Social security – Cost savings first, reform later

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The UK’s social security figures are terrifying. If the related tax credits of c£22 billion per year are also taken into account, the overall cost of the social security budget is close to £190 billion – that’s over £3,000 per person per year. Against that background, the Coalition Government has targeted this budget aggressively in its quest for public expenditure savings.

However, recent media comment has focussed on cost savings, maladministration of benefits, fraud and long-term reform of the whole system: these aims are very different. In seeking to achieve all of them, the Government risks losing focus. Its short-term priority should be to deliver the necessary savings – of at least £5 billion annually.

Aside from its CPI-based uprating adjustment, the Government should adopt a ‘shrinkage’ policy – a combination of a modest reduction in benefit payments and the denying of eligibility to the least deserving claimants – to achieve a substantial reduction in the pay-out costs. For example, a 5% benefit cut and a 5% eligibility reduction could deliver annual savings of up to 10% from the social security programme. Of course, tax and threshold issues distort the calculations, but the principle endures.

In both the short and medium terms, vigorous efforts should be made to reduce maladministration, which – given the immense complexity of the system – is almost inevitable. Furthermore, catching social security fraudsters, whose activities are almost certainly under-estimated, should be accorded priority.

In the long term, full integration of the social security system into the taxation system - thereby giving rise to a negative income tax – is the Holy Grail. It should reduce the poverty trap and deliver major savings. However, it will be a project of byzantine complexity and should only be attempted with the greatest care – it is not a panacea for short-term savings.

A logical strategy?

On reforming benefits

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 I was on both Sky and BBC News last week talking about Work and Pensions Secretary Iain Duncan Smith's proposals on welfare reform. I basically advanced three main arguments, all in favour of the most radical of Duncan Smith's reform options - replacing the entire benefits and tax credits system with a single, 'universal credit' that would be withdrawn at a flat taper rate as a person's income increased.

The first was that the current system is a nightmare, that it is complex, bureaucratic and riddled with perverse incentives that mean it often makes more sense for a person to be on welfare than in work. No one would ever has designed such a system intentionally - it is just the result of one political initiative being piled on top of another, until you're left with a Byzantine mess that makes no sense whatsoever. Given that the current system is so bad, Duncan Smith is absolutely right to want to tear it up and start again. That fits entirely with the  zero base, 're-booting government' ethos that the ASI's has been promoting ahead of the Comprehensive Spending Review. 

My second point was that the key aspect of welfare reform was to make sure that work always paid, that people were always better off working more rather than working less. Getting people back to work, I argued, is the only way we can sustainably reduce welfare spending in the long run. As it is, the welfare bill is just going to keep rising - so again, Duncan Smith is right to be radical.

My third point was that of the various options outlined in the government's consultation document, the single 'universal credit' was by far the most appealing. There are several reasons for this: firstly, having a single credit with a single rate of withdrawal is the best way to ensure that perverse incentives are, as far as possible, removed from the benefits system. A lot of the problems at the moment come from the complex interaction of various different programmes - having only one will make things much easier. Moreover, having a single credit also allows for the greatest short-term savings to be made in terms of reduced bureaucracy and administration, and less fraud, abuse and error. That makes the up-front costs of setting up a new system more palatable.

All in all, the government's consultation document is very promising: if the right choices are made, Iain Duncan Smith's proposals could have a hugely beneficial, transformative effect on the welfare system.

Moving to work

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Iain Duncan-Smith's talk of helping people to move to places where they can find work has inevitably conjured up memories of "On yer bike!" (roughly meaning "Get lost!") What Norman Tebbitt actually said was rather different:

"I grew up in the 1930s with an unemployed father. He did not riot. He got on his bike and looked for work, and he went on looking until he found it."

The coalition government will probably do a mixture of making job-creation easier in deprived areas, coupled with making it easier for people to move to areas with better prospects.

The economics of it are complex. It costs a great deal of public money to create a job – many times over what it would cost to help a family to move. That public money is ultimately taken from the private economy, where it could have generated or sustained more jobs than those it was seen to create when spent publicly. People like Ed Balls who call for massive public "investment" in jobs completely overlook the parallel damage inflicted on the private sector by the taxes it takes to do this.

On the other hand, moving families to where there are jobs might well put pressure on infrastructure. There might be extra numbers for schools and hospitals in some areas, as well as more housing needed and more transport on the local roads. The economics are not entirely one-sided, but on balance moving people to jobs is still a lot cheaper than trying to move jobs to people.

Iain Duncan-Smith points to the fact that some people are trapped, unable to move without forfeiting their housing rights, giving Britain one of the most static workforces in the Western world. Economies are essentially dynamic, with new industries springing up to take the place of declining ones, and not necessarily in the same areas. The combination of state welfare and an insistence on national wage rates by trades unions prevents deprived areas from trading on lower labour costs to attract new businesses.

