Memorandum: From: David Willetts, MP and Former Downing St Policy Adviser. To: Martin Taylor, Head of Tax and Benefits Review Group. Re: How to Avoid Wrecking High Ideals on the Rocks of Technocracy
Most governments try to reform welfare: I have even been involved in one or two attempts myself. Here is a summary of some of the lessons I have learnt from working on the subject for more than ten years now. It might save you a lot of time - and grief- later on.
There are two very different ways of looking at the welfare problem. One approach focuses on the cost of the nearly [pounds]100 billion of social security spending every year. It worries about the inefficiency of the system and the complicated ways in which benefits interact with each other and with the tax system. The aim is to find a simpler, cheaper system. It eschews value judgments and focuses on technocratic solutions. Tax-benefit integration, for which Tony Blair has given you personal responsibility, is the biggest and boldest of the technocratic solutions on offer.
There is a second, rather different approach. This focuses on the effects the welfare system has on behaviour. The problem is seen as not just how much it costs but what it does to the people who depend on it. Frank Field is a leading critic from this school, warning eloquently of the morally corrosive effects of means tests. He wants to move away from means testing towards universal benefits which are based on the morally elevated contributory principle rather than what he sees as the morally devalued tradition of income support, supplementary benefit, national assistance, right back to the Poor Law. He truly wants us to revive Beveridge.
It is a revealing example of Tony Blair's style of government that he appears to have endorsed both approaches. On the one hand you are to work for Gordon Brown on the ultimate technocratic solution, the biggest and best means test of the lot, delivered by integrating tax and benefits. On the other hand Frank Field is pursuing his moral vision of the reformed welfare system with genuine personal contributions. It is just like the Brighouse-Woodhead approach to education reform.
So my first warning is that welfare reform gets nowhere unless the Treasury and the Department of Social Security are in some sort of harmony. You need to thrash this out with Frank Field early on.
The tax and social security problem which we hear most about is high marginal rates of taxation and withdrawal of benefits. Here you are wrestling with the laws of arithmetic. In particular, you should avoid the paradoxical increase in marginal rates that you will achieve by cutting them.
You reduce marginal rates by smoothing out the rate at which benefits are withdrawn. But that brings two problems. First, you spend a lot more money, because you have spread benefit entitlement up the income scale. Second, you increase marginal rates higher up the income scale. People are now suffering the withdrawal of a benefit which did not previously reach them.
So here is my advice on marginal rates. Nobody who tells you they are going to reduce the marginal rate to 90 per cent or 70 per cent or whatever should be allowed to get away with it unless they also tell you two things: how much it is going to cost; and how many people higher up the earnings scale are going to find themselves brought into the system and paying a higher marginal rate than they did before?
We are told that Gordon Brown is keen to copy the American earned income tax credit. When I was in the Downing Street Policy Unit at the time of Norman Fowler's social security review, I was similarly excited by that American example. It is a personal tax allowance that is withdrawn as you move higher up the income scale - if you like, a targeted personal allowance. Nevertheless, it does have its drawbacks, such as the higher marginal rate for people who are having the tax allowance withdrawn.
The green paper that we produced in 1985 as part of Fowler's reform of social security advocated a tax credit to be payable to all low-income families, withdrawn as their incomes rose. …