Even Margaret Thatcher didn’t manage to dismantle Britain’s disastrous welfare system. Judging by the policy plans of the Lib-Con coalition, there is little reason to be optimistic that today’s leaders will be any more successful.The timid proposals on welfare are little more than an expansion of existing failed programmes.
It is unsurprising that welfare reform has presented such a problem for successive governments. The six million working-age adults who now receive out-of-work benefits – plus millions more over 60s receiving generous pension credits – comprise a large voting bloc. Labour would have risked losing its core support had it attacked benefit dependency.
Within the new administration, the rebranded, centrist Conservative Party will be wary of implementing policies perceived (wrongly) as an attack on the poor, while any major changes could face strong opposition from the Liberal Democrats’ hard-socialist left.
Nevertheless, the dire state of the public finances means the new government will have little choice but to make substantial cuts in welfare expenditure. Benefit payments now account for almost one in three pounds the government spends. Balancing the budget will be next to impossible unless welfare plays a proportionate role in the programme of cuts. In reality, the new adminstration may be forced to implement radical reform.
This represents a huge opportunity – not just to save money, but also to address many of the social problems associated with welfare dependency. Life on benefits not only encourages crime and anti-social behaviour; a growing body of research suggests that long-term claimants are more likely to suffer from poor physical health, low self-confidence, anxiety and depression. Studies have also linked worklessness to lower life expectancy. While one should be cautious about such findings, a convincing case can certainly be made that the benefits of employment are not just financial.
The negative effects of welfare dependency are amplified by its concentration in certain areas and among particular groups. On many social housing estates the majority of residents are reliant on benefits. Any sense of shame for relying on handouts has long since disappeared, replaced by an aggressive sense of entitlement. Worse still, the behavioural norms needed to hold down a job – honesty, reliability, good manners and so on - have been undermined. This catastrophic decline in standards will take generations to reverse. Eliminating the poisonous impact of the benefits system is, however, a necessary first step.
The key to reducing welfare dependency is removing the ‘poverty trap’. The current system means that for many claimants it is simply not worth doing low-paid work – at least not in the ‘formal sector’. Once additional work-related costs such as clothing, train tickets or petrol are factored in, someone working full time on the minimum wage will typically be just a few pounds a week better off. Because benefits are withdrawn as income increases, the effective pay rate can be less than £1 an hour.
Working may also mean losing the other perks given to those on welfare, including priority access to low-rent social housing. As a result of massive government subsidies, social properties are generally of superior quality to privately rented homes. Indeed, a high proportion have recently been refurbished with new kitchens, bathrooms and heating under the multi-billion-pound ‘Decent Homes Initiative’. It is almost as if claimants are being rewarded for their dependence on the state.
This approach has to change. Benefits, tax credits and other subsidies have produced close to a communist distribution for families earning less than the median wage. Yet welfare dependency will only be reduced when there is a big gap in living standards between those who work and those who do not.
A series of specific policy measures would push the system in the right direction. Child tax credits, for example, should be paid at a much lower rate to workless households to better reflect the additional costs of working. More can also be done to reduce the income tax burden on low-paid employees – the new government’s plan to increase personal allowances is a good start, though it would be far more effective if it were funded by benefit cuts rather than higher taxes on investment.
The poverty trap is a particular problem for those stuck on incapacity benefits. The incentives to move on to them are too strong and there are powerful reasons for claimants to hang on to these entitlements. But incapacity is a privately insurable risk. The government should not provide special benefits for those no longer able to work as a result of chronic health problems.
Perhaps most importantly, the perverse incentives associated with housing policy must be addressed. Social housing should be very basic – a last resort for the genuinely homeless rather than an aspiration for people trying to get accommodation on the cheap. This means paring down the £7 billion-a-year public housing subsidies and also reforming the £20 billion-a-year Housing Benefit system.
The latter is absolutely essential if work incentives are to be increased. Withdrawn at 65p for every pound earned, Housing Benefit is often the major reason why it is not worth working. Part of the solution is to ensure that a significant proportion of rent is paid from basic benefits such as Jobseeker’s Allowance and Income Support. In this way, tenants are encouraged to find low-cost accommodation and the negative impact of the subsidies is reduced. Moreover, the barmy rules that allow claimants to live in expensive areas such as Kensington and Chelsea should be phased out.
Yet reforming the benefit system is only part of the equation. The next government must also tackle other barriers to work. Key steps include abolishing the minimum wage, reining back employment law, and making it easier for the unemployed to relocate by liberalising the planning system. Indeed, by lowering the cost of housing and basic goods, a programme of deregulation across the economy would enable benefit rates to be cut without increasing poverty, giving a further boost to work incentives.
A policy of radical reform will clearly face stiff opposition from entrenched interests, including the bureaucrats that depend on bloated budgets within government. Small, incremental measures risk being obstructed and diluted, and the political will to push them through could easily dissipate. A more effective approach may be to undertake a fundamental rethin