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Baroness Hollis of Heigham: On the face of it, the new clause inserted by Amendment No. 99 seems reasonable. It is only right that the department should measure the level of benefit fraud and report its findings. But we already do that. The new clause is flawed in two respects. First, it would require the department to do significantly less by way of measurement of the level of fraud in the most vulnerable benefits--income support and jobseeker's allowance--than it does at present and will do in relation to housing benefit from April. Therefore, the noble Lord's amendment, far from encouraging us to ratchet up our battle against fraud, would encourage us to ratchet it down.

Secondly, it could potentially weaken the independence of our estimates. We currently measure the level of fraud and error in IS and JSA not on an annual basis, as proposed in the new clause, but continuously throughout the year. Each year more than 30,000 cases are closely examined by specially trained officers to establish whether benefit is being paid correctly and, if not, why not. From April this year we will launch the first ever programme to measure the level of fraud and error in housing benefit across all 409 local authorities on a continuous basis. We measure these benefits--or will measure in the case

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of housing benefit--on a continuous basis because we know that they are most prone to fraud and error; otherwise, we would have snapshots, with the fraud running for many months.

That is not to say that we ignore other benefits. We are currently running an exercise to measure the level of fraud and error in incapacity benefit. The results will probably be published in the summer. In consultation with the National Audit Office, similar exercises will in future be conducted on other benefits. Therefore, we hardly need a statutory requirement to measure levels of fraud and error in benefits. It is an integral part of our business. The fact that we have developed a robust regime for measuring levels of fraud and error has enabled us to set tough targets for reducing losses in our public service agreement.

In the past the department had a multitude of targets for its anti-fraud activity--the number of visits, the number of fraud referrals, the weekly benefits savings from detected fraud, and the number of claims withdrawn. Those targets generated lots of paper but they were all about measuring activity rather than success in removing fraud from the system. Now we have just one target--the one to which I referred in our previous debate--by which people can judge the success of our anti-fraud strategy; that is, to reduce losses in the two most vulnerable benefits, IS and JSA, by 25 per cent by March 2004 and by 50 per cent by March 2006. Fifty per cent is the standard we are setting ourselves. I cannot conceive that anyone, including the noble Lord, Lord Higgins, will not agree that that is a most challenging target by which to be judged. Nothing in the noble Lord's amendments would increase our ability to meet that; indeed they would actually reduce our capacity to do so.

When we came to power in 1997 we made an important change in the way in which our estimates of the level of benefit fraud are published. They are now published by the Office for National Statistics. This may seem a trivial point but it is not. In the past, benefit fraud figures could be said to have been used as a political football, but any publication by the Office for National Statistics is subject to a strict protocol under which Ministers have no say in either its content or the timing of its release. This very important safeguard of complete independence from the DSS or any suggestion that figures were being manipulated or delayed just before a by-election, or anything like that, would be lost under this amendment if the department were to take back responsibility for publishing the benefit fraud figures. So I think that on that count also the noble Lord, Lord Higgins, would perhaps wish to reflect on the wisdom of the amendment.

Amendment No. 101 proposes the annual reporting of fraud and a statement of annual targets. What it would achieve would be to drag back the system on which we are now making good speed. It would return us to old and ineffectual standards of measuring and tackling fraud. The proposal, with reliance on such yardsticks as the level of fraud detected and the number of fraud cases identified, represents precisely the system we have abandoned because it has not worked as successfully as it should. Under that

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system--the system the noble Lord wishes to resurrect--these were the only standards by which the Government could measure the levels of fraud and gauge success in tackling it whereby high rates of detection would lead to rewards.

There is an inherent contradiction here, and perhaps the noble Lord could help me. If the figure for detected fraud is up, what does this tell us? Have the investigators been doing a good job and should they be rewarded or have the gatekeepers, who should have prevented fraud from entering the system in the first place, been doing a poor job, enabling levels of fraud to rise? If we relied on detection rates for our measure, we would be admitting defeat before we started. We would be saying that fraud is endemic and cannot be beaten, and more and more we would find it after it had happened; we would be chasing after it.

These are not just my criticisms; they are the criticisms of the Public Accounts Committee, the Audit Commission and the National Audit Office. So I am surprised that the noble Lord seeks to resurrect a system which has been so comprehensively criticised by all the relevant independent agencies other than government themselves.

This is not our approach. We think we should be reducing fraud by prevention and deterrence as well as by detection, which is why we have introduced the Bill. That is why we have a singular indicator of success. The public service agreement sets a target for the reduction of fraud and error relating to the two major benefits of income support and JSA of 50 per cent by 2006. We measure progress towards that target not by levels of detection but by a programme of statistically-valid research--the area of benefits reviews. There will be estimates of the amount of fraud in the system produced by the Government's statistical service, not by the DSS, not annually but monthly. These reports show that we are starting to win the battle by a reduction of 6.5 per cent, and I should say that the National Audit Office has given its support to the approach of setting targets for reducing fraud and error based on this form of measurement.

We are extending the same methodology to housing benefit, and once the scheme is in place we fully expect to see a significant reduction in fraud and error. I could go on to speak of housing benefit and so on, but I hope the noble Lord will now agree that his amendments would take us back to the system that existed before the criticism was applied that we were rewarding people for detecting fraud, that we would go for annual measurement rather than regular and continuous measurement and for independent statistics whose timing could not be "arranged" to suit the convenience of politicians. I hope that in view of all that, the noble Lord may feel able to withdraw his amendment.

Lord Higgins: The replies of the noble Baroness during our debates have varied somewhat in quality. Some of them have been extremely good, because she has recognised the force of the argument in a number of cases and has agreed to return at Report stage to the

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most important set of issues that we have been considering. We shall look forward to seeing in exactly what form she produces amendments. As far as these amendments are concerned, I think we have had one of her better replies, and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 100 and 101 not moved.]

Clauses 17 and 18 agreed to.

Clause 19 [Commencement]:

[Amendments Nos. 102 and 103 not moved.]

Clause 19 agreed to.

Remaining clause and schedule agreed to.

House resumed: Bill reported with amendments.

Business

Baroness Amos: My Lords, as consideration of the Social Security Fraud Bill is now complete, this evening's Unstarred Question is no longer restricted to the one hour available for the dinner break. Instead, a limit of one and a half hours will apply. The change does not affect the time allocated to the noble Lord, Lord Phillips of Sudbury, or that allocated to my noble friend Lord McIntosh of Haringey, but for each of the other speakers the time available is increased from four to seven minutes. However, if noble Lords have already prepared four-minute speeches and would prefer to avoid the inconvenience of extending them at such short notice, I can assure them that they will attract no criticism from these Benches.

Earnings Differentials

7.27 p.m.

Lord Phillips of Sudbury rose to ask Her Majesty's Government what dangers they see in the widening differentials in earnings, and what steps they propose to take to address them.

The noble Lord said: My Lords, in an ever more materialist world money has truly become our golden calf. One consequence is that people increasingly judge themselves, and are judged, by their earnings.

To some degree, 'twas ever thus, but because traditional ideologies, both religious and political, are ebbing or have disintegrated, and with them their values and beliefs, the money/esteem correlation has intensified. Though the impact is gradual, one day the old moral capital will run out unless replenished; but by what? That is our challenge.

