Twenty-first century welfare

Issue 218 (October 2010)

David Simmons examines the Government’s consultation paper on reforming the current system of benefits and tax credits.

Background

There have numerous reports in recent years from a range of organisations, setting out a wide variety of proposals for structural reform of the benefit system. One such report, Dynamic Benefits: towards welfare that works, issued in September 2009 by the Centre for Social Justice (CSJ), has particular significance and influence because the CSJ was set up and chaired by the current Secretary of State for Work and Pensions Iain Duncan Smith, and the report, which was the culmination of several years’ work, was designed to provide a blueprint for welfare reform for a prospective Conservative government.

Dynamic Benefits (see Bulletin 212), basically accepted the Labour government’s mantra that ‘work is the best route out of poverty’, but asserted that the structure of the benefit system was, in itself, a significant barrier to this because of its immense complexity and the in-built work disincentives resulting from the rate at which benefits were withdrawn on entering employment, leading to entrenched ‘worklessness’ and ‘welfare dependency’. Based on an analysis of how the welfare system influences claimants’ attitudes and behaviour (‘dynamic modelling’), it proposed the replacement of current working-age benefits by a ‘universal work credit’ and ‘universal life credit’, payable by the DWP and withdrawn by the Revenue at a single taper rate of 55 per cent of post-tax income.

The principles of the report were accepted by the new Coalition government and the Queen’s Speech included a proposal to introduce a Welfare Reform Bill early in the New Year, to simplify the benefit system and improve work incentives. A consultation paper, 21st Century Welfare,1was published in July setting out options for reform and asking for responses to a series of questions by 1 October.

Problems with the current system

The main premise of the paper is the need for fundamental structural reform, in contrast to the well-intentioned but piecemeal, and ultimately unsuccessful, reforms introduced by previous governments. As Iain Duncan Smith stated when launching the consultation, ‘We are proposing to change forever how the system works. Not tinkering around the edges, but a fundamental change from top to bottom.’ Chapter 2 of the paper sets out the perceived problems with the current system, focussing on the two key areas highlighted in Dynamic Benefits – poor work incentives and complexity. In relation to work incentives, the paper asserts that ‘too many people believe they are better off on benefits than in work’ and points to the high proportion of earnings lost (in some cases more than 90 per cent) when claimants enter employment due to tax and withdrawn benefits.2An example is cited of a person earning the national minimum wage who would be less than £7 per week better off by working an additional 16 hours for an extra £92 (‘an effective wage rate of 44p per hour’).3The paper also highlights the perceived concerns people have about the ability of the system to adjust to their circumstances. ‘They ask themselves: “Will the in-work benefits kick in quickly enough to fill the gap before my pay arrives?” and “How long will it take to get out-of- work benefits again if the job does not work out?”’.4

Attempts at reform

With regard to complexity, the paper points to ‘successive attempts to adapt the system to meet immediate priorities, resulting in layer upon layer of ill-fitting changes, often with long periods of transitional protection, adding steadily to the complexity’.5The DWP issues 14 manuals, comprising 8,690 pages, to its decision makers and a further four volumes totalling over 1,200 pages covering housing and council tax benefit to local authorities. Many claimants have to deal with more than one agency to whom they may be required to notify changes of circumstances separately.

Other problems highlighted in the paper include:

  • the rising costs of a ‘failing system’ which are ‘spiralling out of control… at a time when we can least afford it’, with real-time spending on working age benefits and tax credits up from £63 billion in 1996/7 to £87 billion in 2009/10;6
  • continuing high rates of poverty and welfare dependency, with one in four working age adults unemployed and a fifth of families with children in poverty, trapped in a system which ‘gives little consideration to the behaviours it generates’.7

Options for reform

Chaperts 3, 4 and 5 set out options for reform, based on a set of principles which include:8

  • ensuring that the system is affordable in the short and long term
  • ensuring people get and perceive clear rewards for taking up work which outweigh the risks;
  • increasing fairness between different groups of claimants, and between claimants and taxpayers;
  • continuing to support those most in need, and reducing unemployment and the number of children in poverty;
  • promoting responsibility and positive behaviour.

