21
Examination of witnesses
Paul Johnson and Charlotte Pickles.
Q1 The Chair: Welcome to this non-inquiry session of the Public Services Committee. Our witnesses today are Mr Paul Johnson, director of the Institute for Fiscal Studies, and Charlotte Pickles, director of Reform, who are here to talk about the Budget in particular and the financial background to that. We find it useful now and again to do this sort of session in order to inform other inquiries. We are grateful to both of you for coming along, because you have high-quality expertise, and I appreciate how busy you are.
I will ask the first question. What do you predict the Budget’s impact will be on the current economic outlook and the demand for public services, because that is where all our work focuses? It is a big issue at the moment, so we are interested in what impact you think the Budget announcements will have on the cost of delivering those services.
Paul Johnson: Good afternoon. I am director of the IFS. In a sense, there was not that much directly on public services in the Budget but quite a lot indirectly. The big one, which we will come to later so I will not talk about it now, is childcare, but the broader issues are twofold. One is the immediate impact. We clearly have some serious funding issues with regards to public pay requests or demands, or wherever we end up with that. Because of what happened in the autumn, there is some additional money in the schools budget. Broadly speaking, this might be enough to fund the offer that was put, but, clearly, if you use that money for the offer, you do not have it for the other requirements after more than 10 years of freezing spending in that area.
There are similar issues in health. The striking thing about health spending over this Parliament is that, despite the remarkable pressures we are seeing in health at the moment, in real terms the spending increases are actually below what was planned pre pandemic. They are still significant, and they are real, but they are below long-term average increases, and, as I say—quite remarkably, in a way—they are below what was planned pre pandemic, despite what is clearly a higher level of demand, not to mention the pay issues.
Those are the immediate issues for public services. The longer-term ones are really about the numbers that are effectively pencilled in post-election for public service spending, which, bluntly, are pencilled in in order that the numbers that are in the spreadsheet meet the fiscal rules, because if you make any kind of reasonable assumption about what will happen to spending on health and defence and so on, you are left with cuts in what we frequently call the unprotected departments.
My presumption is that spending will be higher than is currently planned, taking advantage of what may turn out to be a better public finance situation or changing fiscal rules or raising more tax revenue. I may be wrong about that, but that is my presumption. You clearly have pressures in the short run, but you also have some probably unrealistic presumptions about what spending will be in the longer run.
The broader picture on public sector pay is that you can take it so far, but, as we are seeing, there is a limit to where you can take it. We know that nurses’ pay is about 10% down on average on where it was in 2010, and teachers’ pay is 13% to 15% down, particularly for experienced teachers. The consequences for recruitment and retention, and obviously the disquiet in the professions, are already very evident, and government will have to decide at some point the appropriate level of remuneration in those sectors.
Charlotte Pickles: I agree with Paul, as you would expect, given the expertise. For me, the biggest question for public services is what we did not see in the Budget rather than what we did see. As you will all know very well, the spending envelopes were set before the inflationary levels that we are seeing, which we did not quite expect. We did not see extra funding, by and large; we saw a few pots here and there but for departmental spending, which is how you fund public services.
There are three huge pressures that public services are facing in those envelopes. One, which we may come on to, is increased demand driven by cost-of-living pressures for people. There are direct implications of that: more people claiming benefits or top-ups to wages. Then there are the slightly more indirect implications—for example, deteriorating health as a result of not being able to heat your home, restrictions on expenditure on food, or the stress of finances. So we are seeing increasing demand on public services as a result of the pressures that households and families are feeling.
Although for some the pandemic may feel quite a long time ago now, we are nowhere close to dealing with the long tail of backlogs across public services. The best guess at the moment in the NHS, for example, which is where we are most evidently seeing this, is that we still have missing referrals from during Covid. By that I mean that we may not have hit the peak of what the backlogs could look like in elective care. That is huge demand coming through into the system.
Back when the spending review envelopes were set, funding was not really put in place for continuing to tackle backlogs, although we have had some pots, and then of course there is inflation. As Paul was saying, that plays out in two main ways: first, in pay settlements and where we will get to for the workforce, which, if you have vacancies, has knock-on impacts on the ability to tackle the demand; and, secondly, in departments that have large estates or large workforces. That inflationary pressure is particularly acute. So we have spending envelopes that, to be generous, will require more than the efficiency targets or savings that were already built in as expectations in the spending review; roughly 5%, I think, was already expected. It will be a really tough time for public services.
However, within that, and linking to the longer-term question, the way we drive productivity in public services has very much come back to the fore. We have seen a drop in productivity in certain areas. Health is a good example: we have less activity per doctor or nurse—per member of staff. We need to grapple with some of these productivity questions and what it would actually mean to drive efficiency in some of the services, and tough questions going forward about the role of public services versus other sectors perhaps or us as individuals and households.
So there is extreme pressure, but also some opportunity to think about how we reimagine—as we would say at Reform—some of the public service models so that they will be fit for purpose and able to operate within sound public finances.
Q2 The Chair: Thank you. You raise some really interesting questions that I am sure we will come back to. I have two small follow-up questions.
First, was the announcement of the extra money that was put into the health and education budget last year to pay for the previous salary increase? I sometimes hear, ‘We gave you the money last year for the offer that’s on the table now’. That bit of my memory makes me wonder whether it was actually to catch up with the previous pay increase.
Secondly, prior to the Budget, there was a lot of talk about an envelope that the Chancellor had to play about with, that there was some extra money. What happened to that extra money? Did it vanish, or is it the extra money that was spent on public services in this Budget?