Britain is also experiencing a simultaneous decline in traditional, organic communities which has no less an impact. They are being overtaken by highly selective ghettoes notable for their sameness of aspiration and lifestyle. The new settlements do not offer the involuntary experiential learning which is a gloriously unavoidable part of the knockabout

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traditional community--comprising people of all ages, types and circumstances--which perforce broadens horizons and sympathies

On top of all this, the high flyers now work under extreme pressure and competitiveness. Not before time, people have woken up to the fact that the extraordinary remuneration which hundreds of thousands currently enjoy comes at a very high personal--and societal--price. It is a world where enough is never enough.

Yet, segregated though the City in many ways is, it is no longer the secret garden which it was until well into the television age. Today, its excesses are trumpeted by the media and exalted by the TV soaps. Even the poorest and most excluded know that last Christmas, Morgan Stanley gave over 50 of its staff bonuses of 1 million each. Last year, around 50 Goldman Sachs partners received over 10 million on flotation. Literally thousands of legal, accounting and consultancy professionals now regularly earn over half a million pounds a year.

Perhaps I may turn to a key comparator with the most highly paid: schoolteachers. While the leaders of commerce, industry and the professions have gorged themselves over the past few years in particular, our schools--the very foundation of our future hopes--are desperately struggling, despite the committed efforts of David Blunkett. While the directors of major companies have seen their salaries soar over recent years, typically by between 15 per cent and 20 per cent annually, leaving the 1999 median figure for major public company chief executive pay at around half a million pounds with options worth around another 20 per cent, teachers have languished. When Douglas Houghton adjudicated on teachers' pay in 1974, his committee decided that their earnings should be 37 per cent above the national average. Today they are a mere 4.5 per cent above the average. Their recent 3.7 per cent pay settlement was little more than the national average and radically less than the 21 per cent awarded to Scottish teachers, spread over three years.

Although the Government admit to teacher vacancies of around only 1,000, the NUT calculates that the number of unfilled permanent posts is nearer 9,000 in London and 20,000 nationally. Even in my home county of Suffolk, which has many advantages, vacancies in maths, languages and CDT often attract no suitable applicants. That is a common predicament. Many teachers have to be imported from South Africa and other Anglophone countries. Many travel up from Wales every day to teach in London schools, some of which are now talking about a four-day week. Primary schools have also had to employ a sizeable proportion of temporary teachers from foreign lands. Supply teachers, like contract nurses, are at best stop-gaps.

On top of all this lies the bureaucratic overburden which demoralises the profession and which is intensified by the salary-related low esteem in which teaching is held--though not by parents--after years of media and political drubbing. What is true of teachers is no less true of social workers, nurses and health workers, the police and many other groups.

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What of the poor? Some say that they have no further to fall, so what does it matter if the top dogs get ever bigger kennels? But resentment at life's disparities can become so acute that those who feel it are incited to aggressive and selfish behaviour which only adds to the crime statistics and general despair. It is no accident that aggression and selfishness are also key attributes of today's big earners.

Although some progress has been made--here I give credit to the Government for their determined attempt to get at the roots of social exclusion--we have a long, long way to go. In 1984 the difference between top and bottom earners was eight to one; in 1994, 13 to one; two years later, 16 to one; and in 1999, 21 to one. Far too many millions are still trapped in deprivation--pensioners, single parent families and young, unqualified school leavers. I shall say nothing of secondary poverty.

One cannot, with 10 minutes on this subject, do more than pick and skim. I look forward to hearing the contributions from other noble Lords on these and many other aspects of this complex topic, not least about the continuing disparities between male and female employees.

Perhaps I may finish with some suggestions--I hesitate to call them proposals--for further discussion as regards ways to mitigate the widening gulf in earnings. First, although belief in prices and incomes policies, and indeed in taxation, as redistributive tools has largely dissipated, it seems to me to be indefensible that a Labour Government should not have done something to increase taxation on pay in its upper reaches, say, over 100,000 a year. It would be a valid symbol--not unimportant in politics. It would hardly touch the productive economy, and it would raise funds, for example, for teachers' salaries or simply for more teachers.

Although the Cadbury, Greenbury and Hampel reports on executives' pay have been useful, consideration should be given to encouraging public companies to include on their remuneration committees at least one unconnected outsider with conceivably an employee representative as well. Companies should also be encouraged to develop and publicise top and bottom earnings ratios.

Section 309 of the Companies Act should be extended so that directors have regard not only to shareholders and employees and their interests, but to the communities of which their companies are a part, and to society as a whole. Capitalism cannot and does not deserve to survive in its present detached state. I say that in full knowledge of the excellent work of business organisations such as Business in the Community and the Prince of Wales Business Leaders Forum.

The public sector should also encourage a more holistic relationship between companies and society by withholding contracts from those which ignore their duties as corporate citizens. Perhaps I may add that some companies are now asking their solicitors what they do by way of pro bono work as one aspect to be considered in the award of contracts.

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Some are even talking of putting an absolute cap on public company pay. That could well cause more problems than it solves, but it should be examined. However, no one, I think, resents the earnings of he or she who has taken great risks when starting up and running a new business. Boards of companies could be encouraged to assess their own performances in terms of softer performance indicators, along the lines of social auditing now being developed by forward-looking companies. Ethical investments, in which I repose great long-term hope, should be encouraged by every means, while sustainability in its widest sense should become the watchword.

The CBI, the TUC and the Institute of Directors might be encouraged to set up a joint monitoring unit for top pay, which could provide a much-needed and authoritative statistical pool, plus a focus for comparative critiques.

Noble Lords will have noted that few of these suggestions rest on legislation. That is no accident. It is increasingly apparent that government can do only so much. Ultimately, men and women in business and the professions must, in particular in the ethical sphere, shift for themselves--albeit with deft government encouragement.

I still believe in the parable of the mustard seed and the power of the individual exemplar, even in this intractable field. That is because no endeavour is more important for the fair and free society which I suspect we all yearn for than this.

7.38 p.m.

Lord Griffiths of Fforestfach: My Lords, the noble Lord has raised an extremely important subject. His speech was far more wide-ranging than I had thought would be the case. Given the inadequate time for our contributions, it will be difficult to tackle the issues which he has raised. Furthermore, this area is something of a minefield. However, perhaps I may begin by saying that I firmly believe that economic life must take place within a framework of equity and morality, as well as of opportunity. I am convinced that society comprises far more than merely a collection of individuals making their livings in labour markets. To think of society in those terms undermines our view of the society in which we live.

On the other hand, we need to be extremely careful about drawing conclusions regarding fairness from the behaviour of earnings differentials. Those are the result of a host of different factors relating to skills, occupation, risk-taking, changing technologies, shortages and so forth. In many cases, the markets are, quite simply, out there. I have served on the boards of around 10 companies. Over the past few years, I have become involved in the appointment of chief financial officers and chief executive officers. Frankly, if one wants someone who is good, one has to pay the market price. For a chief financial officer, that may be 250,000 a year. There is no way of getting around it because that is the reality of the market.

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I recognise that, over the past 25 years, we have seen a general trend towards the widening of differentials, but at the same time, average incomes have also been increasing. We have seen a remarkable increase in prosperity over the same period. I doubt whether we would have had that prosperity had we not had the increase in the differentials.

