Moving towards a new welfare state

17 June 2015

The Treasury will currently be working overtime to complete the Chancellor’s Emergency Budget in time for July 8. We expect that it will, for the first time, lay out how the Government will meet its promise to take a further £12 billion out of the welfare budget. In a new paper out today, Reform argues that a more strategic approach is needed.

The welfare system plays an important role in the wellbeing of the nation. It provides a safety net for people who fall out of work, support for those who can never work, and financial aid for those on low incomes and with significant additional costs. In doing so it seeks to mitigate against poverty and enable all to reach a basic standard of living, in part by helping people move into and stay in work. However the welfare state must also be affordable and be seen as legitimate by those paying for it. Governments must reconcile these trade-offs and make decisions about what they prioritise.

The Coalition years
The Coalition Government prioritised legitimacy and making work pay. They reduced the working age benefit bill by an estimated £16.7 billion a year, largely from capping, freezing and changing the uprating of benefits. They sought greater fairness for those working on low incomes by cutting the amount of money an out of work household could receive in benefits and sought to make work pay through their Universal Credit (UC) reforms.
 

However, whilst the Coalition Government’s savings were sizeable, as the Institute for Fiscal Studies has pointed out in reality they merely stemmed the expected rise in spending. To take a further £12 billion from the welfare budget by 2017-18 would require substantial further cuts. Reform does not believe it is possible to reach this scale of savings without eroding the standard of living of those on already very low incomes.

Priorities for reform
Instead, Reform argues that the Government should seek to make sustainable savings through principled, structural reform focused on the main drivers of working age expenditure. These are disability benefits, Housing Benefit and Tax Credits.
 

For many of those currently claiming sickness and disability benefits, the current system is doing more harm than good. It is well-evidenced that being in work has a strong positive impact on an individual’s health and wellbeing – and that labour detachment escalates over time. Consequently, the high number of people on these benefits, coupled with very low off-flow rates, should be of great concern to the Government.

To address this the Government should aim to remove the perverse incentives to claim Employment Support Allowance (ESA) built in to the current system. Taking the opportunity of UC, it should remove the financial incentive by reducing the Work Related Activity Group rate to that of Jobseeker’s Allowance. The level of conditionality and assessment process for ESA claimants should also be reformed to ensure that people with temporary and/or partial work capability are not left languishing on benefits.

The high number of Tax Credit claimants reflects the high proportion of low skill, low paid jobs in the UK.  Tax Credits, introduced to tackle poverty and make work pay for low earners, subsidise employers paying low wages. The inadequacy of the National Minimum Wage to provide an acceptable standard of living has led to increasing calls for the introduction of a Living Wage, with many employers voluntarily paying it. Reform argues that, while we must consider the potential employment effect, the Government should encourage employers to pay higher wages for those at the bottom of the earnings scale. To this end, the Government should make addressing low pay a priority and work with businesses to achieve this.

Finally, the substantial increase in spending on Housing Benefit is largely a result of change in the way governments support low-income households, not an increase in generosity. Rather than supplying social housing, there has been a shift towards subsidising private rental accommodation. This has led to higher spend for no additional benefit and represents poor value for the taxpayer. Reform recommends the Government reverse this shift by investing in building new social housing. This requires upfront investment but would make significant savings over time. They should also reconsider their intention to extend Right to Buy to Housing Association tenants.

The approach recommended in our new report is based on a principled approach to welfare reform, not arbitrary savings targets. We await July 8 to see whether the Chancellor sticks to his £12 billion cuts.

Hannah Titley, Researcher, Reform

 

