Iain Duncan Smith has set out proposals for a comprehensive reform of the welfare system with the goals of simplification and ensuring that people who work will always be better off than people on benefits. The key features of these reforms are a greater focus on conditionality (so that when people receive support they are required to look for and take-up work), greater support for job seekers through the Work Programme and a Universal Credit.
The coalition is right to emphasise greater conditionality. Similar approaches have led to reductions in caseloads in the US, Denmark, the Netherlands, Australia and New Zealand. Indeed, conditionality has been so successful that countries are extending variations of these policies to recipients of what were previously considered inactive benefits, such as lone parents, disabled people and people with health conditions. Conditionality has also already been successfully used in the UK. The Flexible New Deal, for example, required people who had been on the Job Seekers Allowance for 22 months to engage in Intensive Activity Periods. This conditionality, matched by more intensive support, reduced the level and duration of benefit receipt.
The current conditions of the labour market mean that this approach, along with the extra support provided through the Work Programme, is essential. People should be provided with the practical support and encouragement to find and take up new employment opportunities so that they do not end up trapped on benefits. Yet, other aspects of the proposals will require the Government to go back to the drawing board. In particular, as Reform identified last month, the case for a Universal Credit is weak. While the emphasis on simplification is right the big bang approach taken with the Universal Credit will not work. Simplification needs to be an ongoing process not a one-off change.
There are practical constraints to delivering a Universal Credit. The proposed credit will not be universal but will vary among families depending on their characteristics. For this programme to work there will need to be a new national information technology system which would allow changes in circumstances, such as earned income, to be monitored in close to real time and the levels of entitlement and abatement to be automatically updated. Yet there are several important criteria for eligibility that cannot be automated without incurring significant administration and compliance costs. These criteria include marital status and the length of time that a child resides with a caregiver in a separated household. There is also the problem of the poor record of implementing national information technology programmes in the United Kingdom.
The economic case for a Universal Credit is also weak. The programme would not provide value for money and would not lead to the increases in labour supply hoped for. It has been argued that 300,000 households would be encouraged to participate in work but this would come at a cost approaching £2 billion (over £6,600 per household). On top of this many people already in work would lose more of their earnings from work. These people would be encouraged to reduce their work effort and become more dependent on the state. As the White Paper (table 1) has illustrated, around 300,000 people in work earning below the tax threshold would face an increase in the rate at which they lose income in benefit abatement and taxes. This increase in clawback would particularly affect the second earners in families.
International empirical evidence also highlights the need to be cautious regarding claims that the Universal Credit would encourage labour supply. In the United States, for example, under the Temporary Assistance for Needy Families (TANF) reforms some States took a similar approach to encouraging work as the Universal Credit (increasing the income that is allowed to be earned before benefits begin abating). Yet there is little evidence that this increase in earnings’ disregards had significant effects on labour supply among single mothers. There is also little support for the argument that getting people to work just a few hours a week will provide a stepping stone into work of longer hours. The Universal Credit would thus be likely to encourage low wage, part time work and cause an increase in the welfare budget and the numbers of people on benefits.
A successful welfare reform process is not simply a technical exercise but involves redrawing the boundary between the state and individual responsibility. Since 2000, reflecting an ever-expanding scope of welfare payments, spending on welfare increased even when the economy was growing. There is a need now for Britain to move onto a new path where welfare provision is no longer an ongoing alternative to work and where individuals, families and communities take greater responsibility for providing for their own future. Yet while there is a lot of good in Iain Duncan Smith’s proposals the underlying approach is to move towards a more heavily centralised and expensive welfare system. These reforms would not be likely to help restore the public finances or put welfare on a more sustainable footing.
Patrick Nolan is chief economist at the Reform think tank
