Welfare reform

The public reports of strong arguments over welfare reform need some examination.

The welfare budget is different from most other government budgets for one good reason. Parts of it are “demand led” – if more people need unemployment or disability benefits they need to be paid. Other departmental budgets can be settled a year or more in advance, as you should know how many people you are going to employ and what you will pay them, and know roughly what your bill for bought in goods and services will be. So the arguments about the welfare budget are subject to the caveat that we could end up spending a lot less or a lot more , depending on demand.

In another sense it is also different. All sensible people want the welfare budget to fall sharply for the right reasons. We want more people to get jobs so they do not need unemployed benefits. We want fewer people to be in need of disability or long term sickness benefit. We would like pensioners to retire with savings and good second pensions.

So the argument about welfare reform is what magic combination of rules and spending would help get more people off welfare into work. What incentives would encourage more people to make provision for their future? Solving it requires low taxes on saving and working as well as fair but realistic benefit rules.

Both the Treasury and Work and Pensions have good points in their arguments. DWP says they need to spend to save. If, for example, they pay more by way of in work benefit to make it more worthwhile to work, we might find more people took jobs and saved the state some money overall. If they could adjust benefits so that it was always more worthwhile to work than to stay at home we might make better inroads into the 5 million plus of working age living on benefits entirely.

The Treasury replies by saying the problem with spend to save is the spend is certain and comes first. The saving may not materialise. They might prefer the Clinton approach – the way to make it more worthwhile to work is to do what Clinton did and withdraw benefits from people who can get a job so they have no choice but to take it.

In the UK we combine a progressive tax system with a progressive means tested benefit system. This results in people at the lower end of the income scale facing high combined rates of tax and benefit withdrawal. All the time we have means tested benefits there is a choice between two ways of handling the problem which are less than ideal. Either you have a few people facing very high combined tax and benefit withdrawal rates, or you have a lot of people facing quite high combined rates. If you withdraw means tested benefits quickly it means a high rate and fewer people.

This is ground for natural compromise. The Treasury can bring to the agreement proposals which toughen the regime for anyone who could get a job or is offered a job. DWP can bring proposals which make it more worthwhile for more people to work rather than staying on full benefit. The spend to save element of the package could be tightly monitored, week by week, to ensure savings do materialise. If they do not the formula shouild be amended or the system changed.

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22 Comments

  1. Kevin Peat
    Posted September 14, 2010 at 11:05 am | Permalink

    The system whereby a teenager deliberately becomes a single mum and qualifies for a fully appointed house – and then her mates on seeing the sense of doing it get themselves pregnant – needs to be stopped forthwith.

    There are also massive abuses of disability allowance by able people. And then there is the assumption by politicians that people earning between 25-50k are rich and can take more taxation when, in fact, they often have less disposable income and time than the never-employeds around them.

    The argument for the 'need' for mass immigration is also skewed to the left by the out-of-kilter benefits system.

  2. Mark
    Posted September 14, 2010 at 11:47 am | Permalink

    There was an interesting discussion of NEETS at Carswell's blog here:
    http://www.talkcarswell.com/show.aspx?id=1571

    Some simple population arithmetic allows us to know how many will emerge from education in search of a job or benefits, and how many will displace those in jobs to seek benefits adding to the population via the immigration channel (well, maybe once we have that under control). We also know how many will add to benefits claims as pensioners. The government can decide on the numbers in its employ. Employment in the private sector depends on the economic environment, including the regulations that surround the process of employment, and those that impinge on businesses in other ways.

    As you point out, welfare budgets depend critically on numbers. Looking at where the numbers come from, it seems that the key variables are:

    1) Controlling immigration (the record of the Labour government in creating jobs for immigrants and few for others is appalling);
    2) Ensuring that those who join the workforce are adequately educated – not just in skills, but in attitudes (we may need to indulge in remedial education thanks to the dramatic decline in standards under Labour);
    3) Dealing with the regulation and taxation that militates against private sector employment and growth (we may need to repatriate some powers from the EU to achieve that);
    4) Providing no more than EU minimum benefits to EU migrants to discourage a flood of EU claimants and perhaps being prepared to be French about repatriating EU citizens who have been out of work for a period, in accordance with EU law;
    5) Providing lower benefits to NEETS and recent migrants until they have paid more into the tax system. Some of the lower benefits might be e.g. hostel housing, or an expectation that NEETS will live at a parental home rather than starting families – and perhaps even if they do. Recent migrants might expect to be housed not in expensive central London, but the cheaper parts of Scotland if they become benefit dependent.
    6) The broad thrust of IDS' programme is correct – to provide incentives to escape the poverty trap, and to make people better off when they work.
    7) Do not provide incentives for our most productive members of society and businesses to emigrate (an important part of 3), but worth stating separately).

    The "Clinton approach" is only reasonable when there is an economy that can provide the jobs. It might work if we were not part of the EU (or if the EU changed radically), but in it we could only expect it would generate rising social unrest.

