Jill Kirby: How to cut the £186 billion benefits bill

Jill Kirby is Director of the Centre for Policy Studies.

In its 1997 Manifesto, New Labour promised to “decrease the bills of economic and social failure” It has failed to do so. The Treasury expects total social security payments in 2009/10 to be £186 billion. That’s more than the government will receive in income tax and corporation tax combined; clearly this is not sustainable. Yet any attempts to reduce the cost of welfare will be impossible unless the benefits system is simplified. David Martin’s report for the CPS shows that welfare is out of control due to the error, fraud, overpayment, duplication and sheer confusion built into the present system.

Take the case of a young woman on benefits, let’s call her Kirsty. She lives alone and is out of work. She gets Income Support of £64.30 a week; her rent and council tax are paid by her local authority. Would she be better off working? If she takes a job, her income support is reduced pound for pound against her wages. So far, so straightforward. But her housing benefits are also withdrawn, at the rate of 85p for every pound she earns. If she works 30 hours a week she qualifies for working tax credit, say £30 a week - but then for every extra pound she earns, Kirsty will pay 31p in income tax and national insurance and will lose 39p in tax credit - a total of 70p. Her extra net income of 30p in the pound then reduces her housing benefits by another 25.5p – so that Kirsty will lose 95.5% of every extra pound she earns. Jobcentre staff have to provide claimants like Kirsty with “Better Off” calculations, but these are difficult to prepare and often inaccurate because the system is so complex.

The DWP issues 14 manuals to its staff to help them apply benefits. There are 55 different benefit claim forms in use. A woman with a disabled son recently had to complete ten different forms and answer a total of 1,200 questions to claim her entitlements. Some payments are administered by the DWP, some by HMRC, others by local authorities. Both the DCSF and Department of Health can also be involved. Since 1997 the Government has introduced nine new kinds of credit or benefit and then abolished five of them. A claimant entitled to several benefits will find that the rules differ for each one; different amounts of income are disregarded, thresholds and withdrawal rates vary. Claimants may be treated as working for the purpose of tax credits but not for income support. Some benefits are calculated on a weekly basis, others annually. Complicated calculations are necessary to decide which benefit is the most advantageous to apply for. Some will act as a passport to other benefits, such as free school meals. Then there are the rules for back-dating claims, or changes of circumstances, involving different agencies, who may reach different decisions on the same facts – for example whether or not a couple is cohabiting.

It’s hardly surprising that tax credit overpayments to date have reached £2 billion a year. To overcome this, tax credit calculations now ignore increases in household income of up to £25,000 a year- so families with no need for payments go on receiving them. £400 million a year is overpaid in Housing Benefit alone. Fraud is widespread. Separate agencies only have a loose grip over claimants’ circumstances - including the question of whether they even exist under the identity supplied. Computerised applications, with no personal contact, make matters worse.

Complexity also acts as a poverty trap. If you succeed in negotiating the system to reach a stable position, why risk changing it? New earnings can create too much uncertainty – how can you tell whether you will be better off as benefits are withdrawn and tax becomes payable? Millions of people are both paying tax and receiving benefits; this is expensive and pointless.

This has got to change. Our report recommends the creation of a single benefit form for all claimants, and a single website with an online calculation to show how increased earnings will affect benefit entitlement. Single area offices should administer all payments, so that staff can become familiar with claimants, to reduce the possibility of fraud. The same eligibility rules should apply across all benefit categories. No one should be both paying tax and receiving benefits.

As every government knows, welfare reform is difficult, even with the best intentions. But the present system has become so encrusted with self-perpetuating bureaucracy that it is now impossible to ascertain whether billions of pounds of taxpayers’ money is being properly spent or simply poured away. As the recession pushes even higher the bills of social failure, it’s time for the politicians to get a grip.

Access the full report here.