Paul Johnson: To your first question, the additional money that was made available, particularly for education, was in no sense tied to an increase in pay. It was there in order to help the school system in particular to catch up with some of the cuts over the last decade and some of the considerable strain brought by Covid. Similarly with health: as far as I am aware, no specific additional money has been made available to fund an increase in pay in that sector either. That is still to come. The idea behind the proposal for a one-off increase for last year, I think, is that it is relatively easily funded, but, clearly, consolidating bigger increases will create more pressure going forward.
On the question of whether there was money to play with, this is always a slightly strange game that plays out in the media. What happened, of course, was that the public finances deteriorated dramatically between last March and November, which meant that forward borrowing numbers went up a lot. They improved a bit between November and this March, so if you look at what happened between November and March it looks like there will be a bit more money around over the next few years. If you compare this March with last March, there is far less money around.
On the borrowing numbers going forward, the Office for Budget Responsibility forecast got a bit better compared with November, so there was lower borrowing over most of the next four years, but the Chancellor used up most of that headroom for tax cuts through the expensing in corporation tax and childcare. However, that gap narrowed at the end of the period, which is why some of that spending, in particular the corporate tax spending, is at least deemed not to be there at the end of the forecast period. There is no space at all against the Chancellor's main fiscal rule, which is now debt falling at the end of the forecast period. Debt is essentially stable at the end of the forecast period; it is not really falling.
Charlotte Pickles: There is no fiscal headroom based on the fiscal rules, which is the point that Paul is making. Just as a slightly quirky but, I think, informative observation, the Chancellor stood up and said, with quite some fanfare, that they had built in a £6.5 billion buffer at the end. Then the OBR document, when published, said, ‘By the way, since we set those forecasts, that £6.5 billion has disappeared because of interest rate changes’.
We need to appreciate the volatility, the difficulty, and the large sums of numbers needed to actually be a buffer or to give you ‘fiscal headroom’ which of course just means that you are borrowing less; the money is not there. As Paul is very much saying, we had the head of the OBR in for an event just after the Budget and he talked about those numbers at the end being a kind of fantasy budget, so that probably gives you the context for how realistic some of those numbers are.
Q3 Lord Willis of Knaresborough: Welcome, both of you, this afternoon. I confess to being very ignorant on these issues, so if the question is an ignorant one, please forgive me.
You put in your briefing that about £5.6 billion extra will be spent on health and education over the next two years. If you assume that over the next two years the actual rate of inflation drops to 2%, which the Bank of England has claimed it will within that two-year period, and if interest rates also start to come down, what sort of effect does that have on that global sum of £5.6 billion? Will its spending power get bigger or smaller as a result of those changes?
Paul Johnson: It is important to see this in the context of the increases overall. As I said at the beginning, the increase in the health budget in real inflation-adjusted terms, even after extra money has been put in, is lower than was planned back in 2019. There is extra money there for the health service relative to where we were, but, if you look at what Charlotte was talking about earlier, there is a reduction in productivity in the health service. There are something like 10% more doctors and nurses and so on, but measured activity has not actually grown over that period, so there is a productivity issue as well as a resources issue.
To some extent, the extra money that was allocated was to make up for the inflation that has already occurred. The numbers they would have otherwise had would have been on the assumption made two or three years ago that inflation would be around 2% and wage rises at 2% or 3%. Of course, things have changed and they look very different to that.
To answer your question, these services will still have less than they might have expected three or four years ago, but more than they would have had had the Government stuck to the nominal spending review plans.
Charlotte Pickles: Also, we do not know what the pay settlements will be in that context and whether there will be money to cover whatever pay increases look like. Therefore, if that has to be found from within those budgets, clearly that has implications.
Q4 Lord Shipley: Following on from Lord Willis’s question about the health service, there is a question that I have never fully understood which perhaps you can explain. It is reported that there are 50,000 vacancies in the NHS. If they were filled, is there money in the budget to pay the salaries of the people appointed?
My second question relates to debt and the concerns in the last few days about rising debt and whether interest rates will fall. To what extent should the public services be worried about debt rising and interest rates still being significant while they are taking quite a slice out of public expenditure at all levels of national and local government?
Charlotte Pickles: My honest answer is that I do not know whether they would have allocated that. My working assumption is that there is no pot that is being kept available to fill those 50,000 vacancies, so my guess is not. On top of that, we are expecting the workforce plan that we have been promised—I imagine it will come out shortly after the local elections—which presumably will commit to increasing that workforce further. My assumption is that that has to be new money found.
This is a slightly different comment, but it is probably worth noting that the vacancies are not evenly spread geographically or across the roles in the health service. There is a common view that we have a shortage of doctors. Actually, we have about 35% more hospital doctors today than we had in 2010. If you look at the breakdown of the vacancies, the lion’s share is in community care and mental health and not actually in hospitals, which is where our obsession tends to be. There is a bit of a myth that that is where the shortages are, but—this comes back to the productivity point—we have seen a lot more doctors. That also means that doctors, and particularly consultants and specialists, are at the much more costly end of the NHS pay scales, but the biggest volume of vacancies is in the lower-paid end of the workforce. But no, I do not think there is a pot being kept available for filling those vacancies.
Paul Johnson: It is also worth thinking about scale here. The NHS employs so many people. If there are 50,000 vacancies, that is only a 5% vacancy rate, which is not bad in most organisations. There are additional costs, to the extent that those vacancies are being covered by locums or agency staff.
