By Gavin Kelly and Nick Pearce
13 December 2010
Welfare reform is crucial to the coalition’s agenda. But ministers’ plans are driven by cuts rather than consistent principles, while Labour seems out of touch. Two policy thinkers with insider experience map out a better approach
Almost every significant reform of the welfare state is heralded as Beveridgian in scope and ambition. But the reality rarely matches the lofty rhetoric. The latest attempt – Iain Duncan Smith’s plan for a Universal Credit – is certainly bold. It bears the imprint of a politician who has thought hard about welfare reform, and is determined to drive it through.
But the great misfortune for the work and pensions secretary is that his flagship reform will be outweighed by a broader set of measures being pursued by the coalition government. It is this disparate set of policies – as much as Duncan Smith’s claim to a grand plan – that look set to fundamentally alter the complexion of the welfare state.
That raises the question of what sort of welfare state we will be left with, when all these pieces are put together. So far – aside from some retro-talk about ‘benefit scroungers’ and ‘crackdowns’ – the only clear thread running through the coalition’s agenda is the objective of reducing public expenditure. But that tells us little about the kind of system that will emerge. To answer that, it is useful to ask four fundamental questions that will help to define the character of any new settlement.
First, which sections of society is the government choosing to prioritise for support? On this front, Chancellor George Osborne’s plans mark a radical change of direction. The most significant – and most under-reported – aspect of the Comprehensive Spending Review has been the decision to reduce support for working people. Under the guise of hacking back a ‘spiralling benefits bill’, the government is removing financial support from low- and middle-income working families.
The full implications are not yet clear, but it is at least a £5bn hit, targeted at those with children. This includes reductions to childcare support, the Working Tax Credit and Educational Maintenance Allowances, which pay 16–18-year-olds up to £30 a week to stay in compulsory education. These cuts will all be sharply felt and will expose the under-appreciated role the welfare state has come to play in lifting the incomes of working families. Not only will the changes undermine the stated goal of rewarding work, they will also constitute a major squeeze on the living standards of ordinary families.
Recent analysis from the Office for National Statistics found that while gross domestic product fell by 5.5% during the recession, disposable incomes actually rose by 1.2%. But over the coming years, as the latest Bank of England report made clear, the situation is likely to be reversed. Sluggish economic growth is set to be characterised by falling real living standards, as wages stay flat while inflation, charges for public services, pension contributions and VAT all rise. As the effects start to be felt, it will no longer be credible for the chancellor to claim that it is primarily benefit cheats who are paying the price to prevent bigger reductions in spending on public services. The reaction from working families could make the 10p tax row look like a storm in a teacup.
The second question that needs to be answered is what principle the government is following in terms of who should be eligible for welfare support – specifically, what is the balance between universalism, means-testing and a contribution-based system? On this front, the planned reforms are a confusing hotchpotch. In respect of Child Benefit, the principle of universalism has been wilfully undermined. Yet for the array of non-pension benefits for the over-60s, it is being unconvincingly defended – despite this being the richest generation of pensioners in history.
Meanwhile, the contributory principle has been undermined for working-age people, with the decision to means-test the Employment and Support Allowance for disabled claimants after 12 months. But at the same time it has been strengthened by the renewed commitment to a Basic State Pension rising at least in line with earnings. Yet even this reaffirmation of the contributory principle on pensions could be short-lived, if the government moves to its planned residency-based Citizens Pension entitlement in its forthcoming green paper.
These are conscious choices; no hands are being forced. And for serious reformers such as Duncan Smith, they represent a missed opportunity to think more creatively about who gets help, and on what basis.
The Universal Credit, for example, provides an opportunity to refashion the contributory principle for the post-crash jobs market, rather than for the postwar era that William Beveridge faced. Contributory ESA could have been made time-limited within the Universal Credit, in return for a higher short-term rate of benefit for those who lose their jobs. That could have been part of a wider move to more generous, but temporary, support.
Similarly, the government could have made welfare conditionality both tougher and fairer by putting Labour’s job guarantee – real work matched by real obligations – at the heart of the welfare state. These would be big, strategic reforms, and a more conscious forging of a new type of settlement.
The third question is what type of family structure the welfare state is seeking to support. Under Labour, the strategy was to make life easier for dual-earner households – to boost living standards, promote gender equality and enable parents to share both working and caring.
