When the market knows what's good for you

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THE Bristol & West building society has caught the imagination by announcing that it is considering higher interest rates for unmarried home-buyers. Its records show that married couples are less likely to default on their mortgages than young unmarried people or single parents. Therefore, it argues, they should receive cheaper loans.

For the building society, this is a straightforward commercial conclusion. Actors and, ahem, journalists pay more for their car insurance than bank managers and civil servants because statistics show they crash their cars more often. Mortgage lending, though, has a social aspect as well, especially when the lender starts to differentiate among borrowers on social grounds. And while the Bristol & West's announcement may appear novel, it actually reflects a growing trend among providers of money across the industrialised world.

European countries especially are spending a vast amount of taxpayers' money on social programmes. Yet social deprivation is still more evident in Europe than, for instance, Japan, which spends less on health care than most other industrial countries but whose people have a longer life expectancy than any other.

Such disparities are providing food for discussion at the current Organisation for Economic Co-operation and Development (OECD) meeting in Paris. The theme of this five-yearly gathering is how to get better value for money from social programmes, such as unemployment benefit, retraining, health care and pensions.

In a period of slow economic growth, only a small increase in funds will be available, but a rapidly ageing population will be increasing demand. The only way to square this circle is to shift the aims of policy. Put crudely, it will mean a step back from the nanny state. Instead of merely trying to pick up the pieces when things go wrong, policy should try to prevent things from going wrong in the first place.

Inevitably, this will involve greater use of market-related incentives. One of the troubles with this sort of debate is that policy-makers are so frightened of appearing harsh and uncaring that they feel they must wrap up the message to the extent of rendering it almost unrecognisable.

An OECD briefing paper says: 'There is increasing emphasis on types of government intervention that enable and empower people to take initiatives on their own behalf, and to exert greater control over the circumstances of their lives. The objective is to maximise human potential . . . thereby increasing personal dignity as well as the resources available to the economy.' Translated, this means roughly: 'We must get people back into jobs, rather than pay them to do nothing.'

But how? Bristol & West gives a clue, by making clear to people the costs of the choices they make. Two people who hate each other are not going to get married just to obtain a cheaper mortgage, just as journalists are hardly going to become bank managers to qualify for cheaper car insurance. But even modest financial penalties remind people of the cost to others of mildly anti-social behaviour.

Take the obvious example: smoking. Few people who respect liberal European social values would want to see smoking made illegal. Yet it imposes huge costs on society. The tax on tobacco goes some, but not the whole, way towards meeting these costs, and is generally accepted. Similarly the tax on alcohol.

Bad diet also imposes a high cost on society through extra medical care, lost working days and avoidable premature deaths. Should extra taxes therefore be levied on unhealthy foods? So far, anything more than VAT on sweets is probably unacceptable, even though improving the nation's diet ought to be one of social policy's prime aims.

The idea of using the market as a means of social control is not new. Governments have used tax incentives to try to persuade couples to have more or fewer children. These do work. Sweden, which in the early Eighties had one of the world's lowest birth rates, has shown a sharp rise that has raised it almost to replacement level. The increase may have been caused by some wider social change, but it happens to coincide with the introduction of tax incentives for women having a second child.

Use of financial incentives may not be new, but it is certainly becoming much more fashionable. This is exciting, but it is also disturbing.

The market is an extraordinarily powerful tool that could be used not just to obtain better value for money from social programmes, but also to make countries nicer places to live in. Could society use the market to combat crime more effectively? Forget about fines; anyone convicted of a crime would automatically have his or her income tax increased by 10p in the pound; anyone convicted of driving a car without insurance would have the vehicle confiscated.

It is disturbing, however, because the market can be a capricious and uncertain weapon. It can not only hurt the wrong people but also chip away the freedoms that liberal democracies rightly hold dear. Most people would accept cheaper mortages for people who marry, maybe even a tax on chip butties if it helped cut heart disease. But few are ready - yet - to accept 'workfare', the American system of replacing unemployment benefit with forced labour.