Nicholas Boys Smith: Now it is time to really link welfare to work

Nicholas Boys Smith was an advisor on welfare policy to the then Secretary of State for Social Security, Peter Lilley, before working at McKinsey & Co. He now runs his own strategy consultancy and was secretary to the Tax Reform Commission.  Today he publishes Reforming Welfare with the think tank Reform (Times) and unpacks some of the paper's key messages below.

Poverty has been in the news again. And about time too.

In 1997 one of the mantras of New Labour was their resolution to embrace welfare reform. Their intentions and their language were welcome; to link rights with responsibilities (a “hand up” not a “hand out”), to control spending, to increase incentives to work and to reduce means-testing.

Ten years on, perhaps it is time to ask how they have done. The answer is none too well. They have failed in their core aim. Over 80 per cent of the system remains entirely rights-based.  Less than 19 per cent of expenditure places any real demands on its recipients. But that is not all. The British welfare system is actually worse than most other state-delivered monopolistic welfare systems:

• The  system is too expensive. In 2001, the UK spent over £70 billion, 7 per cent of GDP. This was above both the continental European and the OECD averages (both of which are 6.8 per cent of GDP).
• The system is too complicated and becoming more so. In 2005-06, there were at least 51 separate benefits with a myriad of different qualifying criteria, timetables, tapers and tests. Of these 26 are nugatory – accounting for less than 1 per cent of total expenditure.
• The system fails in its own terms. Despite paying more than average to redistribute income, the degree of relative poverty is closer to US than German levels. This seems poor value for money whatever one’s political perspective.
• The New Deal costs more and achieves less than similar schemes. Unemployment was actually falling more quickly before it was introduced. And almost of the scheme has remained entirely state-run.
• The system continues to trap millions of recipients on benefits due to sharp withdrawal rates. According to the OECD Britain actually has the very worst poverty trap. A one earner couple with 2 children (dare I say it – an old fashioned family !) moving from part time to full time work at the minimum wage only receive 10p out of every additional pound that they earn. The OECD average is over five times that.  The IFS has also shown that 12 per cent of all British working adults face marginal tax and benefit rates of over 50 per cent. 

Unsurprisingly, new figures show that as a result of all this, 71 per cent of working-age benefit recipients receive benefits for over a year.  Trapping people in benefit year after year is not compassionate. It is cruel.

A better way is demonstrated by countries such as Australia. There, welfare provision has been freed up to the voluntary and the private sectors who are paid on results. This has proved more effective at getting people back into work and improving their standard of living than paying official agencies flat rates no matter what they do (or don’t) achieve. The unemployed in Australia can even get to chose which provider they are helped by – based on their results.
In short, diversity of provision, choice and pluralism are not just the answer for the NHS and education. They are the answer for welfare too.

Six fundamental reforms should be made to the British welfare system to stop it trapping millions in poverty and unemployment and to help it further encourage the range of socially entrepreneurial schemes now being so actively championed by the likes of the Centre for Social Justice:

• Diversity of provision. The entire framework needs transforming from one of monopoly to one of choice, diversity and flexibility. The system is currently both state-directed and state-delivered. Instead, it should be state-directed and non-state delivered. 
• Responsibility to work. The obligation to work, or very actively job-seek, can be much more emphatic than it is at present (including an obligation on almost all of those currently on Incapacity Benefit).
• More intelligent design. Overarching benefit levels and tapers should be reset so that they no longer provide perverse incentives (to stay ill or remain in poorly paid part time work, for instance).
• Simplification. There is also scope to simplify some benefits (Housing Benefit above all), to eliminate some, and to limit others to their original design (Tax Credits should be paid neither to those on twice the average wage nor to those not in work at all).
• Removal of lowest paid workers from tax. Lifting the personal allowance would simplify effective benefit delivery enormously. It would make it much easier to avoid the high marginal rates which trap many of the low paid.
• Ownership of welfare funds. Finally, and as part of a future tax cut, part of the current National Insurance payment could be converted into an optional payment. If taxpayers did not opt out they could build up ownership of a fund which bought them enhanced benefit rights (more jobs search assistance for example, higher rates of housing benefit).

It is time for a similar fresh start in the debate on welfare provision; a start that recognises that the majority of Britons want the benefits system to continue, oppose simple benefit cuts but also believe that the current system still traps the poor and must be reformed; a start that really offers a “hand up” not a “hand out”; a start which escapes the monotheistic and imprecise state-provision currently inflicted on the least well off.  Diversity of provision, choice and pluralism are the answer for welfare too.