Rethinking the welfare state

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Jobseekers outside a Jobcentre Plus

"Will work for food? As you should!"

In 1948, Clement Attlee’s acceptance of the Beveridge report paved the way for Britain’s transformation into a “welfare state”. Sixty years later, after piecemeal additions and amendments by successive Governments, Britain’s welfare system has grown into a complex and expensive behemoth, with nearly 50 types of payments available, administered by many different agencies, and the welfare budget gobbling up more than a quarter of Britain’s public expenditure, while costing more than what the Government receives in income tax.

It is blindingly obvious that the system needs a massive overhaul. Not only does it need simplification, but the gaping hole in the nation’s public finances means that welfare reform must reduce the burden on the public purse. Those aims were the two key motivators of the reform package formally announced this week by the Secretary of State for Work and Pensions, Iain Duncan Smith. His aim is to ensure that people are not given the illusion that a life on benefits pays better than a life in employment, and the flagship proposal is to condense dozens of work-related benefits into a single “Universal Credit”, topped up any extra circumstances such as disability. Meanwhile, other benefits will be reduced in value and eligibility, or scrapped altogether. At the heart of it, the current phase of welfare reform is not just about simplification or cost-cutting, but fundamentally changing the relationship between the British state and citizen forever.

There is no doubt that a good welfare system is essential for modern society. It is right that society rewards those who have contributed (e.g. with pensions), supports those who are in difficulty because of circumstances beyond their control (e.g. with unemployment and disability benefit), or invests in actions that will generate positive economic and/or social externalities (e.g. child benefit). But there are strong cases for root-and-branch review of the benefits provided under the system, particularly given changes in social circumstances, disincentives created by benefits, the poor direction of certain benefits, and the negative consequences of undue Government influence in the market.

An example of a benefit that needs reform because of changing social circumstances is the state pension. It is widely recognised that the age when people can begin to claim state pension should rise. Under the Government’s plans, such changes have only been sped up; the fundamental argument is not contested.

The case for disincentives created by benefits is also well-proven. The current system is rigged in a way so that people are discouraged from taking low-paid jobs. Slowing down the speed with which unemployment benefits are withdrawn when someone finds work is sensible, and although there must be penalties for abusing the system, the Government’s plans are, in some cases, overzealous, such as taking away job-hunting time by requiring certain categories of the unemployed to undertake menial tasks.

Thirdly, some existing benefits are so poorly directed that they might as well just be giveaways. Take, for example, the health in pregnancy grant, which is about to be abolished. All a woman has to do to receive a no-questions-asked £190 from the taxpayer is to be 25 weeks pregnant. Not only is this almost duplicated by the Sure Start maternity grant, which pays a mother £500 for having a baby, there is no control over how the money will be spent. Much more effective in terms of investing in our nation’s children is the Healthy Start scheme, which provides expectant mothers with vouchers to buy milk and other recognsied essentials to a healthy baby.

The final problem with some of today’s benefits is perhaps the most controversial—Government interference in the market. One of the most hotly debated benefits to be reformed is housing benefit. Currently, it means that the Government pays low-income households to live where they would normally be unable to afford. There are no criteria for recipients to be in employment. I find the principle of this benefit to extremely unsettling—bordering on bonkers.

Simply put, the benefit is gravely unfair to those who are taxed to pay for it. Why should a working person who cannot afford to live in a desirable area subsidise someone who does not work to live in that same area? Government subsidies to landlords are also inefficient. Not only are such transfers not directly economically productive, they have the effect of driving up rent in desirable areas, adding to the injustice suffered by tax-paying workers who are priced out from desirable areas even more.

Critics say that reducing housing benefit will drive poor people out of areas that they currently live in. This, they argue, will destroy social fabric and cause the ghettoisation of cities, where the poor are hemmed into undesirable parts of town where jobs may be lacking. Yet this argument is deeply flawed. First, community is fluid. People have always migrated in and out of different areas, changing the community with such movements. The argument for paying people to stay put in order to retain community bonds is, in the long run, a poor one.

