The Welfare Revolution

This speech was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Speech by Lord Freud.

My session this morning is on the welfare revolution.

And it really is a revolution. There is an awful lot going on at the moment.

The Work Programme is up and running, helping long term unemployed people find sustainable work.

The Sickness Absence Review was published a couple of weeks ago and we are working hard on the Government’s response.

Disabled people’s benefits are being reformed to make them fairer, more accurate and easier to tailor to individual need.

But today, I don’t want to talk about any of that.

Today, I want to focus on what’s at the heart of the welfare revolution - the Universal Credit - which we plan to introduce from October 2013.

This is a new income replacement benefit that will support people both in and out of work.

It will replace the complex array of benefits currently paid to people with little or no income with just one payment.

It will be simpler to claim, easier to understand and administer and more effective and responsive than its predecessors.

We are working on a real time information system that will mean we are able to find out how much people are earning and readjust their Universal Credit payment accordingly. This is better for people whose earnings fluctuate and will help to reduce fraud.

Most importantly of all people will know what they are entitled to.

We will withdraw Universal Credit at a steady rate as people start to earn more money.

This means if someone takes a job or increases the hours they work they will be able to work out exactly how it will affect their benefits - and see for themselves that they will be better off in work.

Today’s welfare system is a complicated mixture of benefits that have been added together, piled one on the other in a piecemeal way, as successive governments have sought to address different needs.

It hasn’t been improved so much as extended and stretched beyond any relevance to its original intention.

And what we’ve ended up with is unintended consequences, rules so complex that the civil servants administering them struggle to understand them and people trapped in welfare dependency are unable to find a way out of the system and get back on their feet.

This is not what Beveridge intended.

The introduction of Universal Credit will remove the rules and regulations that prevent people from getting back into work quickly.

It will take the welfare state back to first principles.

We want a welfare system that provides financial support for those unable to work - that goes without saying.

But for those who can work we want a system that encourages a return to employment as quickly as possible.

That’s how welfare support should work.

But today’s system barely works at all.

Let me take you through some of the vagaries of the current system.

The current Jobseeker’s Allowance system means you need to work 16 hours or more to come off benefit and see a real increase in your income.

However, for those remaining on benefit and working less than 16 hours, anything they earn over £5 if they are a single person, slightly more if they are a lone parent or disabled, will result in their benefit being reduced pound for pound.

This means someone over 25 can’t work for even one full hour per week at minimum wage without seeing an instantaneous fall in benefits.

If someone does find work for more than 16 hours per week but it is low paid they may be entitled to tax credits.

But they’d need to end their benefit claim and submit a new claim for tax credits.

The benefits system and the tax credit system don’t interact with each other.

So people trying to leave benefits find their benefit income stops instantly but there can be a long wait before tax credit payments start.

This gap in household income can be catastrophic for family finances.

It encourages people either to retreat back into the benefits system or worse, never try to leave.

Universal Credit deals with this issue.

The tax credit and benefit systems are brought together so there’s no need to move between different systems.

When someone does take a job the Universal Credit payment is tapered off at a steady rate so there’s no sudden loss of benefits.

There’s no catastrophic drop of income.

And there’s no 16 hour cliff edge, the Universal Credit will relate to the actual amount someone earns not disappear at an arbitrary number of hours.

The 16 hour rule has also had an impact on childcare support.

Under the old rules working parents could not claim help with registered childcare unless they worked more than 16 hours per week.

For lone parents in particular this made it particularly difficult to start to move into work.

Universal Credit deals with this issue.

We want to remove these barriers so parents can begin a gradual return to work.

Therefore, under Universal Credit, support for the costs of childcare will be available to all lone parents and couples, where both members are in work, regardless of the number of hours they work.

It will mean that for the first time around 80,000 extra families will be eligible to receive support through childcare.

Similarly, the rigidity of the present system makes any form of flexible working, whilst reliant on state support virtually impossible.

The current system is too clunky and slow to respond to changes in hours and incomes.

This means unemployed people have been unable to take work unless the employer can guarantee a minimum number of hours.

This rules out large numbers of agency jobs or casual work. It has made our unemployed population less flexible than the migrant workers who are filling those vacancies.

It is part of the reason why the number of people on out of work benefits remains around the five million mark.

Universal Credit deals with this issue.

Payments will be based on real time earnings.

So, people can work varying hours and still be confident of a minimum level of income.

The current system infantilises people.

It takes budgeting powers away from people by paying their rent and some of their bills for them.

Benefits are paid weekly or fortnightly, whilst most employees receive a monthly salary.

Benefits are paid to individuals where as most families manage their budget as a household.

This means the whole experience of claiming benefits has become completely removed from the experience of receiving a wage.

This encourages dependency because people literally do not know how they will cope without the support of the state.

Under Universal Credit the default position will be a single, monthly, household payment, wherever possible.

This means benefit claimants will have to manage their own finances - their full finances - so when they do find work it’s easier to leave the safety of the welfare system.

We will provide budgeting support for those who need it. This is a real opportunity to really change people’s lives by giving them the tools they need to take control of their finances.

That’s what the welfare revolution is all about - that’s the final goal - to bring an end to long-term benefit dependency and begin a cultural transformation. 

Now I do have one more thing I want to talk to you about today - Support for Mortgage Interest payments.

These are payments made towards the interest on benefit claimants’ eligible home loans.

We think these payments should only be short term, to help people out when they fall upon hard times, so they don’t lose their homes.

The current system of SMI payments does not encourage people to get on top of their own finances.

It is also not sustainable. Even with today’s low interest rates it costs government £400million a year.

We want to recover some of the SMI money so we can reinvest it in helping more people.

For new claimants we are looking at options for recouping that money either when a house is sold or by levying a charge on the property for long term claims.

Today we have published a call for evidence seeking views on a number of options for retrieving some of these funds. We are also reviewing other aspects of our help for home owners.

The call for evidence closes in February next year and we are keen to hear your views.

All I have done today is mention a few small areas where our welfare reforms are going to change things for the better.

And these examples are replicated again and again as we bring coherence to a system that has been inadequate for too long.

But these reforms aren’t about designing a nice, sensible system.

They are about people.

They are about freeing people to get back into work.

Our welfare reforms are about transforming lives.

And that’s why they are worthy of the term welfare revolution.