No one can question the decency of Iain Duncan Smith’s vision for overhauling the welfare state. His message of “making work pay” is winning plenty of disciples. It is a revolution to simplify a fiendishly complex system and make the benefits of employment clear. To some, it is the only way of ending the welfare dependency blighting British cities.
But conservatives should be on guard. Grand schemes are intoxicating. The allure of sweeping change can overpower. The IDS reforms require real, unavoidable sacrifices, even if George Osborne pays billions of pounds upfront. This is not a case of hidebound Treasury bureaucrats blocking change to keep the poor tethered to the state. If the overhaul goes ahead, the risks and trade-offs are considerable.
Here are some of the hurdles that I’ve identified from speaking to people in Whitehall and Ian Mulheirn, an expert on this area at the Social Market Foundation. They prompt two questions. Is it worth it? And is there a simpler way?
Winners and losers Without additional funding, the IDS plan involves raising the tax rate on millions of workers. To “make work pay” for the few he will need to make work pay less for the many. He rightly highlights the absurdity of people who would only keep 4.5p in the pound if they start work. But these are a minority of cases — less than 100,000 households. One IDS proposal to solve this is bringing the marginal deduction rate (MDR) to 75 per cent for everyone, so no one keeps less than £2.50 for every £10 earned. The trouble is that around 2m working households on income related benefits are now on an MDR of less than 75 per cent. They’ll all lose out and see their work incentives reduced. The only way around this is spending more on benefits — a multi-billion pound commitment that the Treasury will find hard to stomach.
An incentive to work less The IDS plan will make it attractive for some people to cut their hours of work. This is a natural result of smoothing out work incentives, which spike at around 16 and 30 hours because of the way tax credits are calculated. This shifts money away from those working 16 hours to pay more to those working as little as 8 hours. That’ll encourage people to take jobs, even for limited hours. But it will also makes it less painful for individuals to cut their hours — which is bad for Treasury revenues.
Thin evidence base All these changes are based on the assumption that if you encourage someone to do a bit of work, they’ll move on to more. It’s a conveyor belt theory. But there is no evidence to prove it. What if people who take low-paid mini-jobs get stuck? There’s a danger the system encourages people merely to stay on the fringes of the job market. One solution is to time limit state benefits. The other — floated in the paper — is for Jobcentre advisers to keep pushing people to work longer. But both involve the kind of complexity and a big administrative burden that IDS is trying to banish.
Moves £23bn from purse to wallet The reform option for a “universal credit” proposes paying the applicant in a household, rather than the carer. It is more simple. And it sounds innocuous. But it marks a massive shift in income from women to men. Presently tax credits are given to carers in households, which are predominantly women. The IDS plan would take around £23bn from them and allow the men in the household decide how the money is spent.
There will still be overpayments The waste in the tax credits and benefits sytem is huge — some £3.8 a year is lost in error, fraud and overpayments. IDS wants a real-time “pay as you go” tax system, which allows tax credits and benefits to be adjusted as incomes change. A good thing. But this will not fix overpayments. The Treasury have largely fixed the problem caused by changes in income. The remaining overpayments are driven by changes in circumstances — families splitting up or getting together. A real-time system of income reporting won’t stop couples breaking up.
It ignores hidden benefits The make work pay package does not include any calculation of benefits such as free school meals, free prescriptions or subsidised child care. These “passported benefits” make a real difference to net incomes. The point on the income scale at which these are withdrawn will mark a massive barrier to work. The IDS paper only addresses half the problem. Without tackling benefits in the round, we won’t know whether this will succeed in making work pay.