Back to Beveridge or Welfare Will Go Bust

Iain Duncan Smith has made a good start on reform but he needs to restore the insurance principle

As Iain Duncan Smith steers his Welfare Reform Bill through the Commons, forcing the jobless into work, the stakes are high. He wants to cut the costs of benefits and change the lives of the out-of-work millions, warning that unless they ”play ball” they’ll see their benefit docked. As well as wielding the big stick, he’s offering some carrots, notably the chance to keep some benefit while earning. The measure is seen as a flagship for the Coalition and a test case for its twin aims of cutting the deficit and state dependency. Will it work? Will the new welfare state be more affordable or fairer than the old one? 

Since the general election, the Department for Work and Pensions script has made the headlines and won cross-party support despite criticism from the trade unions, a few members of the benefits lobby and the Archbishop of Canterbury. On the whole, the feeling is that the new system will be simpler and more transparent than its predecessor. It will inculcate the work ethic and personal responsibility in place of the “something for nothing” society and transform Britain’s wastelands where generations of families in ghetto estates have never had work. For the first time, many of the long-term jobless will clock in and do a day’s work like everyone else. Those who refuse will have their benefit docked. It is, says the Secretary of State, the most important overhaul of the system since William Beveridge created the welfare state.

But closer scrutiny of the White Paper shows that the Bill will be more of a makeover than an overhaul, with more fine tuning on Whitehall’s favoured lines, and tighter rules and streamlining which are the stuff of official reform.

For instance, many of the carrots and sticks now proposed were in Labour’s pre-election plan, Building Bridges to Work. That would have obliged the long-term unemployed to take a job or work placement, toughened assessment for capacity to work and put those on incapacity benefit through a pretty intrusive round of remedial support. The Coalition now casts the net wider and will oblige more of the jobless to work, with even lone parents of young children having to dip their toe in the labour market. The sanctions at which Labour hinted are more explicit here, such as that to dock benefit. The support is more determined, the supervision of capacity to work more intrusive. Nonetheless, the Coalition, like Labour, has the same aim: to check rising costs by curbing claims, whether through fraud, malingering or habitual idleness. The tone, however, differs. In time of crisis, today’s Captain Iain Duncan Smith plays well to yesterday’s Nurse Yvette Cooper. The most striking difference is to cost and machine, not substance. The system is to change from one of many to fewer benefits, with a single Universal Credit due to absorb some of the cocktail of today’s common tax credits and benefits, and costing a cool £2 billion to set up. Like the single currency, big government may have had its day, but this seems to grant it something of a reprieve. 

So there is something here for everyone, except those who are paying the bill. The DWP has won the Whitehall contract of the decade to set up the Universal Credit, which will take up to 2017 to phase in, and it has poached the child and working tax credits from HM Revenue and Customs. As for the claimants, there will be conditions but no cuts unless they default. Those who find a job will be allowed to keep more benefit, 65 pence for each pound, up to a set limit. The Treasury has been promised savings from the new streamlined system, but over time. The only people who will suffer are those who have worked and earned and their families, as some universal or NIC benefits will go.

The sad truth is that neither fine tuning nor a makeover will transform the fortunes of either taxpayer or jobless in a system which has no brakes. The evidence is that the ritual of sticks and carrots meted out by the DWP to “make work pay” has failed to check the explosion of costs and numbers of dependents. 

Yes, the determined Employment Minister, Chris Grayling, may succeed in moving more of the jobless into work by applying intelligence and determination to the plans to use private and voluntary companies to move people into a job on the “Work Programme”. But restoring the jobless to the labour market is only part of what is a far bigger picture. If welfare is to be affordable now and in the future as an ageing population and new work patterns bring fresh costs, Britain’s welfare state must change fundamentally. What is needed, as Beveridge explained, is an insurance system where benefit for lost income is paid from contributions or premiums and builds up in its own social fund. Beveridge’s scheme was published in 1942 and rapidly became a bestseller with no mystery about its appeal: it gave people entitlement to benefit in return for contribution. It ruled out a means test, provided conditions were met. It avoided penalising those who did well or saved and it kept the state small and official interference to the minimum. The worker, the employer and the state each paid into a social fund. In return, the insured had entitlement to benefit if earnings ceased for reasons such as sickness, unemployment or bereavement of the breadwinner.

