After a century of tackling poverty one thing’s for sure: government must play a key role

New Labour’s strategy to eradicate poverty was undoubtedly flawed. But the coalition government’s belief that state intervention was the problem could be catastrophic, warns Paul Hackett

Jarrow marchers head to London in protest against mass unemployment and extreme poverty in 1936 – a symbolic gesture that was largely ignored by the government of the time.

The coalition government has repeatedly pledged to combat poverty and improve relative social mobility. Straight after the election David Cameron told parliament that he ‘absolutely accepts that we have got to do more to help people to get from the very bottom to the very top’. Such promises may come back to haunt him.

While few would dispute that the backdrop of fiscal uncertainty and low growth makes it harder for government, all the evidence suggests that the policies adopted by the coalition risk taking the country back to the 1980s which witnessed a sharp rise in both poverty and inequality.

At the heart of the coalition’s anti-poverty policies is a belief that the state is more part of the problem than the solution. The new Conservative-inspired orthodoxy is rooted in the argument that New Labour failed those in poverty because it made people too reliant on the public sector and state transfers, such as housing and family benefits.

The system was labelled too generous and the ensuing debate on welfare reform has quickly became a moral crusade around the need to actively discriminate between the ‘deserving’ and ‘undeserving poor’. The experience that Whitehall has built up over decades of tackling the structural causes of poverty have been largely overlooked in favour of rolling back the state and promoting an under-resourced Big Society.

Leaving aside the populism of ‘bashing benefit cheats’ in hard times and arcane arguments by Nick Clegg over definitions of relative poverty, is there any truth in the coalition’s claim that reducing the ‘nanny state’ will help combat poverty and improve social mobility? Did New Labour really create a more impoverished and divided society?

The Smith Institute’s recent study on the lessons of past anti-poverty policies – From the Poor Law to Welfare to Work – shows that without state interventions poverty would have certainly been much worse. Indeed, few would dispute the positive impact of Beveridge’s welfare reforms or the benefits of sustained public investment in housing, health and education. However, post-war experience shows that non-state institutions and arrangements (e.g. trade unions, collective bargaining, fair wage regulations, and the voluntary sector) also played a significant role in combating poverty.

These agencies and policies of so-called ‘pre-distribution’ (the way in which the market – notably the labour market – distributes its rewards before the government gets involved) were particularly effective in reducing poverty and income inequality in the post-war period. It is of course much easier for the state to implement effective anti-poverty policies if action has already been taken by others to achieve a more equitable initial distribution of market incomes. If real wages, for example, are depressed and employers are encouraged to rely more on low pay, then the state carries a heavier burden. As we have seen recently, real wages go down and the in-work benefit bill rises.

The impressive reduction in poverty and inequality in the period between 1945 and 1979 was a result of mutually reinforcing policies: redistributive actions by the state (a comprehensive welfare system, improved systems of social security etc.); policies for full employment; and pre-distribution arrangements (e.g. strong labour-market institutions which ensured decent levels of pay). These three policy pillars, which were held together by a political consensus and a publicly endorsed ‘social contract’, were critical to reducing poverty and inequality.

The emergence of Thatcherism in the late 1970s marked the end of this ‘golden era’ of social progress. After 35 years of steady improvement both poverty and inequality worsened. The fall in the value of real benefits and high unemployment were partly responsible, but the evidence suggests that the deliberate dismantling of the institutions of pre-distribution (notably attacks on trade unions and revocation of fair wage and employment protection) had a major effect. The cake got bigger, but the rewards were more unevenly distributed.

The emergence of ‘un-regulated capitalism’ and the growing imbalance between ever-stronger forces of capital and ever-weaker forces of labour led to a steady and seemingly unchallengeable rise in in-work poverty. Not only did the wage gap between the top and the bottom get inexorably wider, but real wage growth began to consistently lag behind productivity. This imbalance remains a drag on our economic prospects and undermines efforts to create a fairer society.

The New Labour era saw a reassertion of the public commitment to the welfare state, with new anti-poverty policies built around increases in social transfers, such as tax credits. Child and pensioner poverty were reduced back to levels in the mid-1980s and unemployment fell sharply as the economy improved, until the recent financial crisis. The claim that poverty rates worsened is unfounded, and it is likely that both poverty and inequality would have been very much worse without Labour’s reforms.

However, the delivery of Labour’s anti-poverty ambitions was hampered by a reluctance to intervene in the labour market or support collectivism in the workplace to reduce employers’ reliance on low pay. The national minimum wage helped improve the incomes of the very low paid, but income inequality still worsened and in-work poverty continued to place a heavy strain on public resources (half the people on housing benefit, for example, are now in work or pensioners).

New Labour had a political blind spot on the influence of ‘pre-distribution’ policies, which in part reflects its ambiguous relationship with the trade union movement and its reluctance to confront corporate power. The furore over high pay and the surge in in-work poverty due to low pay and employment casualisation has led to shift in Labour’s thinking, with Ed Miliband backing the Living Wage and promising to tackle ‘irresponsible capitalism’.

Whether this amounts to a return of an updated ‘social contract’ centred on the three policy pillars that proved so successful in the post-war period remains to be seen. As the Smith Institute report concludes, other comparable countries with less poverty and inequality have both stronger welfare states and stronger labour-market-institutions.

Poverty not only shames modern Britain, but undermines social mobility and makes our economy and civic society weaker. Government has its part to play and state interventions – as history shows – can make all the difference. But evidence from a century of social policy shows that non-state agencies and arrangements also play a major role in reducing poverty.