However, I recognise that there are dangers. I do not see a danger in simply looking at income or earnings differentials, but I see two particular dangers in the UK at present. First, there is the unacceptably large number of people who are employed in the services sector on relatively low pay, however one defines that. Secondly, there are specific occupations--I single out education and health--which are dominated by the public sector, in which differentials have moved, as the noble Lord said, against these professions so that many people feel devalued and rejected. I accept that and I accept everything that has been said about the statistics on teachers and the work done by Professor Smithers.

There are certain steps the Government can take to alleviate the situation, but what would not help would be a significant increase in the minimum wage. If that happened, one may well find unemployment rising among the very people one was trying to help. Further, I very much doubt whether having shareholders' meetings vote on compensation packages and long-term incentive plans for executives, which are very complicated, would improve the situation. One has to accept that executives should run the company. If you think they are doing a bad job, you should remove them.

The Government could do two things. First, in terms of low-paid jobs, it seems to me that the only way of increasing the compensation of the low paid is to increase their skills. Here I declare an interest as the chairman of two companies--one in the field of healthcare and the other in the field of property and services--in which we are trying to increase the skills of the low paid so that we can compensate them more. If the Treasury were to give greater tax breaks or incentives for individuals to invest in themselves, or for companies to invest in training, that would be a very positive move.

Secondly, in terms of education in the public sector, I spent 12 years teaching at university and I have always felt that there was an unholy alliance between teacher unions--including university teacher unions--and the Treasury. There was a narrowing of differentials. I doubt whether this area can ever be adequately tackled without radical reforms in both schools and universities. Much greater freedom should be given to individual schools to negotiate with individual teachers particular rates of pay. In order to bring money in, universities should be given endowments and much greater freedom to charge fees to students. Those are longer term, radical proposals, but, unless we do something of that nature, the problems that have been identified will remain with us.

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7.43 p.m.

Lord Sawyer: My Lords, I thank the noble Lord, Lord Phillips of Sudbury for introducing this subject and for asking the Government to consider what is, undoubtedly, a challenging question. I also thank him for the constructive suggestions he outlined towards the end of his speech.

I hope that the Government see the dangers in the widening differentials in our economy. I accept that addressing such differentials is not an easy matter and, like the noble Lord, Lord Phillips, I agree that legislation is not always an appropriate answer.

The big thing for the Government--and one of the reasons I am proud to be a member of my party and sitting on these Benches--is that they are committed to tackling injustice and inequalities. In the words of the new Labour lexicon, they are "a government for the many, not for the few". So this is a serious issue for the Government.

One the major steps taken by the Government has been the introduction of the national minimum wage. This was a flagship policy of the Government, widely opposed by the Conservative Party and by many people in business. It is now widely accepted by business. And it is official Conservative policy to keep the minimum wage should that party be successful in a forthcoming election. That is good. There has been a sea change in the way people think about tackling the problem of low pay.

There is need for the Low Pay Commission to keep the national minimum wage under review. I do not think that 3.70 is adequate; we should be moving towards 5 an hour. Although the minimum wage may have changed jobs and encouraged organisations and companies to re-train and re-skill, there is no evidence that it has destroyed jobs. We should be aiming towards a rate of 5 an hour. I do not expect my noble friend to agree today, but I certainly hope that he will comment on the matter in his response.

The working families' tax credit guarantees that all working families have an income of more than 200 a week. It has helped hundreds of thousands of parents find a new financial incentive to work. Measures of this kind to lift people out of the poverty trap and to give fair rewards for fair work must be ongoing. I expect my Government to keep these matters under continuous review.

In discussing differentials, it is right that we look at salaries and rewards at the top end of the economic spectrum. I am not against differentials; I accept and understand the need for differentials in industry. Nor am I against fair rewards for people doing tough jobs; I accept that that is absolutely necessary. Nor am I against successful companies making profits; that is the basis of our economic success and needs to continue. But I want all this to take place in communities where people can be housed together, where they can share schools and hospitals together and where they can share work and leisure together. I am frightened that if differentials become too wide we will not create the kind of balanced communities in which I would like to live.

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If, for example, the highest-paid director of Kingfisher plc is paid 2,062,000 per year while his employees are paid an average of 7,000 per year--a ratio of 269 to one--or if the highest paid director of Safeway earns 1,214,000 per year and the staff are paid an average of 9,000 per year--a ratio of 130 to one--I do not think we have balance. We have a gross imbalance. On the one hand we have corporate greed and, on the other, exploitation. I am not in favour of that.

My old friend, Rodney Bickerstaffe, the leader of Unison, used to say to me "How is it, Tom, that in order to motivate people to work harder, you have to pay the rich more and the poor less"? That is still a good question to ask in our society.

What can the Government do about fat cats at the top? First, they can make their displeasure known at the excessive salaries paid to company directors and point to the thousands of business and community leaders who work on reasonable salaries with a top to bottom ratio, not of 269 to one but of approximately six to one or 10 to one. I work in the housing industry, a business that spends 24 billion per year; 17 billion of public money and 7 billion raised on the private market. That industry has a top to bottom salary ratio of about eight to one. It does a damn good job and the people at the top are well rewarded and well satisfied. We can look at different role models in the economy and outline best practice.

Secondly, I would argue for the wealth of the nation and its businesses to be invested in the skills and development of the workforce, not in directors' salaries, a point made by the noble Lord opposite.

Thirdly, we should continuously improve the rights of shareholders to question and hold directors to account. This is on-going legislation that the Government need to keep in hand.

Fourthly, the Government can encourage wider share ownership. They can encourage a wider understanding among citizens and workers of the choices and decisions made in the boardroom about, for example, directors' pay and rewards, so that people are better informed, better able to comment, better able to pass opinion and better able to create a proper climate for public debate.

Fifthly, Cabinet Ministers and others in government can continue to argue for the kind of balanced and fair society that we expect from business. We can talk about how we expect business leaders to behave in future in terms of corporate responsibility.

Finally, the Prime Minister can continue his excellent leadership by example: by keeping Cabinet salaries at a level that will command wide public support, and by ensuring that, at the bottom of the parliamentary scale, we in this Chamber receive some decent remuneration.

7.50 p.m.

Lord Lipsey: My Lords, the whole House will welcome this debate. I thought it particularly appropriate that it should take place in this House, where we are paid nothing and therefore cannot be

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charged with advancing our own interests as "fat cats". However, I am told by my noble friend Lord Sawyer that that is not the case--therefore, I withdraw the idea immediately.

I prepared for the debate last night by reading Francis Wheen's biography of Karl Marx. The first obvious point one comes to when reading Karl Marx is that the revolution is taking some time to come because the "crisis of capitalism" appears to have been somewhat delayed. There is a more serious point. It is clear that we are not going to get the kind of crisis of capitalism that Marx believed would occur. There is not a decline in the return on capital, there is not an impoverishment of the workforce, and there is not mass unemployment--all of which Marx predicted.

However, that does not mean that there will not be a crisis of capitalism. A different kind of crisis can come over an economic system: it is not so much an economic crisis as a moral crisis. It can occur when a system becomes so far divorced from the moral sense of the people who make it work as to become inoperable. "Fat-cattery", as it has been described, is that threat to the system that we have.

In the time available, I cannot go through all the statistics referred to briefly by the noble Lord, Lord Phillips. I commend Stephen Haseler's recent excellent book, The Super-Rich, which indicates both the scale of the sumptuory incomes now being enjoyed and the speed with which they have increased over the past two decades or so.