Five models for a reformed system are then briefly described:

  • a universal credit which would replace most means-tested benefits and tax credits, bringing ‘in-work’ and ‘out-of-work’ support into a single system. It would pay personal allowances to single claimants or couples (as now) with additional payments in respect of children, housing costs and disability on a means-tested basis (with earnings disregards). The work capability assessment would be retained to assess claimants who are unable to work because of sickness or disability. The credit would be withdrawn at a single standard taper rate as post-tax income rose, and claimants would be given a single statement of their entitlement. The universal credit was the model suggested in Dynamic Benefits and is thought to be the one favoured by Iain Duncan Smith;
  • a single unified taper which would retain most current benefits and tax credits but withdraw them at a single standard taper rate, which would apply to overall benefit entitlement rather than individual benefits, which is currently the case. Claimants would, therefore, keep the same amount of every pound they earn as they move into and progress in work;
  • a single working age benefit which would be paid at a standard flat rate to all claimants, possibly on a non-means-tested basis for the first 12 weeks and then on a means-tested basis, with additional provision for extra costs and the retention of tax credits. Contributory benefits would be abolished;
  • the Mirrlees model which would replace most means-tested benefits, tax credits and child benefit with a family allowance, which would be far less generous than current income support levels (£50 for a single person) but would disregard earnings of up to £90 and then apply a 30 per cent taper rate (plus 15 per cent on housing costs) via the tax system;
  • a negative income tax to replace means-tested benefits and tax credits, which would be withdrawn as income rises, in order to achieve a constant marginal deduction rate until all support was exhausted.

Other areas of reform mooted include:

  • extending conditionality to part-time workers ‘to push individuals to extend their working hours and/or increase their earnings until they are working full time or until they are off benefits altogether’ and to claimants not currently subject to conditionality because of ill health or caring responsibilities, ‘requiring them to look for or prepare for work of a few hours per week in line with their capability and circumstances’;9
  • imposing benefit sanctions until claimants ‘demonstrate they have re-engaged with their personalised set of commitments; for those closest to the labour market this loss of benefit for their non-compliance may be permanent’;10
  • moving to a less centralised system with more discretion for advisers at a local level (‘localisation’);11
  • reviewing the role of contributory benefits;12
  • introducing a single application process for all major entitlements, reviewing the role of the DWP, the Revenue and local authorities, and making more use of ‘real-time’ earnings data provided by employers to the Revenue via the PAYE system, or introducing ‘fixed-period awards’, to reduce the need for claimants to notify changes in their income.13

Comment and issues

The paper clearly sets down markers and a direction of travel towards a simplified system with more conditionality and work incentives, but is short on detail and raises more questions than answers about the structure and administration of a new system. CPAG welcomes changes that are potentially positive for claimants, including a simplified system with higher earnings disregards and lower withdrawal tapers, but would be concerned about reduced entitlement for people not in work.

‘Simplification’ is an attractive prospect for claimants and advice workers and easy to ‘sell’ to the public, the media and politicians. It is difficult to achieve, however, where entitlement continues to be based on an ongoing assessment of claimants’ means, housing costs, family composition, disability, capacity and availability for work, and tests relating to conditionality. As the introduction of employment and support allowance (ESA) illustrates (with its 170 regulations, five schedules, numerous sets of amending and consequential regulations and volumes of official guidance), amalgamating different benefits under one name does not always result in simplification.

The worry is, of course, that ‘simplification’ could mean big cuts in entitlement for claimants, including the poorest and most vulnerable. The paper confirms the need to reduce the welfare bill and, following the cuts announced in the June Budget, the Chancellor has openly stated that further reductions are needed and that more cuts to welfare would mean less cuts in other areas of public spending. The paper is short of any detail about potential losers and gainers but ‘making work pay’ implies cutting out-of-work benefits to increase the differential between benefits and low pay. The paper does state in several places that the most needy will be protected without condition but does not specify who the most needy are (only about 5 per cent of ESA claimants currently fall within the ‘support group’). The future of disability and carer’s benefits is left unclear, as is the role of contributory benefits and child benefit, but changes already announced in the Budget suggest these benefits are at risk.