Over the past few months, coalition policy has faced in different directions on this issue. At the Conservative Party conference, the chancellor made a deliberate choice to remove Child Benefit from households where someone is on the higher rate of tax – even where the family income is significantly less than that of dual-earners, each paying the basic rate of tax.
For traditionalists, this was a provocative punishment of stay-at-home mothers (or fathers). But, just a few weeks later, Osborne announced significant cuts in support for childcare that fall hardest on dual-earner households on low and modest incomes. For some couples, the prompt is for someone to stay at home with the children; for others it is for both to enter work. Families are being nudged in contradictory directions by the government.
The final question to be answered is what balance the welfare system should strike between personal and collective responsibility. Here the government has made the clearest possible choice, with higher education funding being the leading example. Most of the political heat has focused on the size of the tuition fee cap – but this obscures a more fundamental issue.
Unlike in 2004, the rise in fees is meant not to increase investment in the higher education sector but to shift responsibility from the state to the individual. In transport, inflation-busting fare rises will serve a similar function. It now seems likely that the government will try to extend the principle elsewhere, with the future funding settlement for the care of elderly people looming large on the horizon.
So far, then, we have little clarity over the nature of the new settlement the coalition is trying to forge. For the Opposition, this raises the problem of how they construct a clear response to a largely unformed agenda. To date, Labour’s approach has been largely reactive and oppositional. The need for welfare cuts has been quietly acknowledged, but measures to achieve this have yet to be set out. Some reforms have been opposed, such as those to Child Benefit, but little has been said about the cuts in aid for working families. Established welfare principles such as universalism have been set in aspic rather than recast for modern times.
Developing a credible alternative on welfare will rightly take time. But Labour will need to face up to the scale of the problem. Not only are its achievements in government being trashed; its default philosophical starting points seem tired. A model of social democracy based simply on spending the proceeds of growth to improve public services and redistribute income has largely run its course. A new and popular account of the welfare state and public services is needed; one that better fits the next decade’s core challenges of constrained living standards and fiscal consolidation.
This requires a massive change of mind-set. In time, the coalition could be vulnerable to the charge that, in prioritising deficit reduction above all else, it is neglecting the big problems facing society, from housing shortages and a broken elderly-care system to growing in-work poverty and the escalating cost of childcare. This charge will be especially damaging if the failure to grapple with these issues now leads to higher fiscal costs and more dire social consequences in the future.
The government has been relentless in its efforts to assume the mantle of ‘fairness’. Ministers regularly argue that it is right to remove some aspect of support from one group because another group doesn’t also have it. Typically, this has resulted in levelling down. This approach could be contrasted with a radical agenda for recasting the welfare state so that it both protects better and demands more.
This would mean engaging directly in the trade-offs that are an inevitable consequence of slower growth and fiscal retrenchment, rather than merely resisting cuts. It would redouble the commitment to full employment; essential to tackling poverty and generating revenue. It would prioritise family services, such as childcare and care of elderly people, over schools and hospitals, not least to help women into work. It would accept that there is now limited scope for more generous tax credits, and seize the opportunity to more robustly shape and regulate the low wage jobs market. And it would admit that child poverty will not be ended without more radical social and economic reform to tackle inequality at source.
In 2010, the coalition gained credit for its tough approach to the deficit and the perception of policy momentum. It remains to be seen whether the Opposition can develop a credible, affordable alternative over the next few years. By then the unknown destination of the government’s welfare journey will have become clear and its full implications and costs will be visible to all.
Haven’t they got homes to go to?
The coalition government’s welfare policy does not illuminate how some of the structural challenges facing the British welfare state will be resolved.
As well as social care, housing is an outstanding issue. The coalition is set to outdo Labour’s poor record on building affordable homes to rent and buy.
Attention so far has focused on the impact of Housing Benefit cuts, but the challenges are far longer-standing and more profound.
Tight mortgage finance and deep cuts in public investment will make access to affordable housing even more difficult for large swathes of the population.
There is now a desperate need to attract large-scale private and institutional investment into the development of housing to rent and buy – but neither party has yet shown the creative thinking necessary.
Meanwhile, for those who do own their own homes, there is a pressing need to think about the best way of ensuring mortgage protection without the cost falling directly on the taxpayer.
Gavin Kelly is chief executive of the Resolution Foundation and a former deputy chief of staff at Number 10; Nick Pearce is director of the Institute for Public Policy Research and a former head of the Policy Unit at Number 10