Monday, 27 November 2006

Welfare is a product of state failure. It is time for Reform

Independent liberal think-tank Reform have today launched an excellent report on Reforming Welfare. Britain faces a ballooning welfare crisis. A shocking 5.4 million working-age Britons (14 per cent of the working age population) rely on state aid, over two thirds of them for longer than a period of a year. The UK spends £79 billion on non-pension social security: more than we spend on Education, which Labour promised would be its priority and which in the long-run is the best hope for reducing poverty and benefit-dependency in the future.

The Government is currently failing. Unemployment is falling more slowly since the New Deal has been launched. The number of people on sickness benefits has nearly quadrupled in 25 years, so that 5 per cent of men aged 25-49 are now ill or disabled. Tax credits are now paid both to the unemployed, which was never their purpose, and to those on high-incomes: a third of tax credit spending is paid to those with above average incomes. Despite a 400 per cent increase in welfare spending under Labour, the UK has the worst poverty trap in the OECD.

The state-monopoly approach has not worked. Fortunately, and perhaps at first glance surprisingly, the market offers the solution. The report notes that “paying independent agencies on results is more effective at getting people back into work 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.” Reform offer six recommendations:

  • Abandon the state monopoly of provision – the state should put welfare out to tender and invite private and voluntary bodies to bid for the contracts
  • Job schemes should be about finding work rather than training, and the unemployed should be required to look for work if they want benefits (this includes those on Incapacity Benefit)
  • Reset the benefit levels and tapers to reduce the poverty trap that results from people seeing massive drops in benefits as they work so that they keep little or none of the extra money they earn
  • Simplify the system by merging some of the 51 benefits, 26 of which account for less than 1 per cent of spending
  • Raise the personal allowance so that somebody working full-time on the minimum wage pays no income tax (a proposal I have made several times before, most recently on 21 November)
  • Transform part of National Insurance into a form of unemployment insurance so that individuals who lose their jobs have ownership of a fund to help them during their period of unemployment.

These reforms are urgently needed. Unemployment is rising under the current Government and one in seven adults now rely on state aid. The current system squeezes ever more money out of the hard-pressed middle classes while failing to address the crushing poverty that afflicts the poorest in our society – it is those just below the “poverty line”, and not the chronically poor, that are the focus of this Government’s efforts.

Rather than continue with the state-centric solutions that have been characteristic of this Government, it is time to employ market mechanisms and the innovativeness of enterprise to address this costly and tragic disaster. This report could not come soon enough.


Jock Coats said...

You know, incidentally, that your proposal regarding minimum wage earners paying not income tax by raising the threshold is one of the aims of the Green Tax Switch policies. I can't remember which way round it was - they either couldn't quite fund exempting up to the minimum wage while remaining within their brief of revenue neutrality and expressed it only as an "ambition" or they were trying for a higher figure and couldn't fund that. Either way it's pretty much party polcy.

Tom Papworth said...


It's the former. The Liberal Democrats have agreed that it is an ambition, but have not yet got the money to fund it.

I agree with the party's commitment not to raise the overall level of taxation any further.

However, I think that we could find the money by squeezing extraneous expenditure. There is so much waste and pointless spending by Labour that I think finding a few billion would be easy.

I like the Green Tax Switch paper, but I think we need to be bolder.

Tristan said...

I think we can squeeze expenditure, and we should be doing so.

Also, sorting out the tax and regulation mess should bring in more tax money at the same overall level of taxation.

Two ideas which attract me (and have been suggested by both the 'left' and the 'right') are negative income tax and a citizens basic income.
If done correctly, these would replace any need for benefits for the most part (excepting extreme circumstances)
This could lead to some people not working and subsisting off that income, but that wouldn't be much different from the current situation, and the opportunities for fraud would be greatly reduced.

Tom Papworth said...

This "replying to my own blog" thing is becoming a habit!

I have struggled with the idea of a citizens basic income for a number of years. On the one hand it seems both fair and simple, two features of which one cannot accuse most current tax and welfare policies. It would also effectively replace welfare, though it would subsidise non-contributors.

On the other hand, it is hugely expensive. The only countries that I know have managed it are oil-states such as Kuwait that effectively distribute out the petro-dollars to all citizens. In poor old Blighty we'd have to fund it from Income Tax which would be expensive and potentially harmful.

Negative Income Taxes do have promise, though Gordon Brown's Tax Credits have been a disaster.

In the long run, of course, lighter taxes at the bottom and an unregulated economy that therefore booms should bring massive benefits to the poor, but voters have traditionally been resistant to the laissez faire approach.