Below is the text of the speech made by Iain Duncan Smith, the Work and Pensions Secretary, to the British Venture Capital Association on 12th October 2011.
It is a pleasure to be here tonight.
I know the economy is on everyone’s minds at the moment.
No more so than in this audience.
Today’s jobs figures are a sobering reminder of the challenge we face.
But before we discuss where the economy is going, I’d like to reflect on where we have come from.
Boom and bust
In the decade to 2008 we saw an uninterrupted period of growth, with employment levels up by over 2 million.
Boom and bust had been eradicated – or so we were told…
Of course we all know what happened when the bubble burst.
But we cannot say that the warning signs weren’t there.
Personal debt had boomed in the years leading up to the recession.
The Centre for Social Justice warned that levels of personal debt were unsustainable in a report published that same year.
Not long after, Northern Rock went to the wall.
And it wasn’t just the banks that were overstretched – it was Governments too.
In fact, the UK had the highest structural deficit of any country in the G7 before the recession started.
We were in 2010 that our priority was dealing with this damaging deficit.
And this was a plan that got widespread support – from the OECD, to the IMF, to the CBI.
It also received the support of the Credit Ratings Agencies, with Standard and Poors taking the UK’s Triple A rating off negative watch.
This last step was crucial, and I think we underestimate it at our peril.
While countries across Europe are facing soaring interest rates we have managed to maintain rates comparable to Germany’s, thanks to our consistency in holding the course.
If we deviated from our plan – let’s say we spent just a few billion pounds more – we would face the serious risk of this extra spending being wiped out by billions of pounds more in higher interest costs for families, businesses, and taxpayers.
You simply cannot borrow your way out of a debt crisis.
But this does not mean we can be complacent – by any means.
Today’s jobs figures serve as a sobering reminder that while we can protect our own interest rates, we cannot so easily protect against the international economic crisis.
We are riding out a storm at the moment, but it is important that we stay the course.
And it is also important that we do everything we can to stimulate growth.
That doesn’t mean breaking our deficit reduction targets.
It means reducing regulation, freeing up the economy, and getting money moving around the system once more.
So we’re cutting taxes for businesses, reducing corporation tax to the lowest rate in the G7 by 2014.
We’re increasing capital spending on roads and railways, even at a time of deficit reduction.
And we’ve struck a deal with the big high street lenders to increase lending to small businesses by 15 per cent this year.
We have also agreed to the Bank of England undertaking another round of Quantitative Easing…
…and, as the Chancellor confirmed last week, we are looking at whether there is more we can do to get money directly to businesses in the form of Credit Easing.
Private equity and venture capital has an important role to play in this growth story.
I understand that, just last year, private equity and venture capital between them invested some £1.75 billion in high technology companies in the UK.
That’s real money, in the real economy, pushing the technological frontier and promoting growth.
But, for me, there is another side to the growth story.
In my role at the Department for Work and Pensions I’m responsible for two of the groups that really matter here: workers and pensioners.
Take pensioners: a significant chunk of our economy is devoted to retirement spending, and so it can have a huge impact.
Our first priority was to secure the position of today’s pensioners.
But we also knew that we needed to reform for the future.
We had a pension system that was increasingly unfunded, and the trend was only set to get worse as life expectancy increased, year on year.
So we were clear that if we were not going to fall back into a debt crisis of a different kind – with the resultant effects on growth – we would need to get the house back in order.
For me this is about asking what kind of society we want for the next generation.
We were heading for one marked by a triple whammy, with our children footing the bill for a crippling national debt at the same time as helping to pay for their parents’ retirement and having to save for their own.
That’s why we are taking the tough decision to ask people to work longer before they receive their State Pension.
And it’s why we are encouraging people to do more to save for their own retirement though automatic enrolment into pension schemes.
Some people have claimed that automatic enrolment is wrong-headed because it will be a drag on growth.
I reject that entirely.
Analysis suggests that automatic enrolment will actually have a positive impact on the economy.
Pension contributions are not somehow lost to the economy.
They are invested in gilts, corporate bonds and equities, supporting increased investment and economic growth.
So what about the other side I mentioned – the country’s workers?
Britain still has some of the best workers in the world.
But we are increasingly a society divided, because we also have a whole group of people who are cut adrift from the labour market – even from the rest of society itself.
August’s riots forced us – as a society – to take a good hard look at ourselves, and to ask why we had allowed such explosive social problems to become ghettoised.
For these problems have been with us for some time, and were not simply a product of the recession.
More than 4 million on out of work benefits.
One of the highest teenage pregnancy rates in Western Europe.
Over a million children growing up in households with parents addicted to drugs or alcohol.
These were problems that the Centre for Social Justice reported on at back in 2007 – in other words, before the recession started, during a period of unprecedented growth.
This breakdown destroyed our ability to compete in the global market.
The cost of maintaining that many people on benefits was a drag on economic growth and a factor in the growth of the deficit.
And it is now well documented that during this period almost half of the rise in employment was accounted for by foreign nationals.
So potential workers were paid to be idle, rather than being skilled up and supported into employment, while businesses imported workers from abroad to do the available jobs.
Yet much of the money being earned here was being sent back home, so the British economy wasn’t seeing the benefits.
Equally tragic was the human cost – people in communities up and down our country unable to fulfil their potential.
This unfulfilled potential takes its most potent form in the street gangs that terrorize many of our poorest neighbourhoods.
In many ways these gangs act to fill a vacuum left by other figures of authority.
Frequently from broken families, gang members seem to be searching for that structure and consistency they are failing to find at home.