Charlotte Pickles: Those costs are very high.
Paul Johnson: The most important point that Charlie made is that we have a lot more hospital doctors, twice as many as we had 20 years ago, but no more GPs and people working in the community. We have really skewed towards secondary care and away from primary care over that time.
On the debt interest question, yes, that is a worry. Why are we in this extraordinary position where the tax burden is rising to its highest level in history and borrowing is reasonably significant, yet we seem be talking about not enough money for public services? There are a couple of reasons for that. One is very poor growth, but another is the very high levels of spending on debt interest, which is rising back to its highest level in about 50 or 60 years. That is because so much of the debt is held in forms that are variable: index-linked gilts, which spiked this year because of inflation, and the debt that is held by the Bank of England.
The Treasury and the Debt Management Office have traditionally prided themselves on the fact that we have longer-dated debt than almost any other country, but the fact that nearly half of the debt is now held by the Bank of England means that it is essentially mark-to-market interest rates that you pay on that, and that is one of the things that is squeezing money available for public services.
Q5 Lord Prentis of Leeds: I had a very similar question. What the effects on productivity would be if the jobs were filled in the health service. I will change it slightly to social care, because there are 130,000 jobs, no workforce plan, no career structure, you start on the minimum wage and you stay on it for 20 years, yet we all know that we are an ageing society and we all know about the issues to do with the care of children.
Where will the money come from to deal with the problems in social care? Connected with that, you have talked on a number of occasions about productivity. Everybody talks about improving productivity; it is language that we have known in the health service for maybe the last 20 years. How do you define productivity in healthcare?
Charlotte Pickles: It is a great question, and it is a question for most public services, because there is clearly no simple answer to the question of productivity. We end up saying, ‘Let’s measure inputs and outputs’, which is activity but not necessarily value. We need to be able to measure outcomes, which becomes incredibly difficult to do. At a basic level, the easiest place to measure productivity is a hospital, because you can start thinking about how many nurses and doctors, how much workforce, you have—'This is what I’m putting into the system’—and, at a really basic level, how many hip operations or other elective surgeries you are doing, diagnostics or whatever it might be. What is the activity that you are actually doing, because hospitals, on the whole, are focused on very tangible activities?
The more interesting question is: what does productivity look like in primary care? That becomes very difficult, because how do you measure something that is not happening, which is the outcome that you want to see? We need to shift the conversation and deliver the long-term plan. As Paul was saying, we have seen an even greater focus on hospitals—that is exactly where the money, the power, the decisions and the people are—when the long-term plan specifically states that the ambition is to shift into community and primary. How you measure success there becomes very difficult, not least because, again, how do you measure something not happening, and over what timeframes are you measuring that? I do not have an answer, I am afraid. In hospitals there is an imperfect and basic but important measure: if we have more in hospitals, why are we getting less from them?
Lord Prentis of Leeds: There may well be problems in the hospital system, but there are more staff, and they do not have the shortages that people talk about. Is primary care not functioning properly one reason why the hospitals are in crisis?
Charlotte Pickles: Absolutely, particularly social care.
Lord Prentis of Leeds: Community care services put pressure on the hospitals, so you have to deal with the whole.
Charlotte Pickles: You absolutely do. There is no doubt about that. But there are also big issues in hospitals. We published a report a month or so ago looking at what is going on in A&E. Everybody is very familiar with the fact that our A&E wait-time targets are not quite as bad as they have ever been, because they have marginally improved, but they are not far off. Yet there are almost double the number of emergency doctors in A&Es compared to a decade ago. Demand has increased by just over 20%, so this is not a problem of too many people turning up. Also, we did a proxy for whether people are turning up at A&E with more complex needs and whether that is creating delays in the system. We found that not to be the case, because we used a proxy of conversion from attendance to admission, which would indicate a complex need.
There is nothing wrong with our A&Es. There is no shortage of resources. There will be some implications of staff sickness in certain A&Es, but the problem is patient flow through the hospital. Part of that is patient flow out of the hospital into social care, which is exactly where your system challenge comes in, but part of it is just that hospitals are not being well managed. There is the challenge, for example, that the right information is not available to take someone from this ward to this ward, or someone has literally not booked the transport to take someone home, or a particular doctor has not signed off the required form.
The NHS finally stopped publishing who was responsible for bed days where someone is healthy—well, healthy is probably an exaggeration—and fit to go home but has to stay in a bed. It did a bit of a data dump just before we published our A&E paper, and we think that somewhere in the region of 40% of those days, which is a lot of bed days and would free up capacity and boost productivity, are actually down to NHS, not social care, responsibilities, and a big chunk of that is down to whether those places are being managed effectively.
There is definitely a purist sense of productivity challenge there. In terms of staffing levels in the NHS, we have just heard that the number of doctors has gone hugely up in the last decade or 12 years. The number of GPs is basically stable, which is a huge issue and a big problem. The number of community nurses is slightly lower, as is maternity. The number of managers is significantly lower. I am not talking about people sitting in HQ; I am talking about operational managers. It is a really unpopular thing to say, but we have a real issue in the NHS about the quality and the capacity of really good operational management. Ultimately, if you think about the complexity of a hospital or a trust, or take it to an ICS level, good management will be fundamental. That, I am afraid, not well enough in place at the moment. Sorry, that was a bit of a long-winded answer but hopefully a useful one.
The Chair: That is very interesting.
