Welfare reform must be based on the principle of ‘something for something’
Welfare reform remains one of the biggest issues in politics today. The coalition and the opposition are locked in battle arguing over the merits of their respective approaches to tackling long-term unemployment, delivering a “something for something” welfare state and ensuring that benefit free-riders are pushed into work.
The first 10 days of 2013 have seen the most recent iteration of this debate. The coalition is legislating its plans for a limit in yearly increases in the majority of benefits and tax credits of 1% for the next three years. From the opposition, we have seen a new policy commitment to a guaranteed job for all long-term unemployed benefit claimants, at a potential cost of £1bn.
Given the strength of public sentiment towards welfare, this political positioning is unsurprising. However, despite differences in nuance and language, these policy stances are relatively similar. Under any government, reforms would be wide-ranging and cuts would be needed. Policy would be focused on “benefit scroungers”. The main issue is that this policy focus means that both sides of the House of Commons are missing the broader picture in welfare reform.
The major problem is not “scroungers” but that the country’s labour market is changing: countless reports have highlighted that the UK labour market is “hollowing out”, with recent growth in jobs coming from the top and bottom of the labour market, while the middle has shrunk; work is becoming less secure, with the old job-for-life becoming less and less likely; and there are individuals and families who, because of the large barriers to work that they face, will find it very difficult to compete in the labour market and find employment.
These trends are only likely to quicken as globalisation deepens and competition from emerging markets becomes stronger. The problem is that, despite the most wide-ranging reforms to the welfare state in some 50 years, the reforms that we have so far seen do not go nearly far enough. It is for this reason that Policy Exchange has argued that a new consensus around welfare is needed: no matter who is in power in 2015, a new welfare reform bill will be needed to prepare the labour market for future challenges and rebuild public support. This reform bill must be built around three key principles.
Building self-sufficiency: 60% of households in the UK receive more in benefits than they pay in tax: they are net recipients of state support. In part this is a result of the tax credit system which, in an attempt to tackle low pay and meet New Labour’s goals of eradicating relative income poverty for children, began to support families earning as much as £50,000 a year. To the coalition’s credit, its reforms have limited the scope of the tax credits system. However, there is still a general presumption within the welfare system that the solution to low pay and poverty is to redistribute income through cash benefits. Doing so simply subsidises low-paid work, leads to lower wages for recipients and does nothing to encourage progression and self-sufficiency. Future reforms must be built around the principle that incomes should come from work and not benefits. This will require reforms to limit the scope of benefits while ensuring that family earnings increase. The 1% cap on benefit increases fulfils part of this goal, but support for those looking to increase their incomes is still sadly lacking.
Something for something: While building a system that encourages self-sufficiency is important, we also need to recognise that some families will fall on hard times. When , the welfare system should support them and recognise the contributions they have already made through taxes and national insurance. This is the founding principle of the Beveridge plan that celebrated its 80th birthday late in 2012. The current welfare system does not reflect this. Strengthening the contributory principle through a system of welfare accounts that sit on top of universal credit and that can be drawn down in periods of need, should be a key plank in building a something for something system that all parts of society believe is fair.
Employment support: the state also needs to get better at helping people back to work through a modern system of employment support. This must begin with an acceptance that Jobcentre Plus is not effective. While 75% of jobseeker’s allowance claimants move off benefit within six months, only around half of these are still in work eight months later, a third are claiming benefits again. Supporting claimants into sustainable, long-term employment should be the goal and this should be delivered by providing targeted support for jobseekers right from the first day of an unemployment claim and building international experience to improve the Work Programme. This is particularly true for those groups furthest away from the labour market that currently face being “parked” without support, but still face a real risk of benefit sanctions. These groups need a new system of support that ensures they are helped with the very real difficulties they are facing.
Reforms that build on these three principles would make the welfare state more effective. They would rebuild support for the welfare state around the principles upon which it was founded and ensure that all families receive the support they need to increase their earnings and reduce their reliance on the state. At the same time they would ensure that those in need get the support they require. These factors should form the beginnings of a new consensus on welfare reform and start a new wave of reform, legislated for in 2015, whoever takes the reins of government.