The British welfare state is changing. Until 1997, Britain sat alongside other Anglo-Saxon countries within the family of "liberal" welfare states of Gosta Esping-Anderson's famous typology. These welfare regimes, typical of countries such as the US, New Zealand and Australia, favour individualism and markets, with limited social protection (more limited in some than others). Social security payments are focused on those most in need and are aimed at preventing abject poverty rather than providing a decent standard of living. Flexible, lightly regulated labour markets create a large low-wage service sector. This has enabled them to have high employment rates, low taxation and balanced budgets. But these achievements have come at the price of high levels of poverty and inequality.
The last eight years have seen Britain evolving away from this model, retaining its best features while adopting some key ideas from Scandinavian countries. In these social democratic welfare states, social security payments are generous and aimed at ensuring a decent standard of living, and come with obligations to find work or retrain. Many services, such as early years childcare, are provided universally by the state. This requires far higher tax and state spending than in Britain but allows the Nordic countries to combine high male and female employment rates with low levels of inequality and poverty.
By borrowing from the social democratic welfare state, Britain has started to occupy a new position in the typology of welfare states—what might be called an "Anglo-social" model. This model is a hybrid of the economic performance and flexibility of liberal welfare states and the social protection and equality of Scandinavian countries.
The most important change has been a Scandinavian focus on work as the route out of poverty. In practice it has meant greater conditionality—requiring welfare recipients to fulfil obligations like attending a work interview or undertaking training. Jobcentre Plus has learned from such schemes in Norway and Sweden. (Reforming incapacity benefit could be a controversial issue in the next parliament if more conditionality is introduced.)
This emphasis on the importance of work has led to a new architecture of tax credits, drawn this time from the US and some elements of old Tory policy but made broader and more generous. These boost the incomes of millions of people, encouraging them to remain in employment by maximising the financial difference between work and unemployment. They are means-tested and expensive to administer. But they have been important in supporting Britain's high employment rate and recent figures have shown that they have substantially reduced poverty and pegged back inequality in recent years.
A second strand of reform has been to re-regulate some aspects of the labour market. The flexible labour market remains an asset—it boosts employment and makes it easier to integrate migrants than in many other European countries. But it is also a reason why levels of poverty and inequality are relatively high. In the absence of strong trade unions, pay inequalities are large and greater strain has to be taken by the tax and benefit system.
Despite flirting with the idea in opposition, Labour was never in a position to introduce the institutions of Rhineland capitalism. By contrast, the Anglo-social model goes with the grain of British institutions and owes little to the "corporatist" or stakeholder model of France and Germany. Public service employment in these states is quite low and extensive labour market regulation and high payroll taxes impede private sector employment.
But other policies have been used to tackle the worst features of a flexible labour market. The minimum wage has put a floor under wages, investment in education and training has increased the stock of skills in the economy and new rights to paid parental leave have been introduced. Less has been reformed at the top end of the labour market, where corporate remuneration remains much closer to American practice than to continental Europe.
A third and crucial strand has been to substantially increase spending on public services, perhaps the defining feature of the last parliament. Labour has managed to shift fundamentally the terms of political debate in this area. And funding through general taxation rather than insurance schemes ensures fewer disincentives to job creation.
A fourth and more recent development has been the introduction of the child trust fund, a universal endowment paid to all newborns. This is a small but potentially important break from the means-tested approach and signals the emergence of a new strand of asset-based welfare in Britain, combining an Anglo-Saxon emphasis on individual capital stakes with social democratic universalism.
Put together, these transformations do justify a new Anglo-social label. Child and pensioner poverty have fallen sharply. Inequality, which has been at historically high levels since the late 1980s, has finally started to fall, and the poorest are beginning to see their incomes grow fastest. Employment is at its highest ever level, despite marked regional differences.
But inequality and economic inactivity remain high; child poverty will take more resources to tackle over the coming decade; and social mobility seems to have stalled. These continuing challenges must now be faced in the light of increasing cost pressures facing all welfare states. Yet in many ways the Anglo-social model is well placed to tackle them and to achieve a fairer society. Why is this?
Productivity increases in manufacturing, technological change and, to some extent, globalisation, place pressure on developed economies to shift towards service-based employment. This creates problems for many manufacturing workers whose specialised skills are often of limited use in these new roles. But Britain underwent a dramatic manufacturing shake-out in the 1980s and 1990s and is now one of the most service-based economies in the world. It will face less difficulty in this area than many other countries—despite the recent trauma at Rover.
Existing pledges also create pressures, such as the government's commitment to end child poverty by 2020 and increase NHS spending from 5.5 per cent of GDP in 1996-97 to 7.9 per cent in 2007-08, but demographic change is also important. Ageing societies are placing greater strain on public finances. However, Britain's population is ageing relatively slowly and the cost of state pensions fell after the Tories pegged them to prices rather than earnings. Although this creates further problems in tackling pensioner poverty, the situation is worse in other countries, particularly Italy and Japan.
A third source of pressure is constantly increasing expectations. People naturally make comparisons with the private sector, which continues to provide increasingly personal services. Furthermore, as people become richer, they demand more from state provision in education and healthcare. While medical advances expand the range of treatments available, the cost of meeting these expectations also rises.
Spending on public services will need to stay high to meet expectations and promote social equity. Relatively high levels of inequality arising from the labour market require increased spending on benefits for the poorest to keep up. Big investments are needed just to stand still. Moreover, there is little possibility of much deeper efficiency gains in state spending.
Britain is well placed to meet these challenges. Its mix of high employment, economic dynamism, public services funded through general taxation and an active welfare state, are strong foundations upon which to build a fairer society. But if the potential of this emerging Anglo-social model is to be achieved, Labour needs to make some strategic decisions in a third term. It should continue to map out a path towards a comprehensive early years education and childcare programme. It should better assist adults to improve their skills and make progress from low skill to better jobs. And it should make further deep inroads into child and pensioner poverty. All of this costs money. But it would leave Britain fairer for decades to come.
