Reforming welfare

Welfare reform should play a much greater role in political debate. A programme of successful reform would have tremendous benefits to society and, above all, to the people currently in the system:

  • Welfare can become a defining part of individuals’ lives and a key determinant of independence and mobility. 5.4 million working-age Britons currently rely on state aid (14 per cent of the working-age population). 71 per cent of these remain on benefits for longer than one year.
  • The scale of spending is colossal. UK spending on non-pension social security accounted for £79 billion in 2005-06, equivalent to 15 per cent of total public spending. That compares to UK public spending of £96 billion on health, £73 billion on education and only £32 billion on law and order.

This paper aims to learn the lessons of previous reform efforts, to make a close analysis of the current position and policy framework and to make constructive policy recommendations particularly in regard to the delivery of benefits.

The history of organised welfare provision and reform in the UK, which dates back to the late sixteenth century, demonstrates that there are inevitable trade-offs between welfare provisions, work incentives and independence. It also shows that while benefits with means tests or benefits without work conditions have typically created perverse incentives, the political difficulty of introducing insurance-based programmes or workfare has been great.

Between 1992 and 1997, the then Government successfully reduced the growth of welfare spending to below the rate of growth of the economy. Some stronger conditions for benefit receipt were successfully introduced, notably on unemployment benefits. The success was however partial. Spending on certain benefits, such as Housing Benefit, continued to grow dramatically while still trapping people in poverty.

The current Government was elected with a commitment to embrace welfare reform. The intentions of Ministers were welcome: to link rights with responsibilities (a “hand up” not a “hand out”), to control spending, to increase incentives to work and to reduce means-testing. Progress towards each of these objectives, however, has been highly disappointing:

  • Over 80 per cent of the system (£64 billion) remains entirely rights-based. Less than 19 per cent of expenditure places any real demands on its recipients.
  • The overall disincentive to work can still be extremely high. The combination of Housing Benefit, Council Tax Benefit, Tax Credits and loss of Jobseeker’s Allowance can even make people actually poorer in full time work than in part time work.
  • The New Deal costs more and achieves less than similar schemes. It has not accelerated falls in youth unemployment. Unemployment was actually falling more quickly before the New Deal was introduced. The New Deal for Young People has placed only 41 per cent of applicants into jobs, while some foreign schemes have placed 65 per cent of applicants, and cost less than the New Deal. The gross cost per job in the New Deal for Young People is about £3,500; outsourced schemes can achieve better outcomes for as little as £2,050. Finally, only a third of New Deal applicants have been placed in jobs lasting more than 13 weeks.
  • Incapacity Benefit continues to hold millions of recipients out of work by penalising them for looking for work. There were 700,000 people on sickness benefits in 1980; in 2005 there were 2.6 million. 5 per cent of UK men aged 25-49 are ill or disabled; a much higher proportion than other rich countries. Incapacity claimants are getting younger (53 per cent of Incapacity Benefit claimants are under 50, up from 42 per cent in 1995) and increasingly from the prosperous South not former industrial areas. The Welfare Reform Bill is an insufficient step in the right direction.
  • Tax Credits were meant to encourage work. They have been largely subverted into something entirely different: paid to people out of work as well as in it, wasted on high-earners and with a complex array of schedules and top ups. As a result, and despite a 400 per cent increase in expenditure since 1997, the UK has the worst poverty trap in the OECD, with marginal tax rates for some part-time workers at between 80 and 90 per cent. Tax Credit design is poor: a third of Tax Credit spending is on the top 50 per cent of earners, and the poorest 20 per cent of earners receive only 18 per cent of Tax Credit spending.
  • Housing Benefit recipients face a cripplingly high withdrawal rate of 65 per cent. If Council Tax Benefit is withdrawn at the same time, people on low incomes can receive less than 20p out of every extra £1 they earn. The official explanation of how to determine a Housing Benefit claim is over 8,000 words long. This complexity results in significant administrative inefficiency; at least £400 million was overpaid last year as a result of administrative error.

The overall system has become astonishingly complex. There are at least 51 separate benefits compared to 27 in 1979 and only seven in 1948. Of the 51, 26 are nugatory, accounting for less than 1 per cent of total expenditure. This figure does not include a myriad of different qualifying criteria, timetables, tapers and tests.

Thirty years of effort has not prevented post-industrial poverty from worsening in parts of the UK – above all Wales, Scotland, the North East and Yorkshire and Humber. These regions are now relatively poorer than they were 20 years ago. The moral consequences of consecutive generations depending on welfare are only now being considered.

A better way is demonstrated by countries such as Australia and America. Welfare provision has been freed up to the voluntary and the private sectors who are paid on results. Paying independent agencies on results has proved more effective at getting people back into work and improving their standard of living than paying official agencies flat rates no matter what they do (or don’t) achieve. It has also unleashed a wave of innovation and of flexibility.

Six fundamental reforms should be made to the British welfare system to stop it holding millions in poverty and unemployment. The first of these is the primary focus of this report:

  • 1. Diversity of provision. The entire framework needs transforming from one of monopoly to one of choice, diversity and flexibility. The system is currently both state-directed and state-delivered. Instead, it should be state-directed and non-state delivered. Only policy and contract management should be the direct responsibility of government. Above all, labour market schemes need opening up to competition with payment on results. All provision should be tendered to both for-profit and voluntary organisations.
  • 2. Focus on work. Job schemes should follow the evidence and place far more focus on actively finding work than on pure training. In parallel the obligation to seek work very actively should be much more emphatic than at present. This should include an obligation on almost all of those currently on Incapacity Benefit and (if they are of working age) on Housing Benefit or Council Tax Benefit.
  • 3. More intelligent design of benefit structures. Overarching benefit levels and tapers should be reset so that they no longer provide perverse incentives (to stay ill or remain in poorly paid part time work, for instance). This requires that the schedules of Housing Benefit, Income Support, Council Tax Benefit, and Working Tax Credits be reset so that their combination does not result in high effective marginal tax rates.
  • 4. Simplification. There is also scope to simplify some benefits (Housing Benefit above all), to eliminate some, and to limit others to their original design (Tax Credits should be paid neither to those on twice the average wage nor to those not in work at all). Where possible, some of the duplication of administration should be eliminated.
  • 5. Removal of lowest paid workers from tax. Accompanying these changes (though not strictly a reform to the benefits system) it would simplify effective benefit delivery enormously if the lowest paid workers were taken out of the tax system altogether. Lifting the personal allowance so that no one working full time on the minimum wage paid tax would make it much easier to avoid the high marginal rates which trap many of the low paid.
  • 6. Ownership of welfare funds. Finally, and as part of a future reduction in the tax burden, part of the current National Insurance payment should be converted into an optional (and hypothecated) payment. Taxpayers could choose to opt out of the payment. If they did not opt out they would build up ownership of a fund which bought them enhanced benefit rights (more jobs search assistance for example, higher rates of Housing Benefit). This fund could be administered by different fund managers, and the rights it built up would be redeemable with different providers.

While the welfare reform debate has stalled, the debate on the reform of education and (above all) the NHS has advanced. It is now increasingly accepted that reform is required if the great state-funded services are to meet their original ends. Support for monopoly provision has fallen and support for choice and diversity has risen. These arguments also apply to the provision of welfare.

Successful welfare reform will benefit both individuals and society. A reformed New Deal alone could deliver total net savings of £2.1 billion over four years.

The moral, social and economic case for welfare reform is extremely strong. The political will has been lacking. It is hoped that this report provides a focus for debate that may result in a new consensus for change.