Give credit where it's due

Benefits must be overhauled and simplified. Only then will work be seen as the most sustainable route out of poverty

By Iain Duncan Smith

To read the papers or listen to the news, you would be forgiven for believing that our unemployment problem began at the start of the recession. However, Britain had deep-rooted worklessness long before the downturn. Successive governments have become adept at excluding people from unemployment figures – for example, the many who are out of work and not eligible for Job Seekers Allowance, but who claim other state benefits. Actual unemployment is much higher than the published figures suggest.

Before this downturn, the number of working age adults on out-of-work benefits reached 5.4 million; youth unemployment was static, despite mass investment for a decade (it is now increasing); and the number of lone parents claiming Income Support, stubbornly high.

Unemployment has been entrenched in dysfunctional communities for decades. Countless children have never seen a parent go to work. And, as they become parents, grandparents and great grandparents, the dependency spiral has gained momentum. Benefits have been handed down, almost like a family business, sometimes for three or four generations.

At the heart of the Centre for Social Justice (CSJ) has been recognition that the nature of the life you lead, and the choices you make, have a significant bearing on whether you live in poverty. Factors such as your family make-up; local education; personal debt; addiction to drugs and alcohol; and economic dependency all contribute. In contrast, policymakers have tended to view poverty through a financial lens only.

For example, it’s fully established that work is good for us far beyond the personal income that it generates. Research suggests that income source is more important than income level in determining levels of social exclusion. Furthermore, earning money through gainful employment has many life-changing advantages – people in work have better health, they develop strong social networks - and they become living proof of a link between effort and reward.

Reducing the inefficiency of welfare, or the mass public expenditure it draws, has long been a focus for incoming administrations. With routine predictability, incoming governments - including the present one in its promise to “cut the bills of social failure” - create new rules to govern access to existing benefits, and introduce new ones. Yet, the cost of welfare consistently has risen above the rate of inflation.

About £74 billion was paid directly to working-age adults and children last year – about 40 per cent of the social security budget. Such expenditure has risen above inflation every year since 1997, when the cost was about £57 billion. And expenditure on working age benefits alone, including last year’s allocation for tax credits, has risen 50 per cent in real terms since 1998/99.

Despite mass tinkering and investment – particularly aggressive in the past 12 years – next year’s incoming government will inherit one of our most dysfunctional public service systems.

First, it’s overcomplicated. There are more than 51 separate benefits that create a myriad of tax traps and special rates for different groups.

Second, it creates a series of disincentives to work - or to progress in work. Few people without jobs look on employment as a moral choice. Rather, it is a practical one and, above all, it has to pay. Yet we expect something different of benefit claimants.

Marginal Tax Rates (MTRs), fuelled by some of Europe’s highest benefit withdrawal rates, can be as high as 90 per cent for every additional pound earned. For out-of-work claimants, we measure the Participation Tax Rate (PTR) – the relative financial incentive to start paid employment at a given earnings level, in comparison to remaining on benefits. Too often PTRs are punitively high.

Consider the example of an unemployed single mother on benefits. If she moves into a part-time minimum wage job earning £80 a week, her benefit is reduced by £60 for a net gain of £20 – little more than £1 per hour. And this is before accounting for any additional travel or childcare costs associated with working. Faced with such a choice, what would any of us do?

Third, it imposes penalties on lifestyle. Married and cohabiting couples qualify for less support than those living apart. benefit payments are reduced massively for those with personal savings, and we are one of only a few countries where low earners with mortgages are not eligible for housing benefit.

Therefore, if a couple stays together to nurture a family and buys a house to build future assets, the Government punishes them. But if a couple with children lives apart, doesn’t save, and rents, they are rewarded. It is surely time for radical welfare reform.

Central to a new benefits system, as outlined in our report Dynamic Benefits, must be dynamic modelling, a method used extensively in the private sector. Dynamic modelling will bring our static and outdated welfare system into the 21st century.

As with taxation, policymakers will be able to project how any given change to the structure of the benefits system will affect different households according to specific measures.

But the development and use of such a model is not enough to achieve reform.

We also need to simplify the system. It is time to consolidate the plethora of existing benefits into two streamlined credits: Universal Work Credit and Universal Life Credit. Some have misrepresented this proposal as a plan to cut benefits and make thousands of claimants worse off. It is not.

The true nature of this proposal is incorporation. For those who are out of work or on very low wages, we propose incorporating benefits such as Job Seekers Allowance, Income Support, and Incapacity Benefit/Employment and Support Allowance into a Universal Work Credit. To maintain living costs support for those on low incomes, benefits such as Housing Benefit and Disability Living Allowance (DLA) should be consolidated into a Universal Life Credit.

Two things would be achieved. First, policymakers would again have central and single access to total benefits payment information for individual claimants. Second, it would end the current multiplicity of benefit withdrawal rates, enabling the introduction of a genuinely transparent and fair universal withdrawal rate – we propose 55 per cent. Such a rate on post-tax earnings, above the earnings disregards (which should also be increased), would allow claimants to project more clearly how much better off they would be in employment, or from an increase in working hours.

The system must also stop penalising positive lifestyle choices. The couple penalty, as well as disincentives to save and own a house, must be tackled.

All the recommendations contained in Dynamic Benefits are underpinned by a belief that work is the most sustainable route out of poverty. Our calculations project that 600,000 households in which no one works would rejoin the jobs market and more than 800,000 would move out of poverty. This, in turn, would lead to annual savings of up to £3.4 billion in unemployment costs; higher tax revenue; reduced benefit fraud; and reduced crime, policing as well as healthcare costs.

These savings would more than cover the direct costs of reform. Our recommended model of implementation, selected from a number of options outlined in the review to achieve maximum benefit for as little financial burden as possible, would require £2.7 billion of upfront investment – an increase of 3.6 per cent on current annual benefits expenditure of £74.4 billion.

Those who’ve criticised this simply fail to recognise consistently mismanaged expenditure estimates and increases. Take projected spending on tax credits by way of illustration. Estimated expenditure on tax credits for 2008/09 was £19.8 billion, and £21.7 billion and £21.8 billion for the following years. Yet, provisional expenditure on tax credits in 2008/09 was £24.1 billion, an increase of £4.1 billion, or 20.5 per cent, on the previous year. If such a trend were to continue, as a result of the recession and changes in households, expenditure on tax credits would rise to £32.3 billion in 2010/11. Even if policy-driven expenditure is discounted, tax credits could be expected to cost £30.3 billion in 2010/11. It is time to compare like with like.

No government has been able to reliably predict its welfare expenditure, nor control the budget. Our dynamic model would pioneer such accuracy.

So to those who argue welfare reform is not a priority, because we are mired in a recession and the jobs aren’t there, I disagree.

The Government cannot continue to talk about the importance of getting people into work, while it continues to preside over a static system full of disincentives for them to do so.

No longer can we afford to play petty politics with a system continually consigning people to a lifetime of state handouts and dependency. Instead, when politicians argue about how to move more people into work and save the taxpayer money, I suggest that we remind them of repeated and unfulfilled election promises. Only root and branch reform of our broken benefits system will meet these aspirations.

To find out more about this article, visit: www.centreforsocialjustice.org.uk

10 December 2009

Iain Duncan Smith. MP,

Rt. Hon Iain Duncan Smith MP, Chairman, the Centre for Social Justice