The defenders of capitalism recognise this threat. Its serious defenders have worried much more about the moral threat than about the economic threat. Von Hayek, who wrote The Road to Surfdom, said that as soon as one interfered with capitalism in any way, one was losing liberty, which was a worse moral outrage. There are those who advance the theory of "trickle-down" to point out that capitalism is a moral system. These are threats that capitalist defenders themselves recognise as being the most serious. Therefore, it is right to take them seriously.

The noble Lord, Lord Griffiths, in a most interesting speech, referred to the role of market forces. It is true that there are reasons in market forces as to why there is more "fat-cattery" today. Let us suppose that for example, the best chief executive is capable of making 10 per cent more out of a company than the second-best. If that company is a 10 million firm in one area of one country, as perhaps it would have been 30 years ago, the extra money involved is quite small and the extra reward that he can command by being that bit better is, therefore, quite small. However, if it is a global company worth perhaps hundreds of billions of pounds, simply to bring about that edge in performance, from the point of view of purely capitalist logic, it is worth giving the chief executive very large amounts of money. That is what accounts for the huge bonuses and share options in the City of London.

There is also the point that global products tend to concentrate rewards. When a Manchester United footballer could appeal only to a man who got on the

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Wythenshawe tram, that limited his earnings. When his performance can be seen and charged for world-wide, he is able to command the vastly greater salaries of today's footballers. So there are global forces that are making for fat-cattery. We should recognise them, and recognise that they limit what can be done about them.

But it is not a question of being helpless. If we compare this phenomenon across countries, we see that it is not universal. I discussed the matter with the noble Lord, Lord Dahrendorf, who is not presently in his place. In Germany, no director of any firm would dream of paying himself the kind of money that we in this country are prepared to pay. The United States has been the most extreme over-payer. The most shocking thing has been the speed with which Britain has moved from being a country that was rather continent in these regards, to being one that is extremely incontinent in the amounts it pays. The 1980s were littered with the names of people who went just too far for their time. Noble Lords will remember Cedric Brown and Mr Dick Giordano of British Oxygen, who was stopped. Now, there seems to be practically no limit. I lay some blame for that on the philosophy of the previous government. I am sorry that it has not come more speedily to an end with the advent of this Government.

We used to apply crude mechanisms such as an incomes policy in the hope of dealing with the problem. They are limited in the effects that they can have in a global economy. If we tax the very well-off too heavily, they will go and find somewhere else to work. That is well known--although that, too, can be exaggerated, as the noble Lord, Lord Plant, showed in his excellent taxation report for the Fabian Society the other day.

I merely make this one point, knowing that I am to be followed in this debate by a Bishop. Moral disapproval has a role in all this. If people feel good, if they can go about their lives feeling that they are good people despite the fact that they are enjoying sumptuory sums of money at some cost to other people, they will pay themselves those sums. No mechanism of law, politics or economics will stop them. If society is still prepared to make it clear that it disapproves of such activities, it can to a considerable extent mitigate them.

We are understanding more and more that capitalism does not stand as an economic system on its own, separate from the society in which it exists. In the same way, if capitalism tries to stand outside a society which is demanding basic moral limitations on the greed of human beings, capitalism is doomed and Marx will be proved right after all. I do not want Marx to be right. Therefore, I hope that, even now, we can learn these lessons and do something to change the moral atmosphere in which we exist.

7.57 p.m.

The Lord Bishop of Oxford: My Lords, I am grateful to the noble Lord, Lord Phillips, for initiating this short but important debate. I entirely accept that an

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element of differential in earnings is highly desirable. But pay differentials are undesirable if they are so great as seriously to undervalue certain types of work as against others.

The reasons for regulating differentials are both moral and psychological. From a moral perspective, do salaries reflect the true worth of occupations to society; or do market forces, as emphasised by the noble Lord, Lord Griffiths, result in a distortion of their worth? When we are ill, we know how much we value good nursing. When it comes to the education of our own children, we know how much we want them to be taught by able, well-trained teachers. Traditionally, people have been drawn into such occupations by a sense of service. Alas, that is not what it once was. But even if it were, it would be quite wrong for society to exploit that sense by paying people in certain professions poorly by the standards of society as a whole. Decent salaries do make a difference.

I remember a time in the 1970s when I chaired a comprehensive school in London. For a short period the salaries of teachers compared favourably with those of doctors. For every post that was advertised we had a good range of able, well-qualified applicants whom we would have been delighted to appoint. That is far from the case now, as the noble Lord, Lord Phillips, rightly emphasised. It is contradictory to value certain professions when we ourselves are in need, or when it comes to our own interests, and as a society to under-value such occupations by rewarding them poorly, and increasingly poorly in relation to the widening differentials in pay to which this debate calls attention.

From a psychological point of view, excessive differentials can harm both those who are highly paid (do they really think they are worth it?) and the lower-paid. For it can be undermining of those doing a solid job of work, day after day and week after week, for comparatively little reward to see people shooting ahead in the salary scale. It can breed resentment and cynicism. Even worse, it can undermine a person's sense of the worth of what they are doing and the "worthwhileness" of working to the best of their ability. Moreover, that is undermining for society as a whole because it devalues that particular occupation.

I recognise that we cannot go back to the Middle Ages. Nevertheless, those earlier concepts of "a just wage" and "a just price" remind us that the economic sphere, as the noble Lord, Lord Lipsey, emphasised, is not autonomous or value free, as some used to suggest. There is an ethical dimension, whether people recognise it or not.

The most persuasive advocates of the market economy, of all political persuasions--including, if I may say so, the noble Lord, Lord Fforestfach, in his earlier writings--have long argued that a successful market economy depends upon the recognition of certain moral values. In short, an unbridled capitalism erodes the moral foundations on which a successful market economy in fact depends. One aspect of that moral dimension is a shared sense of the fairness of things. People recognise that it is fair that if people

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work hard, have undergone a long training or have exceptional abilities, they should receive commensurate rewards. Of course, there can be a legitimate debate about what is an acceptable range of salaries. A maximum salary that is five times the median salary of manual workers has often been touted in the past, although it is now nowhere near reality, as the noble Lord, Lord Phillips, emphasised. The point, however, is not what judgment should finally be reached but that there should be a widespread sense that the judgment that is reached is, by and large, fair. Widening differentials destroy that shared sense of fairness. As the noble Lord, Lord Sawyer, emphasised, that can create a sense of gross imbalances and, as the noble Lord, Lord Lipsey, said, it can bring about a sense of moral crisis.

As we know, the world is dominated by a market economy. I accept that a market economy is the worst possible economic system in the world--except for all the others. We therefore need to make it work for the benefit of everyone, not just a minority. Because that market is part of a global economy, any concept of capping salaries is, of course, fraught with difficulties. As has already been said, people who can command more and who want to earn more can simply relocate to a country that does not cap salaries or which has a lower rate of taxation.

There are real difficulties in this context, and there is not an easy or obvious solution to the problem. Central to this issue is what we might call the lure of the City, where people do indeed work very long hours, but whose salaries--and, even more, their bonuses--have a distorting effect on every aspect of our national life. I remember a few years ago, for example, when I was Dean of King's College, London, being saddened by people who were coming to the end of their research for a doctorate in science--they had spent eight if not 10 years specialising in science--deciding to go into the City rather than to pursue a scientific career because of the comparative rewards.

