Report: 5-year limit on JSA will boost employment and cut welfare spending

For further comments or to arrange an interview, contact Head of Communications Kate Andrews: kate@adamsmith.org | 07584 778207.

• With £12bn to cut from welfare, the Chancellor should put a 5-year limit on jobseekers' allowance (JSA) to boost employment and cut welfare spending.
• Similar welfare reforms in the United States in the 1990s reduced unemployment by 6-7%, reducing benefits caseloads by as much as 96% in some places. Such a change could translate into an estimated reduction in the benefit bill of £300–350 million, based on current spending.

The UK should consider US-style time limits on out-of-work benefits as part of the cuts to benefits spending, according to a new paper from the Adam Smith Institute.

A new report, Time for Time Limits: Why we should end permanent welfare, finds that a 5-year limit on Jobseekers’ Allowance (JSA) across workers’ lifetimes could save the Treasury £300-350m per year, as well as boosting labour markets and putting a break on self-fulfilling cycles of dependency.

The paper, authored by Peter Hill, a lecturer at the University of Roehampton, reviews President Bill Clinton's 'Personal Responsibility and Work Opportunity Reconciliation Act' (PRWORA) which coincided with a massive decline in welfare rolls from 5 million to less than 2 million families by 2006. The act is credited for saving the US government over $50bn between 1996 and 2002.

In some states, there was a decrease in benefits caseloads of 96%, as well as an unprecedented drop in female unemployment and improvement in their financial status even in low paying jobs, and a drop in child poverty. Furthermore, comprehensive econometric analyses suggest that 6-7% of decreases in unemployment counts (and 12–13% of those in female-headed families) are as a result of the introduction of time limits. Although difficult to estimate the exact impact on the UK labour market ex ante, a similar effect on Claimant Count Unemployment could be expected; this translates to an estimated reduction in the benefit bill of £300–350 million based on current spending.

Though Universal Credit is innovative in tackling benefit withdrawal cliffs that make working very unattractive to some households, it does not put any limits on its unemployment insurance provisions. More radical reform like time limits has potential beyond the government's current schemes.

Just as the US ended welfare as an entitlement programme, the paper argues that the UK should also take the radical step of ending JSA being funded from general taxation and instead return to a form of ‘Unemployment Insurance’ funding from NICs. This would mean operating the welfare system as a genuine self-funding insurance scheme managed through the UK Government Actuary’s Department.

Author of the report, Peter Hill, said:

Now more than ever we have to brave new public policy. Money does not grow on trees; policy makers are spending taxpayers’ money - as well as borrowing it in their name - and taxpayers expect it to be well spent. Therefore, tough decisions have to be made to reduce the costs of welfare.

Time for Time Limits encourages readers to turn their eyes across the Atlantic to the radical welfare reform of the 1990s which saw dramatic shifts in unemployment numbers and the associated costs to taxpayers.

If the Chancellor is serious about tackling the deficit, reducing the national debt and returning to strong growth, there is little scope but to follow the path of successful welfare reform pioneered in the United States. Time limits will re-empower the unemployed to take control of their own lives.

Deputy Director of the Adam Smith Institute, Sam Bowman, added:

Getting people into work is the best way of fighting poverty that we have. But the government’s welfare reforms are doing exactly the wrong thing: cutting in-work benefits that entice people into jobs, and raising the minimum wage to make it harder for people to get their first step onto the ladder.

The reforms discussed in this report worked, and may work in Britain, because they made out-of-work benefits a temporary safety net, and made sure that it always made sense for the unemployed to find a job.

Notes to editors:

For further comments or to arrange an interview, contact Head of Communications Kate Andrews: kate@adamsmith.org | 07584 778207.

To access the full report Time for Time Limits: Why we should end permanent welfare, click here.

The Adam Smith Institute is a free market, libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.