Today I want to talk to you about reform of our broken benefits system:
- why reform is urgently needed
- how the reforms will work
- and the social and economic advantages we all gain as a result of these reforms.
The reasons for reform
To reform or not to reform - that is the question.
Here in the UK we live in a wealthy country, yet:
- more than one in four working age adults do not work
- 5 million people are trapped on out of work benefits
- 1.4 million people have been receiving out of work benefits for 9 out of the last 10 years
- we have one of the highest rates of workless households in Europe
- and a higher proportion of children grow up in workless households than in any other European country - some 2 million.
Over a number of years, the welfare system - well intentioned as it has been - has created ghettos of worklessness where generations have grown up without hope or aspiration.
This is exactly what William Beveridge warned against in 1942 when he wrote about his Five Giant Evils in society and listed “idleness” alongside want, disease, ignorance and squalor.
As he said in his Report:
“The danger of providing benefits, which are both adequate in amount and indefinite in duration, is that men as creatures who adapt themselves to circumstances, may settle down to them.”
Beveridge set out to slay idleness and was very clear throughout his career that work plays a critical part in the process of alleviating poverty.
Yet today, the benefits system has created pockets of worklessness across the country where idleness is institutionalised.
I want to transform the system so that we can once again tackle this growing problem that Beveridge identified and we must slay.
This dependency has resulted in a welfare budget that has spiralled, rising in real terms from £63 billion in 1996/1997 to £87 billion in 2009/2010 (including tax credits, excluding pensions) - almost 40 per cent in just over a decade.
Yet the true price of welfare dependency is paid by the individual, their families and their children who are trapped in a cycle of inter-generational worklessness and poverty.
We know that work provides the most sustainable route out of poverty. So to break the cycle of dependency, we need to make sure that work pays - even for the poorest.
Under the present benefit system, the less well-off don’t always see work as the obvious choice.
And there are two closely inter-linked issues that explain why that is:
- first - the benefits regime often provides little incentive for people to take work or extra hours if they are on benefits such as Working Tax Credit
- second - where people do decide to work, the system of multiple withdrawal rates for benefits is so complicated that taking a job at the lower end of the pay scale involves taking a real risk.
Starting with incentives to work, it is evident that working for a few hours is not attractive if it means that you lose £8 or £9 for every extra £10 you earn as your benefits are withdrawn.
Ask yourself - would you work if you had a 90 per cent tax rate?
And such small financial gains have to be weighed against the other risks the poorest face:
- being out of step with your friends and neighbours who see no reason to work
- losing your housing benefit or other types of support
- the risk of not keeping the job for long and then having to navigate your way back through a maze of forms and agencies to land back where you started.
This leads me to the second major problem with the present system - its extraordinary complexity.
To give you an idea of just how complex, consider the fact that DWP issues 14 manuals to staff to help them assess benefit claims. That’s 8,690 pages in all.
You need a maths degree to navigate your way through all this, which helps to explain why it costs multiple agencies £3.5 billion to administer the benefits system and why fraud and error accounts for £5 billion a year.
We can tackle these staggering numbers by re-balancing the risk and reward trade-off for the poorest.
To do so, we need nothing less than a complete rethink of the benefit system.
And today, we begin that process with the publication of our “21st Century Welfare” Paper.
This paper sets out our options for a new regime to replace the current complex system of contributory and income-related benefits and Tax Credits for people of working age.
- close the gap between separate in- and out-of-work benefits, meaning that the transition into work would be simpler and less risky
- re-design the level of earnings disregards to increase transparency and provide additional incentives for families to work
- withdraw support by a single taper so that as earnings rise, people can see a steady and reasonable Marginal Deduction Rate that balances the need for decent work incentives with affordability and fairness to the taxpayer.
This would provide a simpler, fairer and more affordable way of making sure that work pays.
Just as importantly, support for positive behaviours will be balanced by reinforced conditionality so people take reasonable offers of work when they are available.
This will not be a simple task, but it is one that we can no longer avoid and there is a major prize at the winning post:
- a more dynamic benefit system that responds to people’s changing circumstances
- a simpler system that reduces administration costs for the taxpayer and makes it easier for individuals to get what they are entitled to when they need it
- and finally, a system that encourages people to move into work and out of benefits altogether, so that they can escape the cycle of inter-generational poverty and improve their own quality of life along with that of their families and their communities.
We have a rare opportunity to reinvent our antiquated welfare system.
So I hope you will read through the paper; contribute to the debate; and work with us to build a better benefits system fit for the 21st Century.