Lord Prentis of Leeds: What about social care?
Paul Johnson: What was the question on social care? I should start by saying that I completely agree with everything that Charlie has just said. It is absolutely about management, the management of staff. The NHS in many aspects is a very poor employer. You only have to look at the staff survey results and, indeed, at the NHS’s own plan, which basically says, ‘We are a terrible employer’. That is not good for productivity.
My other reflection—this is second hand, since I am a member of the Times Health Commission—one thing that is very striking about what we have heard from those involved in health is there is a sense of a culture that is very risk averse, which also creates a large amount of cost in the system. This is partly to do with getting people out of hospital. Exactly where the responsibility of the hospital and the social care system sits depends to some extent on how those decisions are made. Very often, so I am told, they are made in very cautious manner.
There is clearly a major issue with the social care workforce that is partly associated with a loss of staff as a result of Brexit and partly a result of the very tight labour market at the moment. It is interesting that you mention the minimum wage. That is creating problems for social care and other industries, in the sense there has been a real squeeze in the gap between someone on middle earnings and someone on the minimum wage. The minimal wage has gone up and there is a concertina effect above that, so some organisations and industries are finding it difficult to persuade people to take more responsibility because the net increase in their wage is not terribly much but there can also be little scope for real progress. That is true in social care and elsewhere.
Again, it is not just about wages. It is also about the pressure and the pleasure you can get from work if you only get 15-minute appointments and have to rush between different areas or different homes in order to meet them. Clearly, the workforce will find that much less worth while than in periods past when there was more funding and the capacity to put more real love, as it were, into the work.
Looking more broadly at social care, we are still in a situation where many fewer people are able to access public social care than 15 years ago, not because of the means testing but because of the needs testing, which has become sharper in order to ration what is available. The latest change was in the Autumn Statement, where the reforms, which were due to happen this September, were pushed yet again into the long grass. I do not think it is controversial to say that this has been a major long-term failure of politics in this country for a very long time, and it is hard not to be angry about the way it has happened.
Q6 Lord Porter of Spalding: I have a few points, which is very odd because this is a very depressing subject. No disrespect to our two witnesses, but I am even more depressed now than I was before I started. Do you think it would help if we had 151 officers operating in hospitals, as we do in local government?
The Chair: You might have to explain what that is.
Lord Porter of Spalding: It is the person who stops organisations spending money willy-nilly.
We seem to have complete agreement from every witness we have had that more money is going in and less productivity is being delivered. Matthew Parris wrote in a piece about 20 years ago that, if we are not careful, we will be on the wrong side of the 80:20 inverse with the health service and will just be sticking a load of resource in and hardly getting any benefit out of it at the other end. A 151 officer would prevent people spending money when the business case did not work.
The Chair: Either witness can go first on this, because I am not sure you will have thought about this one.
Paul Johnson: I definitely want you to.
Charlotte Pickles: That is fine.
The Chair: I think this is called thinking aloud.
Charlotte Pickles: This is very much thinking aloud. There are several points here. Do you need smart financial management of public services? Absolutely. Part of the challenge, and why we have ended up where we are, is that in some cases finance directors, or those who are in the finance functions at departmental or trust level, are thinking more about pure cost constraint than what value for money looks like. That has led to some poor decisions, where we have not made the right investments that could have led to quite significant savings down the line. There is something about what we actually mean in public services when we are talking about value for money, which is very different from just cutting spending. There is something there about how we see that.
Clearly in local government there is additional pressure in that they cannot come back cap in hand the way the NHS can and has and does. Foundation hospitals are the obvious example of the attempt to create much firmer budgets.
The positive thing that we are seeing, certainly in NHS England, is that there is a much bigger focus on productivity, efficiency and how the money is spent than we have seen for quite some time, which is promising. This is a huge challenge for integrated care boards. We already know that they are well over budget. We already know that NHS England will expect them to take significant cuts; it will be in the region of 30% for some of them. I would question whether we have the capability in most ICSs—this goes to your point—to do that sort of efficiency drive. Hopefully collectively this will answer your question.
Coming back to where I started, the NHS remains a black hole for funding partly because we have repeatedly failed to deal with the drivers of demand in the system—or, to put it another way, we have repeatedly failed to come up with a serious strategy for prevention and a serious model for primary care going forward. We still have a model for the NHS that was invented 75 years ago, when no one had heard of dementia or diabetes and there were no multimorbidities. What was created was visionary at the time but was designed to fix episodic care needs. If you really wanted to sort out fiscal or financial sustainability in the NHS, you would look at the model and have real conversations about how to reduce demand. We are not doing that seriously at the moment.
Sorry, that was, again, a bit of a roundabout way of answering it.
The Chair: No, it was very interesting.
Lord Porter of Spalding: No, that was a perfect answer.
Paul Johnson: I do not have an enormous amount to add to that. There are a number of issues here. I come back to the point that you are not going to run an efficient service if you do not manage your staff well. If you have a set of staff survey results like the ones you get in the NHS, that means that it is not likely to be an efficient and productive organisation.
There are also questions about the role of care, treatment, diagnostics and so on in hospitals as opposed to outside. Hospitals are where everything happens, but in truth you should do the things that you need to do in hospitals and do other things elsewhere, but we do not have a system like that.
We also need more clarity about how the system sees itself as always the provider and deliverer. Can it also be the partner and commissioner of services and ensure that that happens as efficiently as possible and in a way that makes use of the technological change and innovation that happens in the private sector and elsewhere? We need to be clear that the NHS is there to ensure that people get treatment free at the point of use but not necessarily always to be the organisation that delivers it, although clearly you would need to manage that in a very careful way.
