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Eliminating the deficit will be the defining issue of this Parliament. The Emergency Budget put the cost of welfare at the heart of these efforts. The government spends more on welfare than anything else. The bill for “social protection” is now approaching £200 billion. Left unreformed these costs will become crippling with the cost of benefits to pensioners alone set to increase by £12 billion by the end of the term of this Parliament. Failing to get to grips with this while total government spending is falling will mean much deeper cuts to other departmental budgets.
There is scope for reducing the costs of welfare without compromising other policy objectives. Much welfare spending does not provide value for money. The UK is spending at European levels for poor American results. Although it has one of the most expensive welfare systems in the world, the UK faces rising income inequality, low levels of social mobility and poor outcomes for children. Poor quality spending, not a lack of spending, is the problem.
Welfare reform should set out to not only save money but to support employment and social mobility. The Government has set out an ambitious agenda to reduce poverty through emphasising Big Society not big government, while Frank Field has begun a review of poverty and opportunity. Progressing this agenda requires focusing on reducing the mobility blocks contained in the benefit system and improving educational outcomes for the poorest. This also requires seizing local initiative and innovation and moving the welfare system from the economics of redistribution to the economics of growth and mobility.
But reforming assistance to the poorest families should only be a part of a reform agenda. Improving the targeting of spending would make the welfare system stronger and more just. Experience shows that poorly targeted spending leads to less generous support for poor families. Even a small increase in the generosity of a universal programme comes at a very large financial cost, meaning resources have to be spread thinly and less is available for poor families.
The desire to use welfare to attract votes means that benefits for middle class voters become more generous while poor families are left with scraps. Transfers to working families now account for nearly twice as much of the welfare budget as transfers to families out of work. Improving welfare and sorting out the debt will require wealthy families to take greater responsibility for themselves.
As the Bank of International Settlements has demonstrated, it is the cost of welfare, as well as healthcare, which will largely determine the future state of public finances. The UK is no exception. The Emergency Budget announced policies that would move people off benefits and restrict entitlements, while the Department for Work and Pensions now intends a faster rise in the retirement age. But will these savings be enough to cut the deficit and make the growing costs of welfare sustainable?PDF DOWNLOAD