  3. iain gill
    Posted September 14, 2010 at 12:49 pm | Permalink

    I cannot help think that several layers of mistakes are being made here

    First and foremost if I was a genuine nice person living on one of the bigger social housing estates in the North of England I have one observation THERE ARE NO JOBS IN TRAVELLING DISTANCE and mobility is strongly acted against by the social housing system, the Conservatives need to speak to these people and give them hope and especially hope that their kids will be able to escape

    Secondly the systems should encourage prudence and self-reliance, all of the means tested benefits and so on act against folk saving money and being sensible

    Thirdly even for well educated middle class folk they are suffering big time – we still have open doors immigration policy with large sections of some of our leading businesses thrown out of work and replaced by non EC nationals here for no reason other than their willingness to work for less than market rates

    Fourthly the govt rules themselves act against self betterment, rules which prevent people studying while claiming benefits for instance are counter productive, indeed people should be given an uplift on their benefits if they study – especially in the more deprived parts of the country

  4. ralphmalph
    Posted September 14, 2010 at 1:33 pm | Permalink

    If you want to stop the "Living on Benefits Lifestyle" and make work pay then you have to stop the root cause of the problem which is handing out loads of money and bigger houses to people that have children for economic reasons whilst on benefits.

    So the simple way is to make welfare a safety net again, the benefits are assesed at the point you enter the system and these are based on the number of children you have at this point. Have more kids whilst on benefits no more money or bigger house. Get a new job, have more children and then have the misfortune of being made unemployed, benefits now assesed at new number of children level.

    This simple change would save billions, be supported by every working person in the country and at a stroke send a message to the workshy that there is no free lunch, a message to immigrants, assylum seekers et al that if you come here you come to work.

    • EJT
      Posted September 14, 2010 at 4:24 pm | Permalink

      Not heard that suggestion before. Makes sense on the face of it.

      • THE ESSEX GIRLS
        Posted September 15, 2010 at 12:47 am | Permalink

        We agree too.

  5. THE ESSEX GIRLS
    Posted September 14, 2010 at 4:09 pm | Permalink

    Does anyone have any thoughts on our recent blog of giving employers the service of anyone on benefits for 3 months free of wages & NI?
    The state would continue to pay the benefit for the period. The employer could supplement the wage if he chose to or pay a bonus for good performance and/or extended employment if the employee made good. If not the employee would return to the work pool awaiting up to 3 more opportunities.

    Free capacity or expansion for the employer, work experience for the unemployed and no additional cost – indeed future potential savings – for the taxpayer.

    Disappointingly there’s still no acknowledgement even from the Conservative hierarchy but experience tells us that Team Cam & Team Cab apathy doesn’t mean that any constructive idea from the public is a bad one! The bewildering election campaign proved that to us.

    • A G
      Posted September 14, 2010 at 8:54 pm | Permalink

      I think there might be a problem in that the employers would prefer the free benefit recipients and would start to offload legitimate employees to save on wages.
      I have also thrown out an idea to increase jobs and that is my take on the Laffer Curve which would be to remove all taxes from locally produced or manufactured products supplied locally within a radius of ten miles. This would also distort the market but would be fair because every business could take part. I would not include services because I think we need to create a force of effort for start ups and innovation which will eventually lead to exports. I also think this tax break would increase competition and get rid of the winner takes all feature of capitalism. I imagine farmers and market gardeners selling produce locally and perhaps some individuals making crafts and even clothes to sell to local shops but there will be others whose work involves engineering or more complex industrial supplies. Is this too simple to work?

  6. Andrew Lale
    Posted September 14, 2010 at 4:26 pm | Permalink

    'In the UK we combine a progressive tax system with a progressive means tested benefit system. This results in people at the lower end of the income scale facing high combined rates of tax and benefit withdrawal.' I don't understand- if our tax system is progressive, surely that mitigates the progressive means testing, it doesn't double the effect?
    Also, given that the Clinton welfare reforms did exactly what people hoped (reduced poverty by getting the poor into the world of work) why are we even still talking? Just do it already. I don't understand why I keep reading long abstruse articles about welfare reform when the solution is right there. Very annoying.

  7. Robert Taggart
    Posted September 14, 2010 at 4:45 pm | Permalink

    What about those of us who are happy to 'make room' for others in the employment market ? !
    For just two and a half grand a year methinks one be a bargain for the taxpayer !… one less commuter / polluter, debtor / bankrupt, parent / additional claimant (can not afford to be 'lavish' !).
    Wishing IDS well in his efforts – a single, variable rate benefit for all… so long as the money keeps rolling in !
    Regarding savings, more particularly how to encourage people… abolish the tax on earned interest, simple ? Works for moi !

    • THE ESSEX GIRLS
      Posted September 15, 2010 at 1:03 am | Permalink

      "Regarding savings, more particularly how to encourage people… abolish the tax on earned interest, simple ? Works for moi ! "

      For us too Monsieur Taggart! As we've argued for years…it would work, it's moral, it wouldn't cost the Treasury that much and it would streamline much work within HMRC. As we girls often sing to Bobby Darin's famous song…
      SIMPLIFICATION – THAT'S THE NAME OF THE GAME!