Comments

Comments

Ian

18 June, 2015

I completely agree with Ian Stirling comment below. You can be very much disabled, and placed in the esa wrag group and the reason why the employment prospects are so low is because you are ill !!!! You may not be placed in the support group, but still have a long term illness and whatever support you are given. I.e. cv writing, IT courses etc, isn't going to cure a serious illness which is limiting your ability to work. Also lowering the rate of ESA wrag to jsa, you say it will be an incentive for people to get into work, but you have no idea how illness can affect your ability to do any work. I think your authors think that the ESA system works by if you are put into wrag group you are have a temporary ill ness, but a lot of people have serious long term illness with absolutely no chance of work. The reason why they aren't put into the support group is because they don't tick the right box to be put into the support group. Have your authors ever looked at the descriptors? It's got nothing to do with how temporary your illness is, its whether you satisfy the tick box which then places your in the wrag group or support group. How is a person with a serious illness like Parkinson's, MS or ME be on the same level of benefit of JSA, and then have to compete against them for jobs with a fit healthy person? Lowering their benefit to jsa, wouldn't increase incentive its penalises the person for being ill. In your document it says that PIP is available for people with added costs of disability, and lowering the ESA wrag to JSA shouldn't mean hardship, but a lot of people aren't eligible for PIP. If you are put into the wrag group chances are you aren't eligible for any PIP. Also, as the work programme targets the most abled people as its done by results, its not wonder that the people who are in the ESA wrag group have little chance of working so they don't bother helping them as they know there's little chance ever of them working. An IT course isn't going to cure Parkinson's, MS or ME. Also, a lot of people put in the wrag group don't appeal because its the same level as the support group. But if all of a sudden the rate of their benefit is cut to JSA, you will get a mass of people appealing their decision. The idea of 2 groups of ESA is a good one, and anyone with help and support should be helped back into the workforce. But illness is very fluid and penalising people because their illness has not improved enough is just wrong. But the decision made about which group your put in is done by a tick boxing exercise and I think your authors have a very simplistic idea of how the system is working at the moment and I think care needs to be taken when you make recommendations.

Ian Stirling.

17 June, 2015

"it should remove the financial incentive by reducing the Work Related Activity Group rate to that of Jobseeker’s Allowance. The level of conditionality and assessment process for ESA claimants should also be reformed to ensure that people with temporary and/or partial work capability are not left languishing on benefits." This misunderstands deeply the eligibility for ESA work-related group. Many on the work-related group are not there because the DWP in any sense expects them ever to be able to work again. Simply being disabled enough to never be employable by any employer nomatter how much support you are given is not a qualification for the support group. It is purely because they have not qualified for the support group. As a member of this group, while I wish to work, in practice I'm having trouble getting to the toilet and doing the washing up exhausts me. I have significant extra costs due to my disability, from ready meals due to being unable to cook (I often burn them), to being unable to shop for bargains, or purchase things during periods in work. Is - arguably - this reasonable for the short-term disabled - perhaps. Might this be an argument for reforming the criteria so as to require that there has to be a reasonable prospect of obtaining work with retraining - perhaps. But the bare reduction of ESA to JSA rates is likely to cause a severe increase in hardship, to those able to cope with it least.

Ivor

17 June, 2015

Where are the Change Managers, and the 'business' desire by policy-makers to harness a diversity of minds - where both community and business people engage and listen to ideas... solutions - then, assess, analyse... plan & develop innovative policies that will, ultimately, become the result of confronting all that is tough, challenging and aspirational? Without this approach, how can change occur amid the aspirations - skills and Talent - that exists? I do have a solution based on an innovative approach, but having gone forth into my community with the aim of trying to gain the attention and transitional support that will help my "plan" gain the attention into a powerful sector, I have struggled to find community leaders. Yes, where are those community leaders? I know that I am one of them still fighting to achieve progress with my business "plan" that will inspire many locally, and nationally. Regards, Ivor

