this parliament. It is precisely the kind of improvement that will be felt most by ordinary people.
Airport capacity and HS2 will take up much of your attention as you enter this new role, but taking a North First approach will be key to guaranteeing long-term, sustainable economic success for our whole nation.
(Read more about IPPR North's work)
Dear Secretary of State,
Congratulations on your new role. The inclusion of energy policy within your remit, and the replacement of ‘innovation’ with the broader ‘industrial strategy’ in your job title, means you have the makings of a much more ambitious brief than that of your predecessor. But it is vital that the loss of climate change in the department’s title does not mean its downgrading: on the contrary, the reduction of greenhouse gas emissions must be a core, integrated priority. There are huge opportunities to create jobs and to export to global markets in low-carbon sectors, and a low-carbon industrial strategy – particularly focused on the North of England – would offer major economic benefits.
We think you should focus on these priorities:
- Design a more wide-ranging industrial strategy: To date, the government’s approach has been to focus on a few technology-intensive sectors. But such sectors account for less than 2 per cent of GDP, which means they would need to need to undergo a prodigious growth in order to make even a modest difference to our economic performance overall. You need a much more wide-ranging approach to industrial strategy than this, and should look at ways to support the sectors that employ a large number of people (such as food manufacturing and retail), and those that our economy can’t function without (such as social care) as well as the sectors with the most growth potential.
- Develop a plan before the end of the year for meeting the 4th and 5th carbon budgets: The 4th and 5th carbon budgets, recommended by the Committee on Climate Change, set out the emissions reductions the UK needs to achieve by 2032. The government is already well off these targets. As required by the Climate Change Act, DECC was in the process of working up a plan to get back on track. This will require major progress in further decarbonising the power sector and in delivering low carbon heat and transport. You should ensure this plan is finished before the year is out.
- Ensure the new Chancellor commits to support for energy investment after 2020: In energy policy, you will have read a great deal about the danger of “the lights going out”. These warnings have often been overblown, but new investment in electricity supply is urgently needed. You must secure a commitment from the new Chancellor to a new post-2020 support framework for low-carbon investment. This is vital to restore investor confidence and market certainty. At the same time you should reform the capacity market designed to incentivise power stations to open or stay open in the future. So far this has brought on little new plant while handing perverse subsidies to coal plants which the Government is (rightly) committed to closing down over the next decade. It needs a fundamental rethink to bring on new gas capacity at reasonable cost to consumers, while also encouraging new means of managing demand alongside new supply.
- Rebuild investment in energy efficiency: It is the cheapest way to meet energy needs, and is a major job creator. Now that the Government has abandoned its commitment to achieving a fiscal surplus by the end of the Parliament, and with interest rates at rock bottom, infrastructure investment should be a high economic priority. Energy efficiency should now be classified as a form of infrastructure, and brought under the National Infrastructure Commission’s remit.
Secretary of State for the Home Department
Dear Home Secretary,
Your role requires the most statesmanship of any post. It is vital that immigration policy is actively managed in Britain’s wider economic and strategic interest. To do this you should take the following steps.
Push for an emergency brake on EU migration in sectors where it is harming workers
You should ask the EU for the right to an emergency brake that is triggered when EU migration is harming wages in particular occupations, sectors or locations. This would address some of the most significant public concerns – about control, about wages and about pressures on particular communities – while minimising the economic damage that could result from blanket restrictions. It will also be more appealing to the EU than a blanket restriction, because the emergency brake will be temporary and will always be justified with reference to concrete evidence of problems.
After 10 years of free movement, large numbers of employers are highly dependent on EU migrants, including 12 per cent of the construction industry, 28 per cent of employees in hospitality, and 5 per cent of the NHS, rising to one in 10 doctors. A sudden cut-off of these workers could make the difference between viability and going out of business. This option will help ensure that migrants who come from the EU help fill real labour shortages while minimising the risk of undercutting for domestic workers.