We read that million-pound bonuses in the City are commonplace. That has a distorting effect on every aspect of our national life, not least on the housing market in the South East. We need to recover a sense of jobs being done and of occupations being pursued because they are important in their own right and because they are a way of serving society as a whole, as well as a source of personal fulfilment and financial reward. I once lamented to the headmaster of a famous school that the school no longer produced ordinands for the Church of England in the way it once did. "Oh, Richard", he said, "It's not just ordination; the whole concept of service has gone". So a moral and spiritual revolution is necessary.

As to what steps society as a whole should take, whether through legislation or other means, to close the widening gap in differentials, I honestly do not know. I have listened with great interest and attention to some of the suggestions that have been made in this debate, and I shall listen to others. What I do know is that if that gap continues it will be to the material, as well as the moral, spiritual and psychological, detriment of society as a whole. Important

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occupations will be under-valued and people's sense of the "worthwhileness" of what they are doing will be undermined.

8.5 p.m.

Lord Haskel: My Lords, the noble Lord, Lord Phillips, is right to be concerned at the high earnings in the City and the low earnings of teachers. The noble Lord, Lord Griffiths, suggested that that is an indication of a dynamic and growing economy. However, a polarised economy is manifestly unjust. Is it inevitable that we have to sacrifice social justice and a more equitable society for a dynamic and growing economy? The answer is definitely no. Social justice and a more equitable society are part and parcel of a dynamic and growing economy. A healthy economy is a moral economy.

In order to study pay differentials, I did not look at the fat cats; I agree that they are a distortion. I turned to Social Trends. Chart 5.16 on page 103 of that publication illustrates very well what is happening, although it refers to household disposable income. Twenty years ago, a household in the 10th percentile earned 110 a week. In 1998, the same household earned 140 a week. A household in the 90th percentile earned 360 a week in 1981 and 560 a week in 1998.

What is the reason for that? The noble Lord, Lord Griffiths, touched on the answer. Economists such as the noble Lord, Lord Layard, have shown that during that time the demand for skills became much greater. Globalisation and technology increased the demand for skilled labour and reduced the demand for unskilled labour; hence the differential in wages in the private sector.

The noble Lord, Lord Phillips, asked what the Government propose to do about that. I think that steps have already been taken. The measures have been described by Robert Reich as a three-legged stool: business flexibility, workforce agility and macro-economic policy. Together, those legs provide a firm economic base.

By business flexibility, Robert Reich meant the ability of businesses to set wages and to hire and dismiss their workforce with relative freedom and the flexibility to decide where and how to do business. That freedom may have destroyed quite a number of jobs but it has also generated a large number of new ones, particularly in small and medium-sized enterprises.

That first leg is balanced by the second leg of Robert Reich's stool; that is, workforce agility. That allows employees and workers to move continuously to better jobs--a kind of upward mobility. Of course, education, job skills and training are absolutely critical. Some might say that wage differentials will force people to get skills. That is both unacceptable and untrue; hence schemes such as the New Deal.

All that is not enough without the third leg, which consists of an economic policy that generates a steady and even demand for all the human resources--skilled and unskilled--in our society. Part of that, of course,

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is the minimum wage, but so is taxation policy. The noble Lord, Lord Phillips, was right: in Britain, the distribution of original income is highly unequal. I return to Social Trends, which tells us that in 1998, the average income of the top quintile group is 17 times greater than that of the bottom quintile group. But after payment of cash benefits and the deduction of direct taxes, that ratio is reduced to 6:1. That is quite a reduction.

Of course, we cannot run a modern economy merely by rewarding the fortunate few. It must be achieved by spreading much more widely the opportunity for employment, increased earning power and education. Equal opportunity is central to that. But the right to equal opportunity applies at every economic level. That is why equal opportunity also means dismantling vested interests, restrictive practices and other forms of economic privilege which limit the scope of opportunity for others.

I believe that in that way the state can be an active counterweight to growing differentials in earnings while, at the same time, securing a healthy, growing and moral economy.

8.10 p.m.

Lord Layard: My Lords, it has been suggested that widening inequality is the price of increased prosperity. I believe that that is wrong, and I wish to illustrate why with two facts. Let us compare the earnings of German and British workers. Among those in the top 40 per cent, the Germans earn hardly any more than the corresponding British workers. However, among those in the bottom 40 per cent, the Germans earn half as much again as their British counterparts.

Therefore, where does our lack of prosperity come from? It comes directly from low productivity and the low earnings of people at the lower end of our workforce. If we had dealt with the problem of prosperity, we would have dealt also very largely with our problem of inequality.

Why are our earnings at the bottom end of the scale so low? If we are concerned about inequality, I believe that that is the main question we should consider. As has been said, it is a matter of skills. However, I want to stress that we are experiencing a crisis. It is not a situation that we will survive; it is one that will worsen because the impact of technology constantly reduces the demand for low-skilled labour.

That may seem obvious. However, every week I attend a meeting where someone states the opposite by pointing out a job where a machine has removed the skill from the task or an unskilled occupation which is growing such as domestic service or some form of low-grade service occupation. Therefore, that person will ask, "What is all the scare about?" I believe that such a view is completely wrong. The examples are right, but the aggregate of the labour market is going in exactly the opposite direction.

Countless researches show that the demand for skilled labour is constantly increasing while the demand for low-skilled labour is falling. That does not

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depend on where one takes the cut-off point for skill; it is true wherever one chooses the cut-off point. And it does not depend on which country is studied; the same applies in every country. It is the inexorable result of technical progress and, incidentally, it does not have much to do with globalisation. Therefore, the situation will continue.

There is a race between the growing demand for and the supply of skilled workers. The latter either keeps up, goes ahead or falls behind. Over the past two decades in Britain and the US the supply has fallen behind the demand. That is the chief force which has brought about the growth of inequality in those two countries. Inequality is growing more quickly there than on the Continent precisely because on the Continent the supply of skill has kept up more easily with the increase in the demand for it. As a consequence, inequality has grown less on the Continent than it has in the Anglo-Saxon world.

We see that occurring in the educational policies of the Continent, where much more emphasis is placed on minimum standards, and we also see it in the outcome, as has been mentioned previously in this House. One in five people is functionally illiterate in Britain and the US. However, on the Continent, that figure is less than one in 10.

Therefore, with regard to the question raised by the noble Lord, Lord Phillips, as to what is to be done, I believe that it is clear that the great leveller must be education. There must be more and better education for the less academic half of the population. It is extraordinary--we accept it automatically in Britain--that the academic half receives essentially five years' tuition virtually free of charge beyond the age of 16 while most of the other half receives almost no education beyond that age.

We should not be happy with the thought that the biggest educational proposal with which any party enters an election is to expand higher education to half the population. I am not against that; it is a terrific idea. However, the main question should concern what we do about the other half.

Obviously that must be tempered by considerations of expense. Therefore, it is natural to ask what pay-off society would receive from implementing a proper system of vocational education beyond the age of 16 for the second group of people. Fortunately, so far as we are able to compute meaningful social rates of return from different types of education, the answer is that those rates are at least as good in relation to vocational education as they are in relation to A-levels and university education. Therefore, society would receive a pay-off of approximately 8 per cent from each type of education. Therefore, for the time being, more education for the group about which I am concerned is fully justified on pure efficiency grounds.