Striking a balance

The analysis of the causes of ‘work disincentives’ is somewhat scanty and does not separate out the effects of tax liability and benefit withdrawal on ‘better-off’ considerations. It also ignores the influence of other factors such as low wages and high work expenses. The proposals to reduce and standardise withdrawal tapers may end up being less radical than the ‘hype’ in the paper suggests. With both the universal credit and single unified taper, the paper states that a balance would need to be struck between incentives and affordability when setting the withdrawal rate in the current fiscal climate, and the examples given do not constitute a major advancement on current ‘marginal deduction rates’. The June Budget actually saw an increase in the tax credit taper rate in direct contradiction to the principles set out in 21st Century Welfare. As stated above, the concern is that, in the current climate, ‘making work pay’ will be mostly achieved by cutting ‘out-of-work benefits’, rather than increasing ‘in-work benefits’ (although any increases in earnings disregards would be a positive move).

The paper also assumes that ‘conditionality’ and sanctions are effective tools to encourage people into work, whereas the evidence on this is actually limited and equivocal. Even more significantly, the paper does not consider the effect of factors such as low pay, poor conditions of employment, childcare provision, other in-work expenses and the recession on continuing high levels of unemployment and the need to claim benefits. The role of employers and the costs of the Government compensating for low wages via tax credits and earnings disregards are not discussed in the paper.

Everyone wants to see improvements in the delivery of benefits and tax credits, but it is not obvious why these would be easier to achieve under a new system, especially in the light of likely staffing cuts in the DWP, the Revenue and local authorities. Arguably, the consequences of maladministration and delays could be worse under a more integrated system, where claimants could find themselves without any benefit – whereas, at least with the current system, a problem relating to one benefit (eg, child benefit or disability living allowance) would not affect payment of other benefits – eg, income support or housing benefit.

The paper concedes that structural reform would constitute ‘a substantial project, potentially affecting millions of customers and businesses’ but claims that ‘the IT changes that would be necessary to deliver a more integrated system would not constitute a major IT project’. This does not chime with previous experience of public sector reform and recent large scale errors within the Revenue’s PAYE system does not inspire confidence in its increased use in benefit assessments.

Afterword

Despite the consultation on 21st Century Welfare, which officially ended on 1 October, the Government appears to have already decided to proceed with reform and introduce a universal credit via a White Paper later this year and a Welfare Reform Bill in 2011, although it is expected that the full implementation of the new system will take several years.14 This begs the question of what the point of the consultation actually was. There have been rumours of disagreements between the DWP and the Treasury about whether the upfront costs of the reform can be met at this time, but these appear to have been resolved with the announcement of further cuts to current benefits (see News in Brief, p2). The new system is expected to deliver billions of pounds of savings in the longer term.

 


Please be aware that welfare rights law and guidance change frequently. Therefore older Bulletin articles may be out of date. Use keywords or the search function to find more recent material on this topic.

  • 1. DWP Command Paper CM 7913, available from www.dwp.gov.uk
  • 2. In paragraphs 16 and 17 of Chapter 2, it is estimated that 600,000 people could face a participation tax rate (ie, the proportion of gross earnings lost in tax and withdrawn benefits) of more than 90 per cent, and 130,000 a marginal deduction rate (ie, the proportion of each additional £1 of income lost in tax and reduced benefits) of more than 90 per cent, although many more (over 3.5 million) had marginal deduction rates of 60–80 per cent.
  • 3. para 8, Chapter 2, 21st Century Welfare, DWP, July 2010
  • 4. para 20, Chapter 2
  • 5. para 23, Chapter 2
  • 6. paras 3-5, Chapter 2
  • 7. paras 8 and 10, Chapter 2
  • 8. para 1, Chapter 3
  • 9. para 5, Chapter 4
  • 10. para 7, Chapter 4
  • 11. paras 8 and 9, Chapter 4
  • 12. para 11, Chapter 4
  • 13. Chapter 5
  • 14. Speech to the Conservative Party conference by Iain Duncan Smith, 5 October 2010