Many never make it to the age of 25, yet some of these are really bright kids, just born into the wrong circumstances.
Dealing with Britain’s violent gang culture is vital because the simple truth is that that where gangs rule, decent people cannot live, businesses cannot invest, and communities cannot grow.
What we need is a way out for those who’ll take it and the toughest enforcement against those who refuse. And, crucially, we have to prevent them joining these gangs in the first place.
Broken welfare system
The first step here is getting to grips with our broken welfare system.
The system is complex, contradictory and incoherent.
It takes people’s benefits away at incredible rates as they move into work, meaning work is frequently not worthwhile.
It treats people more as statistics than human beings – as a box to be ticked or a process to be completed.
And it is racked by fraud and error – some £5 billion lost annually because of the immense complexity of the system.
So first, we are simplifying things with the Universal Credit, a single integrated payment which will replace an array of benefits and tax credits.
It will be clear, it will be consistent and – most importantly – it will make work pay.
That’s the first vital step for people who have been out of work for a long time.
Second, and equally important, we have introduced the Work Programme, a package of support run by the private and voluntary sectors which provides tailored help to get people back into work.
Crucially, we will only pay for what works.
And we will continue to pay these organisations as they keep people in work.
Third, we know how important experience of work is for young people who are trying to get their foot in the door.
That’s why we have funded an extra 100,000 Work Experience places over the next two years.
And it’s why we’ve committed to an extra 250,000 apprenticeships over the coming years.
Making work pay, skilling people up, building their experience of work – that’s how we can start to rebuild our labour force and keep people off welfare.
All of this is vital, but we cannot do it alone.
We have had a great response from businesses to our Get Britain Working campaign.
But I want to know if there is more that the financial sector can do.
I want to know if there are areas where you could get involved that you wouldn’t normally look, or where you are currently underrepresented.
The tragedy is that there are plenty of bright kids out there whose start in life means that they will never end up somewhere like this.
I’ve met many of these young people – and let me tell you, when working with numbers and figures there are some who could leave people in this room standing.
But it’s hard for them to get that first break – take the fact that less than a quarter of all employers in England have given a young person their first job after education.
So I have a challenge for you tonight – a direct challenge to the financial sector to get involved in three areas where we are working with young people.
First, through work experience, giving our young people a chance to get a taste of the world of work.
I understand that few work experience placements are currently available in the financial services sector, and I want to know if there is more that can be done.
Second, through apprenticeships, working with my department and BIS to look at placements which bring young people in, help them learn the trade, and set them up for the future.
This is about giving our brightest young people a shot, even if they haven’t gone through the traditional university route.
It’s about letting them prove to you that they can work hard and better themselves.
And third, we need the financial sector getting involved in the early intervention work that Graham Allen has been driving.
Graham’s reports for Government have shown the incredible impact that intervening early in a young person’s life can have.
He has also shown that where we can turn a young person’s life around, the savings to the public purse are potentially huge.
Take the fact that it costs around £59,000 a year on average for a young offender to be placed in a young offender’s institute, or hundreds of thousands of pounds to support an individual for a lifetime on benefits
The tricky bit is getting the money there up front so that we can reap these savings.
And that’s where social investment comes in.
The idea here is that government encourages private investors to back projects…
…whether it be helping young people back in to work, rehabilitating offenders, or helping a drug addict into recovery…
…by investing in ‘Social Impact Bonds’.
These investors are then rewarded with some of the savings to the public purse further down the line – but only if their investments work.
It is still early days, and this is still a fledgling market.
But I think it is a powerful opportunity.
Sir Ronald Cohen – who will be familiar to many of you as one of the father’s of venture capital – is clear about the possibilities here, stating that:
“Social enterprise and impact investing, in short, look like the wave of the future.”
Indeed, in his view: “Impact [social investment] capital is the new venture capital”.
We are already seeing successful projects getting underway…
…from the reoffending social impact bond in Peterborough…
…to my own Department’s ‘Innovation Fund’, which is currently going through its procurement process.
Yes, Government still has more work to do to provide a clearer direction to the market.
But we also need investors to be willing to take the risk and start getting involved.
Repeat the challenge
So let me repeat: these are the three areas – work experience, apprenticeships, and early intervention – where I ask you to think about reconnecting yourself to some of the most troubled parts of our society.
These are places full of young people who – with the right help, and the right support – could aspire to be where you are tonight.
My challenge to all of you is this: don’t just be a successful business – for all the benefits that that brings to our country, and it really does.
We need you to also be thinking about how you can put something back into your local community to change people’s lives.
So let me bring this back to where I started – the state of the economy, where we have come from and where we are going.
Getting the deficit in down is crucial, and so is the plan for growth.
But we cannot assume that these issues are separate from the social side of things – from welfare, from pensions, from family breakdown, from drug addiction, or from gangs.
Whether it be the cost of paying 4 or 5 million people to sit on out of work benefits while bringing in workers from abroad…
…or the cost of putting the same young people over and over again through the criminal justice system…
…the social side is absolutely crucial to the economy.
It is a terrible waste of resources to have people sat on the margins of society, unable to engage with the system.
Ignoring this has been the mistake that too many Governments have made in the past.
But August showed us was that containment is not an option anymore.
For the riots provided a moment of clarity for us all, a reminder that a strong economy requires a strong social settlement.
Our task is to achieve this rebalancing of society,
Restoring our economy must go hand in hand with restoring society.
I believe that this is the challenge of our generation.
Together, I hope we can rise to that challenge.