However, I want to face the situation. Let us suppose that we did those people proud. At some point, we would probably run into diminishing returns. Then another issue would arise. Is it better to help less able members of society by income transfers or to do so by enabling them to earn a better living for

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themselves? I believe that economists have done quite a disservice to this type of debate. If there is any question of inefficiency arising from any form of investment, they have tended to advocate income transfers. I believe that that completely underestimates the moral point which has been made in this debate by many speakers.

There is a strong presumption in favour of people earning their own living rather than living on a transfer--even a partial transfer--because it is so much more dignified and also, of course, less open to the disincentives which arise from income transfers. Therefore, the conclusion which I draw about what the Government can do is that they should implement a concerted programme--it will take 10 years--to make all youngsters sufficiently productive to pay their own way and earn a decent living.

I have concentrated on the problems of poverty because I consider them to be more serious than the problems of riches. I conclude by turning to the question of people with unusual gifts. As has been said, there is bound to be a market-determined wage and there may not be too much that we can do about the pre-tax earnings of such people. However, as my economist colleagues here know, in economic terms the earnings of those kinds of people largely come from rents. Those earnings are much higher than is necessary to motivate them to do their work. Surely we can tax those rents more seriously than we do at present. Currently the standard rate of tax for most people is 32 per cent, including national insurance. Yet the highest rate of tax paid by the fattest cat is 40 per cent. I cannot see how we can possibly justify that.

8.18 p.m.

Lord Plant of Highfield: My Lords, I thank the noble Lord, Lord Phillips of Sudbury, for introducing this interesting and, as it has turned out to be, most stimulating debate. I had not intended to address the question of the dangers. However, as several speakers have pointed to some of the moral issues, perhaps I may say a word or two about those.

First, it seems to me that the general level of capitalism or the market economy must be embedded in a type of moral foundation. Equally, the motivations of the market economy, which largely are those of self-interest, can erode those moral foundations, and it is difficult to see how self-interest can repair or regenerate them. I believe that that is a real dilemma. That point has been noted by many thinkers and, as my noble friend Lord Lipsey said, it may well lead to a type of moral or cultural contradiction in capitalism. It requires a moral framework which it cannot itself engender.

In more immediate, practical terms, associated with high differential salaries is the problem of trying to include the affluent so that they do not detach themselves from common experiences and common forms of provision of goods and services in society, and so that society is not divided between those who are able to afford all kinds of private provision, and the rest of society who have to do other things. It is entirely

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their right to afford those things, but nevertheless it undermines the sense of social solidarity.The answer is to find a way to include the affluent. Those are two definite dangers, in my view.

In the last 50 years of the last century there were two approaches to the issue of income differentials. One was the classic, social-democratic view, perhaps associated with Tony Crosland, who said that we should be concerned about relative positions in society, and that the job of government is to seek to diminish inequality by using the fiscal dividends of economic growth to improve the relative position of the worst off, while maintaining the absolute position of the better off, because, otherwise, the better off will not vote for social-democratic governments. That is a levelling up, not a levelling down. On the other hand, the neo liberal or economic liberal approach stated that inequality is a good thing and a necessary feature of a dynamic market economy; and, not only that, but dynamism in the economy is in the interests of the poorest members of society, including the low-paid, because of the trickle-down effect. The strategy is to improve the real wages of the poor, the absolute position of the poor, while increasing the differential between the poor and the rich, as a result of the dynamism of the market and the resulting necessary inequalities. That is the echelon advance view, which is almost the exact opposite of the social-democratic approach, for the reasons that I have given.

Both of those approaches now seem to be flawed. The social-democratic approach incorporated many good ideas about how to compensate for the consequences of inequality, but it was not so good at explaining the causes of inequality, or suggesting how to remedy the problem of low incomes. Equally, the major problem with the trickle-down theory, the economic liberal theory, is that people have to be equipped to take advantage of the trickle-down mechanism. They have to have skills that are needed in the economy. One of the problems with economic liberalism is that it assumes that the trickle-down effect will occur almost mechanically. The state is prevented from adopting a view that would regard investment in skills, despite the fact that they lead to an individual level of return, as a public good that should involve large public funding. The economic theory seems to run counter to the political theory that the trickle-down effect requires a state to equip people to make use of the trickle-down mechanism, through skilling not just once in life but throughout life, because of the vagaries of the economy; and yet the view of the state inhibits that process.

I agree with the noble Lords, Lord Haskel and Lord Layard, who stressed the fact that the problem has to be tackled in terms of the skills of the worst paid members of society. I take the point made by the noble Lord, Lord Layard, that the decline in demand for unskilled labour may well be the result of technology. There are those who think that it is globalisation, but it does not matter much in policy terms, because the solution is the same: you will only get around the problem if you increase the skills of the individuals,

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and you have to do that throughout their lives. It is partly a question of the skilling agenda, but it is also partly an issue of reduction in the rates of taxation at the lower end of the income scale. We now have the 10p rate, but there is also the Government's tax credit programme.

All of those features fit very much with the diagnosis and the prescription. I am not opposed to the idea of raising the basic rate of tax, in line with the recommendations of the Fabian commissions I have chaired, using that money to take very large numbers of people at the lowest rates of pay out of the tax bracket. Nevertheless, the most necessary fundamental step at the moment is to concentrate on skills and reduce the tax burden on those who are in work but who receive the lowest pay, as the Government are doing at the moment.

The moral issue is being addressed, but it is very difficult to address it in an open market and in the setting of the global economy. However, it is important to work from the bottom up, rather than to put the cap on the top down.

8.28 p.m.

Baroness Thomas of Walliswood: My Lords, my noble friend vividly drew our attention at the beginning of this notable debate to the inexorable and dangerous increase in the gap between rich and poor and indicated some of the moral problems raised by this phenomenon. The debate has been notable because it has been full of speeches of high academic and moral quality, which is gratifying. It is not necessarily always the main focus of our attention during debates.

I regret that I cannot follow in that line; I will do something different and talk about poor people, about poverty, about who form the poor, and in particular the problems faced by women due to the gender inequality in remuneration and income.

I recall that when I first came back to this country in the 1980s, having lived first in the United States and then in the third world, I was struck forcefully by how much the country was beginning to reflect the third world syndrome. It is not just a question of private wealth and public squalor, to which a good deal of attention was drawn at the time, but also the growing gap between the rich and the poor, which was perhaps less vivid at that time but, as my noble friend has said, has marched inexorably onwards.

It is curious that in a first world country we have almost adopted or been driven to a characteristic which is a major characteristic of a third world country. Of course, the gap is not so great, and I do not pretend that it is, but in many ways the poor in this country are as deprived, relatively speaking, as they are anywhere, although they may be richer in absolute terms than the poor in less developed places.

I turn now to the disparity between men and women. My thesis is that this gender differentiation is not only bad in itself but it contributes to the financial problems of many families and of whole areas of economic

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disadvantage. In the time available, it is not possible to lay out the whole statistical justification for this claim and therefore a few facts will have to suffice.

More than half of all women, compared to a quarter of all men, have income from all sources in the two bottom quintiles of the gross income tables. At the other end of the scale, 30 per cent of men, by comparison with only 10 per cent of women, have incomes in the highest quintile of incomes--gross income from all sources. Those are general figures and they have to be taken with care, but it is part of the general picture. It is supported by a mass of evidence on the earnings gap--not the income gap--between women and men. Six million women work part-time because of their family responsibilities. You may say that it is understandable that they earn 40 per cent less than men in full-time work--"They would, wouldn't they?" However, it is also the case that because of family responsibilities, women reach their earnings peak between the ages of 25 and 29, whereas men reach their earnings peak between 45 and 49. That illustrates the broken nature of women's work. On the other hand, single women with no children earn approximately the same as everybody else.

