From the TUC

Who will pay for the “bonfire of the benefits”?

01 Oct 2010, by in Society & Welfare

The front page of today’s Times (paywall) broke the news that Iain Duncan Smith is claiming victory in his tussle with the Treasury. It has now been picked up by the Mail, and Public Service. All report that the Universal Credit (as outlined in the government’s 21st Century Welfare consultation) has got the Treasury go-ahead to replace tax credits, Housing Benefit, Income Support, Employment and Support Allowance and “dozens of other payments” but the future of Child Benefit has not yet been decided – means-testing, taxation and withdrawing it from older children are all being discussed.

There is definitely a case for the Universal Credit – it offers a consistent approach to work incentives across the benefit system and a benefit system that is easier to understand.

But it is less of a revolution than its authors assume. The complexities of the current system were created by 30 years of attempts by politicians and officials to deliver support to people who need it in the context of limited resources.

In essence, the answer has been means-testing. The Fowler reviews of the 80s led to a massive switch from National Insurance to social assistance – essentially a transfer of resources from the fairly poor to the very poor. Labour’s contribution was tax credits, focused on parents in employment – essentially a transfer of resources from middle Britain to the deserving poor.

The government get very upset if you describe the Universal Credit as a variety of means-testing, but essentially, it is another venture down this path: relating entitlement to income. It has the potential to be a much more rational and transparent venture, but it is not in a radically different direction.

In the longer term, this approach risks welfare politics taking an increasingly reactionary tone. As I’ve mentioned before, the impact of making the welfare state more means-tested is to divorce the interests of middle Britain families paying for it from those of poorer families benefiting from it. It makes it easier for media voices to demonise welfare recipients and for politicians to then justify cuts in the benefit budget on the grounds that recipients don’t deserve them. Certainly, that is how I view a generation of welfare reform.

In the short term, once you have accepted that huge cuts must be made – and obviously I don’t – the UC could offer a reasonably fair framework for making them.

The key question is: who is going to pay for it?

The question has two dimensions.

As I noted at the start, the complexities of the current system were introduced to save money. A rational system that treats people in the same way across the income distribution is expensive: in opposition, Iain Duncan Smith’s Centre for Social Justice estimated that this plan would cost £3.6 billion (almost certainly an under-estimate in my view).

Essentially, there are only two ways to pay for this: either the government can raise the money from taxation or it can reduce the sums paid out elsewhere in the benefit system.

The other who: whom question relates to work incentives. The government has repeatedly said that their reforms will make sure that people are better off in work than they are out of work. Again, there are only two ways to do this: the government can reduce out-of-work incomes or it can increase in-work incomes at the bottom end of the labour market. Today’s increase in the minimum wage will only provide a small part of the answer to this conundrum.

The government’s answer to the first half of the financing reform conundrum is becoming clearer. Although the future of Child Benefit is not yet settled – the Conservatives have given an awful lot of hostages to fortune on this issue – some significant whittling away of middle class benefits is looking more and more likely. Expect anguished Daily Mail headlines over the next few months; my argument above indicates that I think this is a strategic mistake for a government that considers itself “progressive”.

The rest of the money is to be raised by sharing with the Treasury the proceeds of savings from fraud and administration that the new system will bring. The Times reports that these predicted savings amount to £9 billion (a sum picked up by the other reports, but in a rather cagey way that suggests that only the Times  has a source for this figure). This is almost certainly a huge over-estimate – the National Audit Office’s recent report on Fraud and Error in Benefit Expenditure put total losses at £3.1 billion and it is unlikely that the UC would prevent all of it. In other words, part of the financing will be done by political massage, always a bad sign.

(This does make me wonder whether the Treasury really has signed off on this deal, or is this an attempt by DWP to bounce them into agreeing? Or an attempt to distract attention from much worse cuts in benefits than today’s stories indicate?)

The other side of the “who pays” question – the balance between cutting out-of-work incomes and increasing earnings – is still murky. We don’t know what level the various elements of the UC will be set at – will they be higher or lower than the benefits they replace? This is vital to establish whether people in poverty will benefit from the reform or not.

The other vital question is about the ‘taper’ – the rate at which the UC is withdrawn as claimants’ incomes rise. Will that be higher or lower than in the tax credits, Housing Benefit and Council Tax Benefit?

The Times say that the Universal Credit will have a 65 per cent taper rate. This is a lower withdrawal rate than HB or CTB but significantly steeper than the current Tax Credit taper rate, and would therefore significantly reduce the incomes of thousands of working families across the country. It would also increase the marginal effective tax rates of many more – one of the main disincentives to work in the benefits system.

In other words, we could see yet another transfer from the fairly poor to the very poor, setting up the problems that will have to be addressed by the next generation of welfare reform.

3 Responses to Who will pay for the “bonfire of the benefits”?

  1. Universal Credit: a simpler system funded by benefit cuts? | ToUChstone blog: A public policy blog from the TUC
    Oct 1st 2010, 1:53 pm

    […] for the Government’s consultation on 21st century welfare – which has been marked, as Richard reports,  by The Times announcing the consultation’s outcome: the Government look set to introduce a […]

  2. Carer Watch
    Oct 2nd 2010, 12:00 am

    If they have ‘decided’ , why bother having the 21st century welfare consultation, closing date was today ( 1st Oct )

    Some reform is being done by stealth. Since this Coalition came to power there has been silence regarding another benefit, namely Carers Allowance. Carers are not unemployed, do not belong on an out of work benefit.
    http://carerwatch.wordpress.com/2010/09/22/carers-once-again-ignored/

    If they press ahead with these plans for a ‘Universal credit’ what about working carers?
    Just now they are allowed to earn no more than £100 – after money has been taken off to allow for their expenses and still claim CA. Would this be permissable under a UC?

    The Coalition needs break their silence and inform family carers as to their intentions for carers benefits.

    Maybe the TUC could obtain some answers as changes will affect many of your own members too.

    Many thanks

  3. IDS has won? I’m not so sure I believe it. « Hopi Sen
    Oct 2nd 2010, 3:30 am

    […] Neil O’Brien, of Conservative Think Tank Policy Exchange has an excellent run down of the questions the reports leave unanswered. These are basically – “where is the money going to come from?” and “how do the sums add up?” I suggest any report that is deliberately vague on these minor issues conceals more than it reveals. remember, the set up costs alone were expected to be of the order of 2-3 billion. (The TUCs Touchstone blog also has an interesting and thoughtful analysis.) […]