  8. Robert Taggart
    Posted September 14, 2010 at 4:51 pm | Permalink

    How to save money on welfare ?… slash the number of 'wasters' employed by JobCentrePlus ! They be at best an 'irritation' at worst an 'intimidation' ! Their jobs are 'manufactured'. Now, if you could find them a job in manufacturing… !
    They cost this country far more per capita than us claimants ! Yes, they do pay tax, but, that would not cover their tea and biscuits allowance ! They are a net drain we could all do without.

    • APL
      Posted September 16, 2010 at 12:14 am | Permalink

      Robert Taggart: "Yes, they do pay tax, "

      No one on the government payroll pays income tax or National Insurance.

      • Robert Taggart
        Posted September 16, 2010 at 12:21 pm | Permalink

        re: APL. If that be the case 'they' should have more sympathy (solidarity ?) with us scroungers !

      • John McEvoy
        Posted September 17, 2010 at 8:03 am | Permalink

        Absolutely correct – very few people understand this fact. The 'tax' is a purely notional deduction that make no net contribution the State coffers.

        Try telling that to a copper or a fireman who believes he 'pays' for his pension!

  9. simon
    Posted September 14, 2010 at 5:05 pm | Permalink

    Even when people are working they are not making enough to buy a house , purchase a pension and have children .

    There carrot is simply not there .

    The main problem isn't too few supporting too many but the high cost of living , principally associated with paying too much interested on propped up house prices .

    We've got to be careful about the plank in our own eye . How about pursueing the Ashcrofts of this world and making them pay their way ?

    Many of the rich are rich through zero sum games with the losers being the average man in the street .

    Stop giving honours to retailers who push goods imported from China and recognise people who support British workers instead .

  10. Tim
    Posted September 14, 2010 at 10:57 pm | Permalink

    I am fed up with politicians who say they are going to get disabled people ‘off benefits and into work.’ They want the first but ignore the second. I’ve been on IB for more years than I care to remember and the problem is NOBODY WANTS TO HIRE DISABLED PEOPLE! Three quarters of employers to be exact:

    Why do you pick on me? Pick on these employers!

  11. THE ESSEX GIRLS
    Posted September 15, 2010 at 2:15 am | Permalink

    SEEKING OUT WASTE? LOOKING FOR IMMEDIATE SAVINGS?
    Do read on….

    2 of us gnashed our teeth and the others smiled ruefully!
    We were discussing the Daily Mail1’s so-called ‘expose’ of the Commonwealth Development Corporation (CDC) over the last couple of days and subsequent comment from the DfID.
    ‘PRIVATE EYE’ has covered this scandal in great detail for years and we wonder if journalists and politicians ever keep abreast of the excellent work done by a publication that digs deep and is so much more than it’s original satire sheet.

    CONTINUED BELOW

  12. THE ESSEX GIRLS
    Posted September 15, 2010 at 2:16 am | Permalink

    CONTINUED FROM ABOVE

    A lucrative part of the CDC was sold to its management in 2004 for £373,000, a valuation produced by the buyers themselves! Renamed Actis the new company was subsequently given an estimated value of £100m and has continued to provide profits and vast management rewards from enterprises that are at odds with its traditional mandate of helping the poor in undeveloped countries. It is said that the PM of the day took a great interest in the enactment of the new questionable strategy. How typical that we taxpayers were severely short-changed. How very typical of New Labour.
    More delving please and immediate reformation without huge executive payouts!

  13. StrongholdBarricades
    Posted September 15, 2010 at 11:49 am | Permalink

    I wish to know if other parts of the public sector actually utilise the things put in place by the last government with regard to New Deal?

    Surely the MOD could run 26 week courses to enable the long term unemployed to gain some experience, and also utilise this method as a recruitment aid, and a justification for their training requirements as I'm aware that there is a sizeable drop out of original recruits from the 6 weeks of basic training.

    In any other industry it is simply labelled as moving budgets around to facilitate growth

  14. Lindsay McDougall
    Posted September 17, 2010 at 11:02 pm | Permalink

    When Labour introduced the national minimm wage, some Conservatives suggested that it might lead to an increase in unemployment. Labour rejected this, and for a few years the statistics suggested that they had won the arguement. Now it is less clear.

    The minimum wage is about £6 per hour. Suppose a pub landlord employs 5 staff at this rate. If the minimum wage was reduced to £5 per hour, or if that were the going rate, he could afford to employ 6 such staff and customers would not have to wait so long for service. The number out of work would also be reduced.

    • Howard
      Posted October 2, 2010 at 10:31 pm | Permalink

      Yes but they would actually be earning the equivalent of about £20 per hour by the time their household income has been topped up with means tested benefits. Those 6 jobs would cost the government more than the 5 on the higher wage.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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