Those differentials appear to be grounded in several persistent factors. A recent EOC report, Women and Men in Britain, concludes that gender segregation in the work place and between different sorts of work, including part-time working, is a major culprit. As the EOC puts it:


    "Gender rather than individual skills and abilities continues to be a major determinant in individual economic prosperity".

The predominance of female employees can reduce the salary scales of a whole profession: consider teaching and nursing. Yes, men and women teachers are paid almost the same, but as several noble Lords have pointed out, the whole profession is not paid enough. Graduate teachers are leaving the profession at quite an early age because by the time they have worked for five or six years the disparity between their earnings and those of their contemporaries is too great to be tolerated.

There is also compelling evidence that employer pay discrimination is a contributing factor influencing unequal pay. As we all know, that discrimination takes many forms: placing female employees at the bottom of salary ranges when men are placed along the range; job evaluations that discriminate against jobs held predominantly by women; and discrimination in the way in which women are assessed under performance-related pay schemes.

Perhaps it is not surprising that since the 1980s the pay gap has stuck stubbornly at around 20 per cent. Government research indicates that gender stereotyping still influences choices made and advice given when girls are deciding on their future work. That may include the decision whether to stay at school, as mentioned by the noble Lord, Lord Layard.

My view is that the disparity between women's and men's earnings is an important part of the wider disparity to which my noble friend has drawn our attention. It reinforces family poverty; it reinforces

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ideas of women's secondary status; but it does nothing to create that sense of fairness within the community to which so many noble Lords have referred tonight. It also results in the high proportion of women pensioners who live in poverty, because if one is not paid enough, one does not have a private pension and one has to depend entirely on the state pension.

A large number and a wide range of solutions to the problems have been suggested. I welcome the Government's efforts to deal with the problems of low pay such as the national minimum wage, better skills and improved compensation through state benefits. I should add the pension uprating which my own party has been promoting: 5 for all pensioners; 10 for those over 75; and 15 for those over 80.

However, I do not believe that those kinds of solutions will ever constitute the whole answer. I end by joining all noble Lords who have called for a lead from government and from society to emphasise how wrong, how immoral and how unfair can be the gaps between the earnings of one group and another. I hope that the Government's new interest in poverty and in gender equality is not a flash in the pan. It must be a commitment for the long term.

8.34 p.m.

Lord Henley: My Lords, I start by referring to a brief remark made by the noble Lord, Lord Lipsey, when he referred to the salaries that Manchester United pays some of its players. I am tempted to ask whether one wants to return to the bad old days of the maximum wage. I see that the noble Lord, Lord Burlison, is still in the Chamber. He will remember the days of the maximum wage. I am sure that all noble Lords will agree that it would be a mistake to return to that form of self-imposed industry regulation of wages just as it would be bad to return to any form of incomes policy.

I am sure that all noble Lords will also agree that what is true for the entertainment industry--football, music, or whatever--should also be true for the City. We should be wary of trying to castigate certain categories of industry as being wicked fat cats, whereas others, because they earn their living in the entertainment industry, appear to be allowed to earn whatever sums they like.

I have two relatively brief points to make. First, it would have been helpful if the noble Lord, Lord Phillips, in introducing the debate, had argued that relative poverty has risen substantially under this Government in sharp contrast to the proud promises of that now abandoned campaign song, "Things can only get better".

Many noble Lords will have seen the recent Rowntree study that showed that the number of people living below the so-called "poverty line"--that is, on half the national average income--has risen to 14.25 million over the past two years. That is 1 million more than in the early 1990s.

My second point relates to the key advances that the Government have claimed that they have introduced in terms of attacking the problems of poverty. I refer to the points made by the noble Lord, Lord Layard.

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He said that he wanted to concentrate on poverty rather than on the earnings of those at the top. First, I believe that the immensely complex working families' tax credit increases dependency because means testing is extended over a far larger range of incomes. It seems scarcely credible that people on over 40,000 a year may be brought into the welfare system, as I understand is the case. No doubt the noble Lord, Lord McIntosh, will address that matter. I believe that the Chancellor is creating a new poverty trap in which middle-income families who are promoted or earn overtime will be heavily penalised.

The Government's other boast is the national minimum wage, to which my noble friend Lord Griffiths of Fforestfach referred. Fortunately, it was introduced at a level lower than originally threatened and therefore has been less disruptive than many feared. Although a future Conservative government will not seek to repeal the national minimum wage, we do not believe that it is a well targeted device for the relief of poverty. We remain concerned at the compliance costs for business and will seek to improve its administration.

This Government do not appear to mind complication, either in the tax system or in the social security system. They appear to be obsessed with the desire to make people feel grateful to the Chancellor. While pledging to "make work pay", the Government have fundamentally reduced the amount that "work pays" by increasing the tax burden. That has fallen particularly severely on those least able to cope with higher petrol prices and the whole range of the Government's other stealth taxes. The latest figures show that the tax burden on the poorest 20 per cent of households is up from 37 per cent of gross income in 1997 to 40 per cent. We all know that previous Labour Chancellors paid for their public spending excesses by squeezing money from the rich. We all remember the noble Lord, Lord Healey, when he was Chancellor. Under this Government, a typical working family is paying 670 a year more in tax. Labour will never address the divide between rich and poor unless they ease the burden that they have placed on middle-income people and poor alike.

We on this side of the House have always believed that the best cure for poverty is not a growing welfare state but a growing economy in which we can all share. That is the difference between us and the Government in this debate. Fundamentally, we on these Benches believe that jobs and enterprise best tackle poverty and deprivation. That is why, when we return to government, we shall keep taxes down and invest in key, vital services to help the poor, while spending only what the nation can afford. We shall cut the burden of regulation through regulatory budgets and exemptions for small businesses. We shall abolish taxes on savings for all but higher-rate taxpayers. I believe that that is the way to spread opportunity for all and to help the poor and the middle-earners alike.

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8.41 p.m.

Lord McIntosh of Haringey: My Lords, I have to confess that since I was a child I have always had an idiosyncratic view of widening differentials. I have always thought that those who have the most interesting jobs should be paid less than those who have the most boring, difficult, dirty jobs. I still believe that our earnings differentials are entirely the wrong way round. However, I recognise that no society in history has ever taken that view. I recognise that Marx did not take that view; I think that William Morris came close to it. As my children grew older and went into the job market, I told them, sadly, that my ideals did not accord with the way society worked, that they should obtain better skills and earn more money, in which case they would have more interesting jobs. Whichever way round the causal connection operates, that is what it is about. That is the received wisdom.

Faced with the issue of widening differentials, which the noble Lord, Lord Phillips, has properly introduced to the House, I considered the next part of his question, which is, "What can the Government do about it?" I hope that the House will forgive me if I do not talk about fat cats or about reducing even the relative income of the very rich. I prefer to talk about the point made by the noble Lord, Lord Henley, namely, how best we can make available a large cake in which everybody can share. I should also like to talk about skills and education and about the Chancellor's passion for the reduction of poverty and the elimination in the long term of child poverty.