Reform the system for international students
International students are our fifth largest export sector, but Britain has among the most restrictive rules in the western world. We are among the few OECD countries that do not allow them to work once they’ve completed their studies. This makes no sense. While immigration policy made this problematic before the referendum, today it is a matter of national importance given that international fees made up one-eighth of universities’ revenue last year. This makes university budgets the most vulnerable to Brexit. The most powerful way of keeping the sector competitive would be to relax the rules on British-educated foreign students getting graduate jobs afterwards. Your priority should be in sectors in which there are clear labour shortages, or which are of intrinsic value to wider goals, such as science, engineering and nursing. Moreover, to retain our status as a research superpower, it is vital that we are able to attract and retain the most talented minds from across the globe. After all, economic success is heavily dependent on advances in science and engineering.
Actively retain the highly-skilled migrants already in Britain
The fall-out from Brexit raises a significant risk of brain drain: Paris, Dublin and Berlin have not hesitated to roll out the red carpet to the best minds working in Britain’s financial services, legal firms and tech businesses. So our offer to the world’s best and brightest needs to improve. You should offer streamlined naturalisation for those we are keenest to retain (lowering the waiting period from five to two years). Your other plans should include fast-track visas, ending the cooling off period that forces employees of international firms to return to their country to renew their visa, and lowering the threshold for the investor visa (currently set at £2 million).
Disaggregate the net migration target
None of the above will be possible if you retain the net migration target in its current form. It lumps all migrants together: refugees, surgeons, investors, fruit-pickers, students and spouses. This inability to differentiate is corrosive to the public debate because it is impossible to distinguish between the positive and negative effects of immigration. It is critical to recognise the differences.
So your number one job is the toughest of all: ditch the failed net migration target.
All in all, this is a tough agenda. You will need to reconcile the conundrum of the vote to leave the EU: how will Britain succeed economically while fulfilling the democratic instruction to better control immigration? We have set out an approach. Before too long, you will need to do likewise.
(Read more about IPPR’s work on immigration)
Philip Hammond, Chancellor of the Exchequer
The UK economy has been pushed to the brink by austerity, now Brexit has it rocking on the edge.
Financial markets reacted strongly to the vote to leave the European Union, and although we have seen some signs of stabilisation, the pound is still down by around 10 per cent against the dollar compared with before the referendum, and shares in UK banks, airlines and homebuilders in particular have all fallen sharply.
The UK is now facing the possibility of a sustained stagnation or recession, and as with all downturns, it is the worst off who will be hit the hardest. IPPR analysis has already shown that the impact of higher inflation one year on from a Leave vote could hit those at the bottom of the income distribution twice as hard as those at the top.
The Government needs to change direction on fiscal policy
The most effective means of countering a downturn in this situation is increased government spending, in order to raise the overall level of demand in the economy. And with UK government borrowing costs falling as investors move their money into safer assets in view of the turmoil, there could be no better time for government to borrow in order to provide this injection of demand.
Theresa May has already acknowledged the need to abandon the government’s surplus target, but in many ways this was a fait accompli – any kind of surplus would have proven extremely challenging even before a Leave vote, now it has become impossible. But simply moving down one gear on austerity is not enough: there needs to be a deliberate change in direction if Brexit induced damage is to be contained.
If the OBR confirms that the UK economy has experienced a shock, which would trigger suspension of the existing fiscal rules and a vote in parliament, You should set out plans to remove public investment from deficit targets and target debt reduction over a longer time horizon.
Extra spending should be targeted at both digital and physical infrastructure projects, and the government should launch a review to explore the best way of accounting for investment in human capital. Those areas of expenditure – such as some elements within education, skills, employment programmes and health – that pass a tight set of criteria such that they can be shown to boost the productivity of our workforce should be treated as a form of investment spending.
Instead of ruling out tax rises at this early stage, as the prime minister has done, you should also set out a review of the entire UK tax system. Revenue streams from wealth should be expanded. And regressive and inefficient tax reliefs – such as those on buy-to-let mortgages, some elements of capital gains and pension contributions for high earners – should be revisited to avoid further cuts. Where appropriate, the Treasury should also consider new mandates for the Bank of England that allow for more innovative forms of QE that find their way quickly into the real economy.
Committing to new public investment would represent a more effective response to the threat of recession than the Bank working in isolation, and with the few tools left at its disposal. If done in the right way, it could also begin to tackle the longer, and far harder, task of addressing the underlying economic disconnect and disempowerment that contributed to the Brexit vote in the first place.
A version of this memo previously appeared on CapX: http://capx.co/uk-needs-new-public-investment-to-stave-off-brexit-downturn/
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