Economics: Equality fades as Labour edges to the centre

THE LATE John Smith gave the Commission on Social Justice a two-year mission to 'think the unthinkable' about the future of the Welfare State. Its conclusions, alas, fall largely into two categories: the unoriginal and the unworkable.

The Commission was supposed to provide the Labour Party with a distinctive and attractive vision of a modern Welfare State for which it could fight.

But while Sir Gordon Borrie's great and good have certainly managed to come up with a big book, they have failed to come up with a big idea - or at any rate a new one. The tone of their report is virtually indistinguishable from the Mais lecture on markets and the Welfare State delivered by Kenneth Clarke in May.

Far from breaking new ground, the Commission has simply advanced the gradual convergence of the centre-right and centre-left in British politics that has been under way since the mid-1980s. Mr Clarke's wing of the Tory party and Labour's modernisers are both advocating so-called 'social market' economics. The defining battleline on economics and the Welfare State no longer divides the Conservatives from Labour, but social marketeers from the unreconstructed free-market right.

The free marketeers believe the Welfare State should be a minimal safety net. They argue that anything more generous will damage economic performance by weakening work incentives. Social marketeers, instead, see the Welfare State as an important way of complementing and sustaining a market economy.

They believe the Welfare State is needed to reassure people that they need not resist the constant and unsettling change that is unavoidable if a market economy is to stay competitive.

The extent of common ground between the Tory left and 'New Labour' is remarkable. The Commission argues that people should be able to use the money spent on their benefits as a subsidy with which to attract potential employers; the Government is already running a pilot scheme. The Commission urges that Unemployment Benefit, Income Support and Family Credit be reformed to encourage part-time work and to encourage people off welfare and into work; the Chancellor has already signalled that this will be a key theme in next month's Budget. And the Commission argues that the married couple's tax allowance and mortgage interest tax relief should be phased out gradually; this is already happening.

Much praise has also been lavished on the Commission's proposal for a minimum guaranteed pension, with a universal second pension on top. But this is not as radical as its proponents claim. It is equivalent to raising Income Support for pensioners and tinkering at the edges with the existing earnings-related pension scheme.

In some areas, however, the Commission should be congratulated for going further than either Labour's modernisers or the Tory left, notably in drawing attention to the scandalous middle-class con trick of state funding for higher education. Why should taxpayers cough up for the living costs and tuition fees of a privileged minority of the population, most of whom will go on to earn more than their fellow citizens in later life?

But the Commission has also come up with some real duds. Its proposal that unions and employers meet to decide a voluntary norm for pay increases reads like a draft policy document rejected in the early days of the SDP. The idea that pay bargaining should be synchronised at one time of the year is just as nave. It threatens a highly politicised wage round that might even have the potential to bring down a government.

Some of the report's detailed proposals for the tax and social security system are equally muddle-headed. Plans to extend Housing Benefit to cover the mortgage interest payments of low earners would cost a fortune and fail to target effectively those individuals and families most in need.

It was inevitable that a report written by committee and aimed at audiences both inside and outside the Labour Party would vary enormously in the quality and practicality of its proposals. The Borrie Report will not be cited in future decades as the Beveridge Report was. But it may still have lasting historical significance as the document in which the left formally surrendered in the battle against inequality of income and wealth.

The Commission dutifully describes the widening in the gap between rich and poor that has taken place over the last 15 years. But it does so in the tone of anguished resignation one might expect to hear at an Islington dining table, not the angry determination of a popular movement, confident that the goal of greater equality can and should be achieved.

The changes in the world economy are naturally forcing the rich and poor further apart in industrialised economies. New technology means that employers are increasingly willing to pay a premium for educated and flexible workers. And competition from low-wage rivals overseas means less demand for the unskilled.

Both the Borrie Report and Mr Clarke's Mais lecture capitulate in the face of these trends. They argue that inequality can only really be addressed by helping people to move from low to high-paid jobs through education and training. But this strategy is also available to the newly industrialising nations. There is good evidence that spending on education is much more productive in developing countries than in those that already spend a lot.

The economic pressure towards greater inequality has been exacerbated here by tax and benefit policies implemented while the free-market right was in the ascendant. Mr Clarke would hardly undo these measures, but even the left is ducking the challenge. The closest the Opposition gets to espousing a radical redistribution of wealth nowadays is to enclose Littlewoods Pools coupons with copies of Labour Party News.

Having conceded the high ground on equality, the left may never be in a position to get it back. The political debate over welfare in Britain may increasingly resemble that in the United States, where Democrats and Republicans vie to be tougher than thou. Dave McCurdy, a Democrat running for the Senate in Oklahoma, is promising 'no check' for those who refuse jobs or training, 'no check' for having more children, and 'no check' for lacking full citizenship. It is a refrain that before long might easily trip from the tongue of Mr Blair.

No mainstream politician now believes that the electorate will pay to narrow the income divide. So the best we can hope for is a change in the underlying economic pressures towards inequality. This has happened before. Inequality worsened when firms replaced workers with machinery during the Industrial Revolution, but the gap between rich and poor narrowed again between the 1920s and 1970s.

The experience of the Industrial Revolution also calls into question whether spending more on conventional education is the best approach in the meantime. Weavers in the early 19th century enjoyed soaring incomes when spinning was mechanised, only to lose out when technology reached their own craft. Paul Krugman, the US economist, fears the same may happen in what we now regard as highly skilled occupations. In 20 years it may be tax lawyers who are obsolete and gardeners and cleaners who are really in demand.