Charlie's last point about managing demand is so important here. The costs of living in a world in which you are managing demand by default, by waiting list, by discouraging people from turning up and so on rather than by being explicit about how you will do it in the long run are potentially very high indeed
I will come back to something Charlie said in answer to an earlier question. It is really worrying that we still have millions of people who did not turn up for treatment during Covid who still have not turned up. In one sense, it is a miracle that the waiting list is as short as it is. We have not had one more person joining the waiting list than we would have expected pre pandemic, which is astonishing. The waiting list has gone up because the treatment has slowed down at the other end. Who knows what will happen as a result of that? This is why Sajid Javid, when he was Health Secretary a couple of years ago, or whenever it was, said that he thought there was a risk of a waiting list of 12 million or 13 million. That was on the basis of only a fraction of those who missed treatment during the pandemic turning up.
Charlotte Pickles: It is really important to note that we are literally rationing care—that is what we are doing with wait lists and the inability to get a GP appointment—so it is not a universal service if people cannot access the care they need. The result is early deaths, disabilities, pain, and people dropping out of the workforce because they can no longer work because of these health needs.
Coming back to the observation that we are being rather depressing here, there are quite a lot of examples internationally of different ways of approaching health that are delivering much better outcomes at lower cost. Part of the challenge is that we have had too much of an exceptionalism view of the NHS and we have been reluctant to look at other countries.
I am not talking about creating a private insurance system. Look at some of the things that are being done in Singapore on digital and public health, in Israel with home hospitalisation and the use of technology, and in Finland, Denmark, Spain. They all have examples of things that we could be doing better to deliver the model that we all know we need, which is greater community care, greater self-management, greater use of technology, which can lead to some of that demand reduction, but we are just not doing it.
There is hope if we are willing to learn from places that are doing things differently and if we accept that that does not mean that we are criticising NHS. The only way to save the model of the NHS is to start changing how we approach it.
Lord Carter of Coles: I have a generic question, which we will get to later at some point.
Q7 Baroness Stedman-Scott: Thank you for your briefing sheets, which are really helpful. I have two questions.
First, notwithstanding the points you raise in the briefing sheet about perhaps £70,000 per job created as a result of trying to get people back to work after health issues and economic inactivity, how effective will the Government's measures on childcare be towards the stated aim of increasing employment and growing the workforce?
Secondly, do you believe there is a way—I am not asking you how—to create a new childcare model? Have we looked at who is making it work around the world? I cite the examples of Australia and Canada.
Charlotte Pickles: You did analysis on childcare, Paul.
Paul Johnson: Yes. I will start but leave the difficult bits there. On the question of how much difference the announcement will make to numbers of people coming into the workforce, it is clear that the large majority of the money spent will go to people who would in any case have been at work. If the purpose is to bring people into the workforce, inevitably the large majority of the money—we think something like five-sixths of it—will be dead weight. It will be great news for people who are spending a lot on childcare, because part of the purpose of this is to relieve the cost of living pressures on families where both parents are already choosing to be in work. Perhaps it is unfair to call it dead weight, but if your only purpose were to bring people into work, something like five-sixths of it would probably be dead weight.
The OBR’s estimates are that something like 70,000 or 80,000—I forget the exact numbers—might be brought into work by this, which is based, broadly speaking, on analysis that we and colleagues did at the IFS. It is very uncertain, but it is probably the right order of magnitude. But that is not a big number in the context of a workforce of 30 million. Overall, this is a tiny number of people. Even in the context of the numbers we have lost since the pandemic, it is a small number and is dwarfed by changes in assumptions about numbers of immigrants, say. That is just to give some sense of scale.
It is part of a longer-term policy by which childcare has become more focused on being a public service for families where both parents are in work, in order to encourage work, rather than 20 years ago when it was focused more on helping those on the lowest incomes and providing high-quality child education. So we have moved very much in that direction over the last 20 years. But, again, this is a relatively limited offer in some sense. This is not going to give you 40 hours a week, 52 weeks a year, or anything like it. It works out at an average of 22 hours a week over a year, which will obviously help a lot, but for mothers who use 22 hours a week, for example, we know that working 22 hours a week is not very helpful, to put it mildly, for long-term development in the labour market, if that is what the purpose is.
That said, this appears to us to be yet another step in the creation of what over the last 20 years has been a whole new leg of the welfare state. Twenty-five years ago, the state really did nothing to provide childcare. It is now, or will be, providing free childcare for a significant amount of time for a large number of children between nine months and school age. That is a substantive change over that period, but, as I say, with a stepping back from doing this in order to support the development of the most disadvantaged children.
Charlotte Pickles: To Paul's point about the objective of childcare—I emphasise the word ‘care’—this is absolutely not a view on the quality of any individual childminder out there, but there is a difference between a babysitting function to allow parents to go out to work, and high-quality, early-years interventions. We have not had that conversation at all.
There is also a question here about whether the overarching aim of government should be to increase the participation rate of parents by 60,000, or might we want to think about the fact that there is quite a lot of evidence showing that, in those early years, having a parent at home can have quite a big impact on the development of that child? Again, thinking about short-term/long-term value from taxpayers’ pounds, is this going to be the best value?