There has not been much disagreement about the nature of the problem. As economies become more developed and shift their emphasis to producing goods and services that demand more highly skilled labour, it is possible that the wage gap between the high skilled and low skilled will increase, leading to wider income inequality. In that connection, the noble Lord, Lord Layard, referred to the important role of technology.

Throughout the OECD the employment rate of low skilled and poorly educated workers has fallen since at least the early 1980s. In the United Kingdom, job prospects for those without skills have declined dramatically. What we are seeing--and I am grateful to the noble Lord, Lord Lipsey, for drawing attention to it--is a version of part of Marx's prediction made more than 100 years ago. It is true that we have not experienced the crisis of capitalism. However, we have experienced continuing pressure towards relative impoverishment of the workforce.

We know from the social and economic policy of the whole of the past century that if this issue is neglected, differentials will increase. We have seen over the past 20 years not only the relative impoverishment of the poorer parts of our society but, in some cases, and certainly in the United States, an absolute increase in poverty. That means that social and economic policy must very firmly and deliberately be directed towards dealing with that problem. In the United Kingdom, the demand for unskilled labour has been reflected in a fall in the relative wages of unskilled workers. In this country wages have been rising for all points in the

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earnings distribution, though not in the United States, but the lowest paid have seen only a small increase in real terms. The rise in wage inequality in the United Kingdom since the late 1970s has been one of the fastest of all developed countries.

One could say that it does not matter if people face only short periods on low pay and have a good chance of mobility into higher paid jobs; but that is not the case. There is evidence that many individuals move between low pay and unemployment, rather than better paid jobs, and that significant numbers are trapped in low pay throughout their working lives. Therefore, our primary emphasis must be on economic stability as the basis of our policy.

As we outlined at the beginning, the central objective of the Government is to achieve high and stable levels of growth and employment to fulfil Britain's national potential, and to build a stronger economy and a fairer society, to which everyone can contribute, thus benefiting from a share of greater prosperity. I believe that even those who fiercely criticised the way in which we approached this matter almost four years ago will acknowledge that these policies have been remarkably successful. That means that we are able to respond effectively to the challenge imposed by an increasingly global economy, ensuring that all individuals are equipped with the skills necessary to share in global prosperity.

The argument for greater emphasis on skills is that we cannot compete internationally through low wages. We are committed to encouraging a high skilled, high wage and high productivity economy. That is the only way in which we can compete successfully in the world economy, taking advantage of the fact that some developing countries will naturally have an edge where low cost, relatively unskilled labour is important. If I had the time, I could continue at length on the theory of comparative advantage.

The noble Lords, Lord Griffiths and Lord Layard, have emphasised that we must ensure that people in the workforce have good basic skills--literacy, numeracy, communication and IT skills. There is a high correlation between those who lack basic skills and unemployment. Even those in employment are likely to earn far less than people with higher skills. We should also ensure that access is available to lifelong learning, so that people have the skills to adapt to changing circumstances and the opportunity to progress up the earnings ladder.

I do not have time to deal with the range of education and skills programmes--the Excellence Challenge, the Connexions partnership, the strategy for adult basic skills, and, in answer to the noble Lord, Lord Griffiths, who rightly referred to lifelong learning, the individual learning accounts that will be available to one million of the workforce by March next year. It can be said that, in addition to what has been done in traditional school education, the emphasis of this Government has very heavily been on the skills that are necessary for employment in the 21st century.

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We have also implemented reforms to make work pay. Those cannot be seen individually. If we are to consider the danger of poverty, which the noble Baroness, Lady Thomas of Walliswood, rightly emphasised, the reforms must be seen as a package. We have set ourselves the target of increasing the earning power of the lowest paid workers so that they will be in a position to become financially independent and escape poverty. Even low paid jobs will improve employability, and they can be a stepping stone to higher wages.

As the noble Lord, Lord Sawyer, rightly emphasised, the national minimum wage removes the worst case of exploitation, promotes greater decency and fairness in the workplace and underpins the Government's reforms to the tax and benefit system. The national minimum wage, which we introduced almost two years ago, has benefited between 1.2 and 1.5 million workers. The average increase for those paid less than the national minimum wage prior to its introduction is approximately 20 to 30 per cent. I can update the figures given by the noble Lord, Lord Henley.

By removing the worst excesses of low pay, the national minimum wage has been a significant factor in bringing about the reversal of the trend of the past two decades when higher gains in pay went to the highest paid. Increases in pay across the earnings distribution for the year to spring 2000 show that earnings of the bottom 10 per cent increased almost twice as fast as the top 10 per cent.

The national minimum wage has been particularly valuable in low-paying sectors such as retail, hospitality, cleaning and security. I say in response to the noble Lord, Lord Phillips, and the noble Baroness, Lady Thomas, that it has been particularly important for women workers, who make up three-quarters of its beneficiaries. In the year to April 1999, the gap in the average hourly pay of women relative to men narrowed by a full percentage point. That is the largest amount for a decade.

The noble Lords, Lord Griffiths and Lord Henley, believe that if we were to increase the national minimum wage we should be risking serious job losses. That is exactly what was said before we introduced the national minimum wage. I shall not speculate on future government policy, but I want to record the fact that during the past two years the fears of the Conservative Opposition about the effect of the minimum wage have been effectively disproved.

The national minimum wage is part of the Government's overall strategy to make work pay. With the working families' tax credit, which is the next part of the policy, it guarantees to every family with children and with at least one person in full-time work a minimum income of 214 a week, or more than 11,000 a year, from April this year. Together, the tax and benefit reforms underpinned by the minimum wage--if we did not have it the taxpayers would pay and not the employers--enabled us to do more than we could ever have done by individual policy.

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The noble Lord, Lord Plant, rightly drew attention to the fact that tax credits are the most effective way of tackling poverty. They can be targeted at low-income households; they can be varied according to family circumstance; and they do not raise the direct cost of low-wage workers to employers. In other words, we could not use the national minimum wage alone and we could not use tax credits alone but the two of them together are immensely powerful. They make low-paid work more attractive to the unemployed and work rather than benefit a more attractive proposition. If we did not have the national minimum wage, employers would take advantage of workers by lowering wages. The national minimum wage ensures a level of fair remuneration in the labour market.

The 10p rate of income tax is the lowest starting rate since 1962-63. The basic rate is the lowest for 70 years, worth between 60 and 150 a year, with the largest gain for the low paid. In addition, we have increased the threshold for paying national insurance contributions, which means that 1 million low-paid workers no longer pay NICs. Let us add to that what

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is planned for the next two years. By 2001, a single person on the minimum wage will be 300 a year better off as a result of the tax and national insurance cut. In 2003, we are extending the principles of working families' tax credit to those without children. The employment tax credit will help to support working people without children as well as helping to tackle in-work poverty.

I acknowledge that I have not talked about high pay. I have followed the wise words of the noble Lord, Lord Plant, who said that it is important to bring up the earnings of those at the bottom rather than to bring down the earnings of those at the top. That attack on poverty is the thrust of the Chancellor's economic policy and has been ever since he took office.

I do not believe that many people in this country realise the moral passion which enthuses the Chancellor of the Exchequer in his hatred of poverty and inequality. The more that that is recognised, the more it will be recognised that we are indeed attacking the problem, so rightly drawn to the attention of the House by the noble Lord, Lord Phillips.


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