OUR piecemeal welfare state should be replaced with a ‘minimum income’ system and compulsory insurance for everyone,argues Tom Miers
When politicians talk about welfare benefits, they often do so out of context, which is enormously confusing. Take the recent debate in Scotland about universal benefits such as free university tuition, or bus passes and free care for the elderly. The Labour leader Johann Lamont wants these removed from the rich, essentially as a form of “progressive” taxation. The rich, in her view, should contribute more in net tax/benefit terms so that we can stop public sector cuts. She was attacking the SNP government from the left.
But First Minister Alex Salmond accused her of shifting to the right and joining the Tories in their programme of benefit cuts. Bizarrely, Conservative leader Ruth Davidson endorsed this point of view by welcoming the Labour leader to the fold. She sees student contributions, for example, as an economic necessity, but cannot decide whether to sell this as a hit on the rich or a limit on the “something for nothing” society.
All of this goes to show that you cannot discuss specific benefits without taking the whole tax/benefits system into your calculations. The range of benefits is so complicated that changing one in isolation creates all sorts of ripples and false incentives elsewhere.
The net position for any individual or family changes unpredictably, not just as politicians meddle but as their own circumstances change. This is not just extraordinarily difficult and expensive to administer. It is also unfair, as people are disadvantaged if they act virtuously but bump into one of the many “poverty traps” that riddle the system. On top of that, it damages the economy because it encourages people to adjust their behaviour to maximise their net tax/benefit position instead of their productive output, typically by refusing work if the additional income invalidates a benefit.
This week, the Chancellor George Osborne described the example of two young people. One is on the dole and so gets housing benefit and can rent a flat. The other has a job and so has to stay with his parents. In some cases the very act of getting a job leaves people only marginally better off with net pay of only a few pence an hour. So much for the minimum wage! Understandably many prefer to stay on benefits.
But such poverty traps are not confined to the bottom of the income scale. The Chancellor himself recently created another one much further up. Means-testing child benefit left earners just below the higher income tax threshold worse off from a pay rise of less than £1,750. They also had a perverse incentive to fiddle their accounts so that their income is shared with their spouse. Osborne has since tried to smooth out the child benefit trap, but the system is now so complicated that it would take the whole of this page to describe accurately, and it still leaves anomalies. Suffice it to say here that an extra half a million people will have to fill out self-assessment forms from next January.
It is much more efficient to raise revenue by imposing income taxes than by withholding benefits. Tax can be set as a proportion of income (with higher rates for the wealthy if necessary) so that an increase in income is always worthwhile.
This logic points to a radically simplified benefits system, so that everybody gets the same deal whatever their circumstances. Governments can then pursue their social and economic agendas much more transparently and efficiently through the tax system alone.
How could this work in practice?
The benefits system has evolved piecemeal over the last 100 years or more, and this explains its complexity. Each benefit is designed to deal with a specific circumstance – ill-health, unemployment, the birth of a child, old age and so on.
Beyond this, you can divide them into four categories, governed by whether they are “universal” (in other words awarded regardless of wealth, like child benefit or NHS treatment), “targeted” to the poorest (tax credits, social housing), in cash (unemployment benefits) or in kind (education and health).
There is no rhyme or reason to this beyond the historic circumstances in which each was introduced, which makes the current debate in Scotland so limited. If Johann Lamont thinks the rich shouldn’t be allowed free bus passes, does she think we should means-test education provision or the state pension? If Alex Salmond thinks everybody should get free prescriptions, why shouldn’t we all get subsidised housing?
Similarly, if the state is happy for us to choose between private food providers with cash benefits, why not our school or hospital?
The whole system needs to be re-thought. We should replace our higgledy-piggledy welfare state with a universal, cash-based “minimum income” available to all citizens, rich or poor. Out of this we would all take out insurance against the hazards of life such as ill health or old age (otherwise known as a pension). Like motor insurance, this would be compulsory but we could shop around for the best deal and keep the difference. This would encourage both husbandry in the individual and competition in the provider.
On top of the insurance element, the minimum income would include an amount designed to provide the basics of food, fuel and accommodation for all, with children receiving a supplement to cater for their education.
Every year the “minimum income” would rise or fall according to inflation across the range of insurance products and basic requirements. It would thus benefit from improvements in productivity but cater too for the increased costs of new technologies, for example in the field of medicine. Government could set the minimum requirements of each insurance package and also variables such as the retirement age. But overall it would be mercifully free of the political headache of fiddling with the welfare system.
Because the minimum income would be universal, the overall cost of the system would be much higher, notionally requiring higher income taxes. But in net terms, individual taxpayers would be no worse off, and if the minimum income was aggregated with their tax payments at source, they would barely notice. The effect would be that the balance of tax and benefit income would shift as incomes rose, just as they do now, but in a far simpler way that smoothed out all the anomalies and poverty traps.
In fact, the overall economic costs of welfare would probably be lower, allowing lower overall tax/benefit contributions even for the wealthy, because the system would have no distorting false incentives, would be cheaper to administer and would benefit from competition in services that are now provided “in kind’ by the state.
To his credit, Iain Duncan Smith, the Work and Pensions Secretary, is rolling a number of cash benefits into one “universal credit”. In other parts of the welfare state successive governments have allowed us to shop around for publicly financed services. Even the Scottish Government has introduced examples of this – parents use state vouchers to buy nursery provision from private operators, and bus passes are used with private companies.
So a holistic, universal, cash-based benefits system goes with the grain of current reform, while allowing philosophical differences on redistribution to be expressed through the tax system.
It is something we could all rally around, from every part of the political spectrum.