There is also definitely a question about what families want for their children and their development. Setting aside those perhaps not philosophical but bigger-page questions, will it achieve its goals? Paul is the expert on how solid the behavioural assumptions are. We would say that they are probably good, but you would not want to stake your lunch on it. We will see if there do turn out to be 60,000 in work, but there are clearly massive challenges here in achieving that. Where is the workforce coming from? We have talked about workforce in social care, in the NHS, and more broadly in the public sector, but if you talk to people in the industry they will tell you that they are struggling to recruit.
There are some upfront incentives in the Budget such as grants, which is good, and hopefully that will make a difference, but this is not a well-paid industry either. If you are self-employed and earning less hourly than the minimum wage, and you can go to Aldi or Lidl or another supermarket and earn significantly more, why would you not do that? Again, this falls into the category of how we think about the workforce and whether we have a workforce that can deliver the ambition that we are setting out here in policy terms.
Then, of course, there is also a question about whether the increase in the hourly rate of payment will be sufficient to cover the costs. You might say, ‘The sector would say that it needs more money, wouldn’t it?’ But there probably is something in whether this is sufficient to meet the demand that you are potentially creating. The test of all policy is surely whether it is deliverable, and I am not sure we have answered all those questions as to whether this one is. There are some quite big issues that we would need to think about.
The one thing that was in the Budget which I think is fantastic is pulling forward the childcare coverage for Universal Credit claimants. Benefit claimants now getting that money up front rather than in arrears is quite a gamechanger and will make a big difference; it is really positive. Also, the amount you can claim in universal credit has been uprated by CPI from when it was frozen, so you can now get hundreds of pounds more in UC.
The bit that is targeted at low-income families in the means-tested system is really positive, and hopefully we will see a shift of people into work from that, but obviously that is a much smaller element than the much larger amount of money that will those who are already in work. I do not have children, but I would be slightly more sympathetic to saying there probably are middle-income families where a woman is working basically to pay childcare costs, so there is some value in recognising the system is fundamentally broken in terms of costs, which I think you would say as well, Paul.
Paul Johnson: That is essentially what I was saying.
Charlotte Pickles: Exactly. It comes back to your purpose. What are you trying to achieve with this? There are questions to be asked there too, and internationally. The childcare model is much like the social care model. It is broken. It does not work. We are paying the workforce peanuts to do really important caring jobs. We cannot seem to work out a system that would enable you to have higher wages in these really vital roles, yet the private market is not stepping up to come up with an alternative solution. I have not worked on childcare models around the world, but if there are examples where countries are doing it better, of course we should look at them and see whether we can improve the system, because it is not really working. It is really expensive. We spend a lot on childcare—people forget that in this country—for far worse outcomes, much like in a lot of our health.
Baroness Stedman-Scott: Thank you for that. You have people who are paying more for their childcare than they are for their mortgage.
Charlotte Pickles: Pregnant Then Screwed is the campaign/pressure group that estimates that about 17% of people, women in particular, fall out of the labour market because of the cost.
Baroness Stedman-Scott: It seems that the motivation for this childcare push, much as it is welcome for universal credit recipients, is to get people into the workforce.
Paul Johnson: It might be. It is interesting to look past the rhetoric, because most of the money will go to making people with children better off. The reality is that is a significant part, probably the bigger part, of the purpose of this.
It is worth making two extra points. As Charlie said, after this we will be spending a lot of public money on childcare in a way that just does not seem very effective. We need to be thinking about the model for payment and delivery.
There is another thing to bear in mind. There are lots of families paying a lot of money for childcare—I was in this position 20 years ago—but the median spending on childcare for families with children under five is zero. So most families are not spending a lot, partly because it is so expensive that they are deciding not to do it. It is a relatively small minority of families who are spending a very large amount on childcare. The cost may be pushing others away from spending money on childcare. Even given the availability at the moment, quite a lot of families are not using the maximum available. Some of that may be because there are other costs involved. We need to keep those facts in mind. The average family is not spending a lot on childcare, as I say, but that may be because it is so expensive that they feel pushed out. The average family is not spending that, but 20% or whatever are spending a very large amount.
The Chair: Lord Shipley, let us introduce the next topic.
Q8 Lord Shipley: On the same day as the Budget, the health and disability White Paper was published. You both made comments around that time about the work capability assessment issues. Could you say a bit about what impact the changes to capability assessments will have on the people who receive health-related benefits and on their participation in the labour market? What will the impact be on the labour market as well as on them personally?
Paul Johnson: I do not know the answer. This is a very—to use a ‘Yes, Minister’-ish term—courageous policy, in the positive sense as well as in the sense that it is quite risky. In the positive sense, the idea is essentially to move to a single disability payment that is not related to work capability and which looks a bit like the way a Personal Independence Payment works at the moment. That is positive, because at the moment you get a significant increase in your universal credit payment if you get this work incapacity element, so there is an incentive for you to show that you cannot work. We do not have anything like positive, strong evidence on this, but that may be taking some people further from the labour market than we would like.
I say that it is risky for two reasons. One is that if you look at the numbers of people on incapacity and disability benefits over time, it is that Personal Independence Payment group that has gone ever upwards. We are moving all of it into that group, which has been moving ever upwards. There is a risk that more people will move into that category.
The other risk is that some people currently receiving the work incapacity element of universal credit will apply for the Personal Independence Payment. Charlie probably remembers the numbers. Significant numbers of those who are not currently on PIP will fail that assessment. Then you will be looking at a world in which a significant number of people who were receiving high levels of universal credit because they have some form of sickness or disability are then taken off that. So either you will risk spending more or you risk taking people off benefits to which they have hitherto been entitled.
