Magazine article Public Finance

Thinking the Thinkable

Magazine article Public Finance

Thinking the Thinkable

Article excerpt

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 underreported - 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 1Op 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. …

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