There is a huge amount to like about the principles set out in 21st Century Welfare, the new report from the Department for Work and Pensions which sets out the options for radical welfare reform. It is a powerful statement of intent that Iain Duncan Smith intends to overhaul a system that is failing the poorest instead of applying more counter-productive sticking plasters.
The report sets out four options to drastically simplify benefits: a "Universal Credit" that simplifies existing benefits into a single payment scheme; a "Single Working Age Benefit" recommended by the IPPR that would replace all benefits to the unemployed, disabled and others with a single scheme; a "Mirrlees model" proposed by the Institute for Fiscal Studies that would cut benefits but provide an initially zero and then low withdrawal rate; and a negative income tax model recommended by the TaxPayers' Alliance in our recent report Welfare Reform in Tough Fiscal Times.
As I wrote in an earlier post, there are a number of serious problems with the current system:
1. It is too complicated, with more than 50 different benefits (the take-up rate for Working Tax Credit is only 57 per cent)
2. It is poorly administered, with fraud and error costing £4.5 billion each year
3. It’s unfair on couples because some lose up to £1,336 by living together
4. Those who work and progress in work are financially penalised, the minimum wage of £5.80 an hour can be worth as little as 26p
5. The number of people living in severe poverty has increased from 5 per cent to 6 per cent in the last decade
A simplified system along the lines that the DWP are considering could yield huge improvements in all those areas. Unfortunately, there are two areas where today's report falls down.
The DWP needs to look at changing the poverty line. As they aren't willing to do so, they are still talking about marginal withdrawal rates of around 70 per cent. While it would be an improvement from the situation facing some families today, that isn't nearly good enough. A minimum wage of £5.80 an hour would then still be worth as little as £1.74. That massively undermines the incentives to work produced by the market, it is hard to think that it would be seen as acceptable at the other end of the income distribution. Under our proposal, with a poverty line of 50 per cent, it is possible to ensure that total marginal withdrawal rates are never more than 55 per cent.
The failure to take the tough decision and bring the poverty line down to 50 per cent also means that the scheme will cost money, at least until it gets more people into work. That creates two threats to the reform. First that a Government facing a dire fiscal crisis will be put off and water down reforms, or insist on a higher taper rate that will further undermine incentives to work. Second that the public, who rightly think they already pay more than enough for the welfare system, will turn against the reforms and make it easier for them to be unwound by an antagonistic Government in the future. Policy Exchange polling found that the four areas the public were most likely to support cuts were the BBC, culture media and sport, international aid and benefit spending and tax credits. Can a coalition Government making cuts really afford to increase spending in two of the four areas of cuts that the public think that is least necessary?
The other area that the DWP need to think about is tapering benefits over time as well as with increased income. From page 25 in our report we set out some details of how that might be possible to improve incentives to work without unduly complicating the vastly simplified system we proposed.
So there is a lot to welcome in this report, and that was certainly the focus of our response today. But Iain Duncan Smith does need to understand that ducking some of these tough choices now could make things more difficult down the line. We will be making that clear in our response to the consultation.