Given this, encouraging mobility of labour seems a fairly obvious and helpful thing to do, rather than an occasion for outburst of pious rage. Helping people to do what they want to do creates opportunities for them to expand their lives, rather than keeping them confined and limited.

Reforming welfare

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Iain Duncan Smith, Secretary of State for Work & Pensions, points out that the present system tends to park some people on long-term benefits. His department reports that 1.4 million people in the UK have been on an out-of-work benefit for nine or more of the last 10 years; that social mobility in Britain is worse than in the USA, France, Germany, Spain, Sweden, Canada, Finland and Denmark; and that a higher proportion of children grow up in workless households in the UK than in any other EU country.

Part of the solution must be to tackle the poverty trap that means some people wanting to move from welfare to work face losing over 95 pence for every £1 they earn. Another part must be to look hard at entitlements. The state allows some people to shun work because they prefer a life that combines leisure and benefits, and it allows them to do so indefinitely.

In many other countries unemployment pay is regarded as a stop-gap, to assist people who lose their jobs over the period until they can secure another one. In the UK, it can become a way of life. Countries that do offer indefinite welfare tend to have high long-term unemployment. The countries that time-limit it tend not to. The moral seems to be that you get the unemployment you pay for.

Iain Duncan Smith should consider limiting unemployment support to six months, a figure used in some other countries. The knowledge that it will cease will encourage people to try very much harder to find work, and perhaps to be less fussy about what type of job they will accept. The approaching cut-off point will prompt support from families and charities, too.

This should be coupled with moves to make it easier for small businesses to take on new staff and for the private sector to create the jobs that will be needed. The impending threshold rises for income tax will also help to make work more attractive.

This approach would radically transform Britain's welfare system and set about dismantling the dependency culture it has fostered. It is long overdue. 

A socially mobile Britain

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Civitas released a report this week showing that most politicians are poorly informed about social mobility in the UK and because of this have created a number of policies that are unnecessary and damaging. It argues that Britain still is a meritocratic society and that there is no need for the meddling and positive discrimination in education and employment that the previous government encouraged.

Among other things, Civitas found that ability trumps class in the UK, with ability being over twice as influential as origins in determining a child’s future success. It seems that actually what really matters is talent and hard work to change your chances in life, not government interference.

No doubt Harriet Harman will be outraged by these findings. Civitas is critical of the last government’s attempts at social engineering, which has encouraged discrimination in favour of working class students at university and has attempted to flatten income distribution through higher taxes and redistribution. None of these government strategies have actually encouraged social mobility. In reality it is through individual striving and ambition that people’s material situations are best improved, not through unfair government policies that prioritise one social stratum at the expense of others.

Ultimately nature isn’t fair and government can’t beat the laws of nature. Everyone possesses different abilities, talents, and levels of intelligence. As such we can’t all hope to achieve the same affluence or status in life and it is foolish of governments to think otherwise. It seems to me it’s about time the aspiring middle classes stopped being unfairly stigmatized and taxed and are recognised, as Civitas highlights, as the motivated, intelligent and productive wealth generators of our nation. It’s ironic the past government has sought to punish those who have elevated themselves through hard work, whilst claiming they are seeking to improve social mobility. Ultimately the lesson from this report is that if the new government really wants to create a fair society then they should step away from any attempts at social engineering and let people determine their own futures.

IDS's welfare reform

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Iain Duncan Smith, the UK's welfare minister, proposes reform measures today that could – just possibly – create the sort of welfare system we want. He has spent a decade in opposition studying the problems of unemployment, incapacity, and disadvantage, and has developed some no- nonsense solutions that might be politically difficult, but which could be effective.

He is helped, of course, by the plan, spearheaded by coalition
partners the Liberal Democrats, to raise the tax threshold markedly, so as to take the poorest people, on £10,000 or less, out of tax entirely. As he says, at the moment, it is not worth people leaving benefits to take a job for less than £15,000 because the combination of the tax they pay and the benefits they lose means they face an effective marginal tax rate of 70%, 80% – even 90%. Even the richest bankers only pay 50%.

That is why we have 5 million people of working age on benefits, and why, in a country with rising longevity and health standards, 2.5m people – and rising – remain on incapacity benefit. Can they all, really, be completely unable to work? Or can we help some of them back to work?

Past efforts to move people from welfare to work – like outgoing Prime Minister Gordon Brown's "New Deal" – have not succeeded, even with stricter and stricter rules, for two reasons. First, the incentives have been stacked against people moving from benefits into low-paid work. Ask the low-paid staff of any cafe or pub in Britain how long they work, and they will say sixteen hours – because if they work more than that they start losing benefits. So employers have to take on twice as many people to fill the shifts, with twice as much headache- inducing paperwork.

Second, the state welfare system treats people on benefits as case numbers on a spreadsheet, rather than individuals. Many people on incapacity benefit, for example, could do some work at home, if it could be organised for them. Yes, they might have good and bad days, but it needs the personal touch of a private or voluntary agency who understands this. That is why IDS is keen to involve more such groups in the actual delivery of unemployment and incapacity benefits.