Secondly, “ghettoisation”, if carefully managed, can have benefits. No longer are certain parts of town naturally geographically undesirable, as they used to be in the industrial revolution. Undesirable city districts are so because of a historical lack of investment. By allowing people to naturally move into parts of town that they can afford themselves, the Government will find it easier to concentrate on improving infrastructure and life chances for the whole area’s residents, rather than leave different authorities to deal with scattered pockets of poverty within their areas. The Government can also subsidise transport for poor people, so that they can still travel to where jobs are. The subsidy can be considered as an indirect investment in infrastructure, which is infinitely better than subsidising private landlords, who may not recycle the money back into the economy.

For the past sixty years Britain’s welfare system has served the country extremely well, but to continue to be fit for purpose it requires fundamental changes to how it functions. The Government’s plans are bold, and they are the right steps towards ensuring that society continues to reward those who work hard, and protect those who are vulnerable.

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Welfare reform: good news for Britain

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Iain Duncan Smith

Iain Duncan Smith: welfare revolutionary

Plans to radically overhaul Britain’s benefits system have been unveiled this week, ahead of the government’s spending review later this month. They were the result of a long-running struggle between the Chancellor George Osborne and the Secretary of State for Work and Pensions, Iain Duncan Smith, with the latter emerging victorious.

According to the government’s budget in June, welfare will cost the taxpayer £194 billion this year, a whopping 27.8% of government spending, and £44 billion more than the government’s income tax receipts. The welfare system is not only expensive, but complicated too. Not only are there multiple payments for the same individual or household, but the rules regarding when the money is withdrawn discourage the unemployed from taking on jobs.

The welfare reform announced this week by Mr Duncan Smith at the Conservative party conference aim to tackle complexity first, cost second. Most of the current benefits will be collated into one super-benefit, with exceptions such as disability living allowance. The money will be withdrawn gradually as people’s incomes rise, encouraging them to work. People who have been unemployed for more than 6 months will also get a government grant to start a business.

The welfare reform package hints at significant start-up costs, which are the grounds of objection by the Treasury, whose aim is to make Britain’s ends meet. After all, any increase in the welfare budget to finance the reform must be met by savings somewhere else. No concrete details have yet emerged on how the reform will be funded, and the Treasury is still insisting on saving some £11 billion from the welfare budget this year.

It is entirely normal for new projects such as the welfare reform package to incur a start-up cost, and completely understandable for the Treasury to be jittery about funding them at a time when the public funding gap is so wide. But welfare reform is essential to placing Britain on a path of better recovery. For many years now the press have been circulating stories of dishonest benefit scroungers who manipulate the system to live off the backs of hardworking taxpayers. Of course, many people who stay trapped on the system may have found it simply uneconomical to take up paid work, and they cannot be blamed. Most people at least agree with welfare reform in principle. Ensuring that the welfare system does not hold people back from taking employment not only helps to repair the nation’s finances in the long run, but it can work magic in many areas in Britain that need reform, because employment provides not only a financial boost to individuals, but a psychological one.

The dispute between the Treasury and the Department for Work and Pensions reveals an important dilemma facing the government as the cuts to public expenditure start to bite: how to transform Britain for the better with less money. The government has so far been careful to ensure that at least outwardly, the poorest are shielded from the worst of the cuts (read: the worst of the cuts, not the cuts itself). Announcing the withdrawal of child benefits from higher-rate taxpayers is a positive move, even though it breaks an election promise by the Conservative party. So is the capping of benefits to average household income and plans to recognise marital commitment in the tax system.

As the cuts to public expenditure begin to bite, there will no doubt be pain to every sector of society. Rants from the Left about the pain being unfair are essentially pointless: nobody in the right mind thinks that pain to themselves is fair. However, such pain is essential for the whole of the country to plug the massive funding gap that Labour party had left with Britain. The country as a whole did not deserve all the benefits it was showered with by Labour during the boom years, since there was no sustainable way of funding them. If it takes big cuts and a revolution to drag the benefits system back into reality, so be it.

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