And for those who did not pay their way or earn? A subsistence sum from general tax would be given with help to find work. As the state had the duty to see that earning people were better off than those on benefit, subsistence or “national assistance” was calculated to be adequate, but was not set above the level of earned income and was means tested.

As governments over time abandoned the insurance principle and treated National Insurance as just another tax, costs and dependency spiralled. First, politicians raided the social fund for the favoured beneficiaries of the day. In the 1940s and 1950s, these included the old-age pensioners; from the 1960s and ’70s came the growing proportion of non-earning households, such as those with lone parents and then those where the breadwinner had moved from the labour market to incapacity benefit. As a result, NI, instead of being self-funding and regulating, became a patchwork of handouts and rules, with the contributors increasingly penalised in favour of non-contributors, some of whom did better on benefit than earning families. 

The lesson is a salutary one for a Coalition intent on change. These raids happened because the lines were blurred by governments which abandoned the duty to promote a system that could be afforded and paid for by working people in respect of their own cover. Instead, it moved to a different form of welfare and a softer rhetoric in which one group of people was paid with another group’s money, often beyond a just redistribution of tax. That was to culminate in Gordon Brown’s use of the system for favoured groups, for which the Coalition must pay the bill. The danger is that unless the ever-increasing plunder of the middle class’s assets is stopped, its victims will either move themselves out of reach or the government to the opposition. Economists warn of the flight of capital, labour, earnings — and the taxes they bring in — as people escape from the governments who punish them for earning.

The Coalition therefore has every reason to restore fairness and affordability — the watchwords of the moment. It can do so at a stroke with the benefit system through one fundamental change, to ownership. Just as personal ownership is proposed for free schools and social care, so too it could work for benefit. How would this work?

First, NI would be restored as a system for personal insurance accounts based on benefit for contribution. Cover for loss of earnings and retirement would be central to an updated package. Once the rules were agreed, a settlement for each person would be calculated for contributions made in working life. The system would be governed by law, but managed by independent societies or companies. For most people, the incentive to work, keep costs down and save for a rainy day or for retirement would be through the individual account that could be topped up for extra cover.

For the jobless who do not find work, economists now propose ownership of benefit. Everyone, they say, should own their individual account where unemployment benefit is credited each week. The balance builds up for people who work and do not draw benefit, but can only be cashed in at retirement. Such accounts would be cost-neutral because of the incentive effect. The figures calculated for Germany, France and Italy suggest unemployment would fall in these countries between 34 per cent and 50 per cent. 

And for those who remain out of work or do not contribute? Ministers insist that people on benefit should not be as well off financially as those who work and earn. Their support would be paid from general tax and calculated so as to be sufficient but comparatively fair and managed under the new Universal Credit.

The practical side would be relatively simple as the different parts are pretty much in place, and such a change would probably cause less expense or upheaval than present plans, particularly if contracted out to one of the UK’s successful accounting companies.

But ownership must be matched by a sea change towards all who pay their way. This means an end to the war on the middle earners, including the penalties meted out through the benefit system to tax- and NIC payers. The plan to end child benefit for those who earn more than £44,000 (take-home pay, £32,270 per annum) has been rightly criticised. The Coalition would do well to pause, for removing the benefit compounds the injury done to earning families who lost the child tax allowance on earnings in the 1970s, as it was to pay for a more generous child benefit. But the problem spreads far deeper. Any single-earner family with two children that earns up to £26,400 will be less well-off on earnings than a family led by a non-earner on a jobseeker’s allowance with two or three children and housing benefit for a three-bedroom house (and that is without any of the add-ons). 

If the Coalition is to succeed in returning probity to the benefit system, it should see the benefit battle, not in terms of sticks or carrots or fine-tuning a system aimed at special cases. Rather, it should seize the chance to restore the true concept of fairness: where benefit is linked to contribution made over working life and where the entitlement is honoured, whatever the income of contributor. This will mean a seismic change to both the tax and the benefits system so that society, whether it’s Big or small, will take the long view of paying its way, over a lifetime’s earnings.

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