MR TOMMAS H GRAVES

17 June, 2015

by Tommas Graves TAX THE RICH? Picketty and all that. Would taxing the rich reduce inequality? We need to know how it is to be done, how would the tax be raised, and how would the extra revenue be used? Shall we tackle the last question first? How would the tax be used? The current cry is that wages are too low, so we might suppose that some or all of the extra tax is to be used to alleviate the condition of the poorest. They are certainly squeezed. If you read the writings of Paul Nicolson of “Taxpayers Against Poverty” it is plain that the poorest are under great pressure (1). So, maybe the minimum wage is increased, or the level of benefits is raised, or that VAT is reduced. What would be the result? Here is an example told by Winston Churchill in his campaign speeches of 1909. “Some years ago in London there was a toll bar on a bridge across the Thames, and all the working people who lived on the south side of the river had to pay a daily toll of one penny for going and returning from their work. The spectacle of these poor people thus mulcted on so large a proportion of their earnings appealed to the public conscience, an agitation was set on foot, municipal authorities were roused, and at the cost of the ratepayers the bridge was freed and the toll removed. All those people who used the bridge were saved sixpence a week. Within a very short period from that time the rents on the south side of the river were found to have advanced by about sixpence a week, or the amount of the toll which had been remitted.” (2) Would it be any different now? All experience tells us that this is taking place now, under our noses, and inexplicably it is accepted as the way things are. So, how did the poorest land up in this quandary? Let us cast our mind back to the history of the conditions of the working people. In the first place, at the Conquest in 1066, William parcelled out all the land to his supporters, so every farmer had a landlord. He was expected to provide service to the king, so he levied a charge on his “tenants”. Bit by bit, the control of the land that was given to the barons morphed into a rent, and instead of being sufficient to meet the king’s demands, became the most that the farmers could pay. Skip a few hundred years. The farmers were replaced by sheep as nearly all common land was enclosed. Displaced people drifted to the towns where the recent birth of industry promised them employment. But now they had nothing to sell but their labour. The product of their work belonged to the entrepreneur or landlord. There was no fall back to a piece of land they could call their own. The owners or landlords exploited this position to the maximum, forcing down wages to a minimum. Their condition was aptly described by Dickens and others.(3) The public conscience again arose, just as Churchill describes, and various measures were brought in which alleviated the problem, more by increasing the minimum acceptable than anything else. But the basic conditions were unchanged. The measures had to be paid for, so taxation was introduced, which eventually became paid by those poorest. Of course, such taxed could not be paid for out of a wage already pushed down to the minimum acceptable. The result was that taxation came out of rent. And let no-one tell you that the poor do not pay taxes. Recent figures from the ONS show that the lowest quintile of earners paid 31% of their take home pay in indirect taxes, that is VAT, fuel duty, etc.(4) This is even before they hit the thresholds for Income Tax and National Insurance. (5) And they also have to pay Council Tax. Thus the lower paid and those who pay rent are held in a vice like grip. Rents and taxes are now supplemented by the withdrawal of benefits as they seek to better their position. Truly a triple lock! Taxing the rich cannot help them. Instead let us use the extra money to improve living conditions and infrastructure. That will surely benefit all. But the plain fact is that such expenditure only goes to increase the rent of land. More pressure on the wage earner, and more receipts to the landowner, who benefits. Taxing the rich in this way only makes them richer! How would the tax be raised? We are obsessed with taxing work. It can be shown that of the total cost of employment, one half is spent on taxation. (6) This magnifies the cost of getting work done and produces many harmful effects. An employee has to add value to the tune of two times the amount he has to live on. No wonder we have an army of unemployed! Is there not a better way? Those who follow the teachings of Henry George will know that the outcome of our work is the product of two causes. The first is the work we undertake individually. This should be rewarded by the full product of that work. The second cause is the work we do together. If this is accounted for to the community which creates it, rent does not arise. So all get their just reward and none get something for nothing. There is plenty to spare for those who cannot work. Inequality has two causes, and the first is differing ability and the amount of work a person is prepared to do. We admire those who work hard and build a fortune thereby. But the second cause is derived from something for nothing. Those who receive the rents from land are receiving something for nothing. We are not talking about rent for buildings and equipment, just that relating to land, which is a free gift to all. But now we read that UK landlords make £177bn from rising house prices over 5 years.(7) What this reflects is rising rents, of maybe £9bn over 5 years, on the basis of 5% relationship. This is £9bn taken from the result of other peoples’ work. The fact that landlords can do this, despite not having made any effort, reflects the result of the whole community’s efforts to run and improve the whole country. So now we can answer the first question;- How it is to be done? You collect public revenue by an auction of the benefits provided at each site; you then reduce taxes on wages first, then other taxes, and at the same time provide free land wherever it is not in use. The public revenue collected will inevitably be more than the current cost of providing the services. The alternative of free land will provide the antidote to keeping wages low. Wages will rise to the most that can be produced on the best land still available. The surplus public revenue will be put to improving infrastructure, which will become self- financing as market- values increase. We can call this “Location Value Refund” as it simply returns to the community the amount of benefit received from the occupation of a site. In this way, the undesirable side of inequality is removed, as also is the triple lock on the lowest paid. Picketty and his team did a huge amount of valuable work in setting up his thesis. What a pity he did not add some insight into natural law as well. References (1) http://www.taxpayersagainstpoverty.org.uk (2) “The Peoples Rights” by WSC – Jonathan Cape 1970. SBN 224 61748 6 (3) “The Village Labourer” and “The Town Labourer” by JL & B Hammond, Longman Group 1995 ISBN 0-86299-345-8 and 0-7509-0966-8 (4) ONS paper “The effects of taxes and benefits on household income, 2010/11 page 9. (5) “Employer’ Burden ” see http://landisfree.co.uk/EmployersBurden2014-15.pdf (6) Ibid http://landisfree.co.uk/EmployersBurden2014-15.pdf (7) Financial Times 12/1/2015 Kate Allen and Jim Pickard. http://www.ft.com/cms/s/b94cd0d2-95a8-11e4-a390-00144feabdc0.html