The thinking behind it is entirely understandable; it is because of this world in which we are basically asking people to declare themselves unable to work in order to get more money.
Charlotte Pickles: I will declare an interest in that we wrote a paper, called Working Welfare, back in 2016 recommending almost exactly this policy, and I would recommend that everybody read it. Paul has articulated the big issue with the work capability assessment, which is that the objective is to fail this assessment, to prove that you cannot work. By the way, doing that is totally rational behaviour. However, if you would quite like to work and would perhaps like to try doing a job, you are terrified of trying it, because what if it does not work out? You have just proved that you had some capacity and now you cannot get back on the benefit.
The whole thing builds in what I would call very perverse incentives around behaviours. I will not give a full history lesson—I could be very geeky on this topic—but the WCA and employment support allowance, the original benefit that it was applied to, was invented by new Labour. It was John Hutton at the time who said, ‘You are more likely to die or retire on incapacity benefit’—its predecessor benefit—'than to ever move into work once you are on IB’.
The point of creating the employment support allowance with this assessment was to try to prevent that. The assumption was that a million people would come off incapacity benefit as a result of introducing this. That did not happen because it is designed not to incentivise people to move into work; it is designed to incentivise people to show that they cannot work at all. So the principle of removing this is incredibly positive.
On the question about what that could do for labour market participation, Paul is right that we really do not know, because this is quite pioneering, globally. This is one of the few cases where we are trying to do something ahead of the curve, because so many countries around the world have seen the same increase in disability benefit claims or caseloads. We do not know, but this certainly removes one of the significant barriers to being able to try work that is in place at the moment.
The second thing worth thinking about here is that it will work only if there are the right support services in place to enable people who have a health condition or a disability to move closer to work, to move into work, and then to sustain work. We are not in a position yet where we have the right support services.
On the risks, which again Paul identified, there are probably two main unanswered questions in the White Paper. One is how you apply conditionality, because at the moment conditionality is dependent on the category you are put in. If you are in a category that says that you failed the work capability assessment, not only do you get this additional amount of money, but it is also essentially, ‘Bye, bye. We’re not going to require anything of you anymore. We’re not going to provide anything for you anymore’. What happens if you do not have an indicator of whether you will start requiring people to engage with a work coach or a support programme or some type of service has not been decided, and obviously you get into quite tricky territory of client conditionality with people who have a health condition.
The other thing is the question of notional losers. It is important to say ‘notional losers’ here, because the working assumption is that there will be transitional protection, as there was when universal credit was introduced. In theory, no one who is currently in receipt of these benefits is likely to lose out on any money. The question is about new people coming through. Well done to DWP, which has given itself a very long period of time to get this right. It has obviously learned from universal credit and built in a good timeframe. The majority of people are unlikely to be eligible for PIP, which is about extra costs. If they do not have extra costs relating to their disability or health condition, they will not get PIP.
The big increase in the caseload of UC or ESA has been in mental health. About half of the caseload now is mental health on these benefits, and the lion's share of that is a category called mental and behavioural disorders, most of which are depression and anxiety. Most people do not have extra costs because they have depression or anxiety. They are also conditions that, with the right support, you very much should be able to live with or even overcome.
That is where you get into the question of people who will not get the additional money because they will not be eligible for PIP in future because they do not have extra costs, which is the purpose of that benefit. How are we going to support those people to manage depression, anxiety, the mental health disorder they have in order to be able to be in work and then to sustain work? That is the really interesting question. If we can nail that, we can have a huge impact on disability employment.
Q9 Lord Carter of Coles: On the quantity of labour that is available in the market, is there a model for the whole economy? You make the point that there are 70,000 jobs coming in if we get the childcare right and then 245,000 net migration a year. Are we going to run out of labour, particularly in public services, where it impacts low wages?
Paul Johnson: In the end, the economy will come to some sort of equilibrium. Do not forget that, in other parts of the woods, I get asked whether we will run out of jobs because of AI and so on. We will get to an equilibrium where we are neither running out of jobs nor running out of labour, because companies will have to increase the wages in areas where those jobs are really necessary or the sectors will dwindle. That may mean that the structure of the economy changes. If we cannot bring in migrant labour to pick strawberries or what have you, we will have no strawberry farmers. It will come into equilibrium in that way, rather than by bringing more people in to pick the strawberries. I have nothing against strawberry growers.
Another way of asking that sort of question, or thinking about the counterfactual, is asking what would have happened had we not had the several million additional immigrants over the period from the year 2000, when we had a very different economy to the economy we have at the moment. I do not know in what way it would be different, but we would not be sitting here thinking, ‘My God, we’re 5 million workers short’. We would have a different set of services and goods being produced and a different structure of our economy. That is not a particularly helpful answer, but economic models are just not very good at this.
Lord Carter of Coles: Would it be less prosperous, then, if we want growth?
Paul Johnson: Most of the evidence suggests that immigration clearly increases the overall size of the economy and the tax base, particularly in a world in which we have an ageing population. It increases the tax base for paying for the older population, and to a remarkable degree. In the last 50 years, we have had no increase in the fraction of people over pension age relative to under pension age. Part of that has do with the increase in pension age, but part of it has do with large numbers of people coming into the country.