His other initiatives – making sure people are assessed immediately so that their health problems get fixed rather than getting worse – loans for unemployed people to set up new businesses or work clubs to help themselves or others, a sliding scale of sanctions to prompt people back to work, and simplifying the system by slimming down the number of benefits (from 51 to, ideally, just one long-term and one short- term benefit) – are all useful measures. But getting the incentives right, and making sure those who do remain on benefit are dealt with as people and not as case numbers, are what will really make the difference. 

Public goods and private action

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On Monday evening, Dr Stephen Davies delivered the Libertarian Alliance’s third Annual Chris R. Tame Memorial Lecture. He spoke on ‘Public Goods and Private Action: How Voluntary Action Can Provide Law, Welfare and Infrastructure – and Build a Good Society’. As always, Dr Davies was first-rate, with much food for thought.

Dr Davies articulated an argument largely missing from the free market and libertarian arsenal, namely that voluntary collective action leads to a more robust and humane society. In consequence, a strong moral case exists for a reduced state, to permit individuals the freedom with which to collectively build their own institutions, separate from politics and managerial class that currently dominates it.

Examples were used to show how historically, private actions have produced public goods. Private companies built the UK’s railways and canals, while by the 1830s Turnpike Trusts has set up over 30,000 miles of private roads. In police, prosecution associations sprung up to facilitate justice for the poorest, the efficacy of which is proved by the fact that insurance companies offered cheaper cover to those in these associations. In welfare, mutual aid was the prime alternative to the state, not charity as is often supposed. These and many more examples show how we used to thrive with much less state.

Given the fiscal crisis and the structural deficit, Dr Davies argued that there will open up a very real opportunity for the revitalisation of civil society along these lines. He argued that the client-patron relationship between the governed and the governing could and should be broken down in order to turn back the infantilisation of the people. In this counter-revolution, Dr Davies suggested that education could be the key, with competition undermining both the elites’ qualifications and the passivity of the people engendered by state education. Let's hope he's right.

H/T Samizdata for the photo.

The welfare state

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We're still in it.

Wealth inequality and the Hills Report

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Over in the think pieces section of the website, ASI fellow and pre-eminent blogger Tim Worstall has an article examining the National Equality Panel's 'Hills Report', with particular emphasis on its treatment of wealth inequality and the gender pay gap.

Tim argues that not only did the report's authors directly ignore Office of National Statistics guidelines on how to measure the gender pay gap, but that they also hugely overstated wealth inequality in the UK by failing to take account of the effects of the welfare state.

He makes a good point: politicians use wealth inequality as a justification for all kinds of redistributive policy interventions, but then fail to take account of the effect these policies have.

Why, for example, do we count private pensions as ‘wealth’ but ignore the guarantee of a state pension? As Tim argues, this is a piece of ‘wealth’ with a calculable net present value. The same is true of access to the NHS. And when these two aspects of the welfare state are factored into our measurement of wealth inequality, the wealth gap between the 10th and 90th percentile is not 1:100, as the Hills Report suggests, but is actually more like 1:5.

If you were a cynic, you might say that it rather suits big government politicians to be able to advocate wealth redistribution on the basis of inequality, safe in the knowledge that this redistribution won’t actually affect their chosen measure of inequality and deprive them of a case for further interventions. And so leviathan keeps on growing.

Anyway, if you want to know more check out Tim’s article. If you want to debate the issues he raises, you can do so in the comments below.

Social security – The shrinkage strategy

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With the starting gun now fired for next month’s General Election, there will be widespread debate about public expenditure cuts – a near certainty given the colossal £167 billion projected public sector net borrowing (PSNB) deficit for 2009/10. Last year, the social security budget is expected to have cost £164 billion, along with a further £23 billion for the related Tax Credits.

Given Total Managed Expenditure (TME) of an estimated £643 billion for 2009/10, pre debt interest, it is clear that social security – the UK’s largest public sector programme – could yield very sizeable savings. Once the high cost of pension provision is stripped out, which – depending on the methodology used - accounts for around a third of the budget, cuts will probably be sought from the remainder of the social security programme.

Some commentators have advocated a ‘Route One’ approach by simply abolishing some benefits or by scaling back Child Benefit entitlements. The more scientific approach is to operate a top-down policy and specify a budget that must be met each year until 2014/15.

Of course, it is very difficult to forecast the precise costs of social security payments, especially with rising unemployment and uncertainty on take-up levels. But, in setting the annual budget, the relevant Secretary of State should be held responsible for delivering it.

The most sensible way of achieving savings is by imposing a shrinkage policy right across the budget – but with the pension element being exempt. If Incapacity Benefits were, for example, reduced by a modest 2% per year – and entitlement were limited to only the most deserving 97% of applicants – net savings of well over 3% should be generated annually from this component of the budget.

Apply this methodology across a social security programme costing c£100 billion per year, pre pension provision costs, and do you not achieve material savings?