24 November 2006
Work and Pensions Secretary John Hutton must feel it's a case of 'mission accomplished' – for now. His ministerial team's extensive plans to reform the UK's retirement, benefit and child support systems, outlined in the Queen's Speech last week, were met with a surprising degree of parliamentary unanimity. Even Conservative Party leader David Cameron begrudgingly 'welcomed promised measures linking state pensions to earnings'.
But Labour's programme could still sow the seeds of a radical – and controversial – future for welfare provision. We just haven't yet seen the all-important funding details.
Dave Simmonds, director of the Centre for Economic and Social Inclusion think-tank, says: 'There's widespread acknowledgement that what the government is broadly trying to do is correct, but a feeling that they should have been making many of these changes some time ago.'
He notes that Chancellor Gordon Brown has already imposed tough new efficiency targets on the Department for Work and Pensions' departmental expenditure limit (Del) during the next Spending Review period (2008-11) – a 5% real-terms decrease in its operating budget.
'The extensive policy programme outlined last week could become very resource-intensive within that restricted budget,' Simmonds warns. He cites the launch of the Employment Support Allowance from 2008 as an example. This will partly replace incapacity benefit payments paid to 2.7 million claimants by splitting future payments in two: a higher IB rate for those unable to work, and the lower ESA payment for those deemed employable. The change, outlined in the Welfare Reform Bill now before Parliament, reflects Hutton's ambition to get a million people off benefits and into work.
But the assessment system underpinning the switch could be costly. 'How, for example, can the government accurately determine if a person with a history of mental health illness is able to work?' Simmonds asks. 'It is going to require a hefty administration system, including an effective appeals procedure. Can the DWP fund that effectively?'
A department spokeswoman said this week that its forthcoming efficiency requirements made its policy programme 'a big challenge – but not insurmountable'.
But such is the concern about budgets that ministers have already taken some tough decisions to limit costs. The impending Pension Reform Bill proposes that we work for three years longer before claiming the basic state pension after 2046, when the pension age will reach 68. Discontent over the rise has abated in the face of substantial economic arguments.
But another decision relating to the Bill continues to cause concern. The restoration, after 19 years, of the link between the basic state pension and earnings will stop the erosion of pensioners' income compared with the rest of the population.
But pensions minister James Purnell said last month that he would restore the link only from 2012 at the earliest. The Fawcett Society, which campaigns to eradicate the gap between female and male earnings, says: 'By waiting until 2012, the value of the basic state pension will fall a further £10 per week in relation to earnings.' This could push hundreds of thousands of pensioners (particularly women, whose payments will remain lower until a new system of pension 'credits' begins) towards formal poverty thresholds – potentially undoing progress against another Labour welfare target.
Senior Whitehall sources this week countered that the commitment to restore the link to earnings required substantial assessment. One told Public Finance: 'It's a brave but necessary policy shift, but introducing it immediately was seen as an unpalatable option at the Treasury; they need to find this cash first.'
Carl Emmerson, deputy director at the Institute for Fiscal Studies, puts the annual cost of the delay at £500m. The extra cost of the state pension plans will be met partly by the phased increase in the pension age from the mid-2020s. But the institute estimates that would still leave a shortfall in cash for other changes, such as simplification of the state second pension and improved arrangements for carers.
Emmerson estimates that an additional 1.5% of UK national income would be needed: £20bn, or £280 per person annually. But he warns that the real 'catch' with the basic state pension proposals will be the potential for Hutton's long-term plan to be reversed should Labour lose a general election or change direction under its new leadership from next year.
'Since Labour came to power, we have witnessed pension overhauls in 1998, 2002 and now 2006. So there has to be some doubt about long-term political will,' he says.
Liberal Democrat pension spokesman David Laws last week indicated that Hutton's fragile consensus could disappear. One policy where long-term cross-party consensus has been achieved is the abolition of the troubled Child Support Agency, the core recommendation of an imminent child support white paper.
A senior DWP source this week confirmed that the paper would 'draw heavily on the recommendations of Sir David Henshaw's review', published this year. The agency will be replaced with a streamlined organisation and new enforcement powers will allow the DWP to pursue absent parents.
But Laws fears that the narrow focus of a new CSA could lead the government to 'try to write off hundreds of millions of pounds worth of maintenance arrears, which many families have been waiting years for'.
Despite government protestations, this fear is shared by the Child Poverty Action Group. Chief executive Kate Green warns that with so much potential legislation on the agenda, ministers must not undo child poverty gains from one Bill with ill-considered proposals in another. 'The Welfare Reform Bill may increase poverty for some through the introduction of new benefit sanctions,' she said.
This brings us to 'joined-up' government. There are 'interesting ingredients, being thrown into the DWP's shrinking cash pot', says Simmonds . 'But it remains to be seen if the policies are achievable within that context.'
Hutton has won a battle to achieve short-term consensus over his welfare plans. But will he win the longer welfare war?
Pension reform
- State pension re-linked to earnings from 2012
- Retirement age raised to 68 by 2046
- Modernised payments to cater for women and carers
- Simplified state second pension
- Separate white paper, and later Bill, to establish a delivery authority for the National Pension Savings Scheme
Child support reform
Welfare Reform Bill
PFnov2006