What it does for average productivity per worker is much less clear. Had we not had this additional labour, some of them often working in relatively low-paid jobs, we might have been forced into higher levels of capital investment and productivity. That is speculation. The truth is that most of the economic modelling of this kind of thing is done off the basis of marginal changes or over short run. It is really hard to determine what the long run impact on the economic equilibrium is of that kind of thing.
In the short run, we clearly are running out of labour in areas like social care at the moment, because we have had a sudden change in the numbers of people coming in, from other countries in particular, and a sudden change in the demand for labour from other parts of the economy. That has been very hard for a service that is constrained by public spending to adjust to. In other parts of the economy, in the private sector, you will get adjustments through changing the way things are done, increasing wages or reducing services in a way that does not look quite the same as when you effectively have a public service trying to deliver within a fixed budget. That is different from what you see in the private sector.
Lord Carter of Coles: So there will be continued pressure for the foreseeable future.
Charlotte Pickles: There is an assumption that to drive greater prosperity we must have more people.
Lord Carter of Coles: It is a question, not an assumption.
Charlotte Pickles: No, exactly. There has historically been an assumption there, but part of the challenge, as Paul is saying, is that if you compare us internationally, both in capital investment and in investment in skills, we do not fare very well. We have not really been investing in human capital, whether physical or technology, in the way we should have been. There are all sorts of brilliant, tiny examples. If you go to a supermarket on the continent, most of the pricing on the shelves will be electronic, whereas if you go to a supermarket here, some has to go round replacing pieces of paper.
Part of the question is how we get more from the people we do have. It is stating the blindingly obvious, but part of the solution is about skills and investment, both by government and by businesses that have been underinvesting in skills, and in technology. We have touched on that, whether it is social care, health or any of these things, we could be doing better even with the workforce we have, which is not to say that we do not still need to be thinking about what that workforce will look like going forward.
Lord Carter of Coles: Just one more thing. I want to go back to your NHS example. You have systematically pointed out that the NHS has significant resources, but you identify a management issue. That seems to be true of everything. Do we as a nation, particularly in the NHS, have a real management issue with the ability to use the resources well?
Charlotte Pickles: We definitely do in the NHS, and we have been looking at that. We do not look at the economy more broadly—that is probably something that Paul could answer—but certainly in public services there are issues with how we deploy our people, how we do flows through any kind of process, our ability to identify opportunities for savings or to be more efficient. That all comes back to how you are managing a service. I would definitely say that we do in public services.
Paul Johnson: More broadly, there is very good evidence that the quality of management in a country and an organisation is important for the productivity and performance of that organisation. Former colleagues of mine, John Van Reenen and Nick Bloom, have done studies across the world and shown very strong causal relationships between management quality and success and the productivity of organisations in the public and the private sectors. It is important to focus on both economically and for the provision of public services.
Q10 Lord Porter of Spalding: Just on that productivity line, most people know that if you do not invest in skills or mechanisation, you either import workers or export jobs. One or the other has to happen with that workflow. I do not really understand the maths sitting behind it. If somebody was able to do a Saturday morning—obviously you would want to incentivise that by making it tax free, because the Chancellor never had his hands on that money in the first place, so you would not take it off of them on the Saturday—were they to do an extra four hours a week to give them the same value as inflation would take off their wages, does that count as an increase in productivity or is that just the same as less work for more workers?
Paul Johnson: It depends how you are measuring productivity. If you are measuring it as productivity per worker, then it would increase productivity because you have the same number of workers but doing more hours. If you do it as productivity per hour, it does not make any difference to productivity. Actually, you should probably think about it in terms of productivity per hour, because that is the actual amount of effort being put in.
When you are looking at international comparisons, what you are looking at really matters. A lot of hours are being worked in the UK relative to some other countries and, increasingly relative to other countries, quite high numbers of people in work. If you look at the productivity per person of working age, we do not look as bad as we do in terms of productivity per hour worked, because compared with countries like France the average number of hours worked by people between the ages of 18 and 65 is higher, but they produce less per hour.
Lord Porter of Spalding: Mechanisation will be the only way then. If we are aspiring to reach the level of productivity of a place like France, the only way we can do that is by increasing the number of people who invest in machines that end up decreasing the number of people working.
Paul Johnson: You need a combination: education, skills, and investment in all sorts of things, not just mechanisation. You need investment in processes, for example.
Lord Porter of Spalding: I am a brick layer by trade. Telling me to have a degree will not make me lay more bricks. The degree is the thing that stopped me having to lay bricks. If I want somebody to lay bricks, they do not need more education; they need more hours in which to work faster.
Charlotte Pickles: You might have people who are more skilled at bricklaying than others. This may not be a good example, but you would not necessarily need a robot to start laying the bricks—to take the example to the extreme. I am probably clutching at straws with the brick example in particular, but there may be new methods that you can use. Upskilling does not necessarily mean getting a degree or even thinking of it in an academic sense. Do we have people who are skilled for the roles we want them to do, and how are we deploying those skills in the most effective and efficient way? There are still questions over that before you even get to automating things—using technology to speed up processes and all that sort of stuff. It is probably a combination of those two things.
The Chair: I am conscious that we have already gone two minutes over the time. I am depriving Lord Willis and Lord Prentis of another question, but it has been a very wide-ranging discussion and I hope that the issues you might have raised have been answered in the discussion so far. We are very grateful to you both. I have certainly increased my understanding of what is quite a complex issue. You have delivered it in a way that even I find easy to understand, and it is not my strongest suit. Thank you very much for your time and the contribution you have made to the committee.
