Within the centre right, I think most people agree that the welfare system is in serious need of reform. It is simultaneously failing the poorest, unfair on couples, costing a fortune and - most importantly - trapping people in dependency with high marginal withdrawal rates. So most of us wish Iain Duncan Smith well as he sets out to reform the system. But there is an abiding concern that it might not be possible right now, with a crisis in the public finances.
Most potential reforms involve higher spending initially, as benefits are withdrawn more slowly to make it more worthwhile for people to work and raise their income. The expectation is that those reforms will save money over time as more people get into work. But that might not be good enough for a Government that faces a dire fiscal crisis and is cautious (probably too cautious) about relying on dynamic benefits to pay for static policy costs. Beyond that, we should be looking to get taxpayers a better deal and producing a system that has lower costs on a static basis, while still improving incentives to work, would add to the dynamic savings.
It just wouldn't be good enough to put off serious welfare reform to another day. Applying more sticking plasters is likely to exacerbate the complexity of the welfare system and would be a massive missed opportunity. Improving incentives to work now is particularly important as it will mean that the new opportunities that the economic recovery will present are more likely to be taken. And welfare reform involves hard choices and it could be a long time before politicians are next ready to think seriously about doing something to remedy the situation. Paltry reforms might be worse than nothing at all, if they encourage people to think that the issue has been dealt with.
So at the TaxPayers' Alliance we've put a lot of work into a major report, out today, on how to reform welfare now. The report includes a costed proposal, based on full datasets from Office for National Statistics surveys, to amalgamate out of work and income support benefits into a single negative income tax. The report's central finding is that it is possible to do that and massively improve incentives to work while saving money, but only if we set a more realistic poverty threshold.
Keeping the poverty threshold at 60 per cent doesn't really help the poorest. Too many people slip through the net and the numbers in severe poverty (less than 40 per cent of median income) have risen substantially over the last decade. Withdrawal rates are brutal; the minimum wage at £5.80 an hour can be worth as little as 26p an hour. It is all incredibly complex, with 8,690 pages of manual needed to administer DWP benefits.
If we cut the threshold to 50 per cent, then we can stop people falling through the net, keep total marginal withdrawal rates down to 55 per cent and save £1.7 billion even before welfare reform starts getting people back into work.
That is the kind of reform the welfare system needs and the Government should move to introduce. To promote it, please read and pass on the report and share the video at the top of this post.
