Iain Duncan Smith

A new means test. A savers penalty. A hit in income for 600,000 prudent households. Is this really Tory policy?

Buried in the welfare reform bill, published tomorrow, is a new rule that will achieve just that. You have to wonder whether it will survive in its current form.

Iain Duncan Smith’s ambitious plan to create a new Universal Credit will extend a savings means test — applied to those on out of work benefits — to working families that would currently be eligible for tax credits.

This will mean any working family with savings of more than £16,000 will have no entitlement to universal credit, once the system is in place.

That affects around 400,000 working households, taking in some cases more than £100 a week from their wallets. 

Jim Pickard

Here is a link to the full ft.com story if you are interested. But the key points of this morning’s report by the Institute of Fiscal Studies – on the impact of IDS’s universal credit – is:

There’s been lots of speculation over the Treasury’s plans on sickness benefit. The Times flagged up a proposal to “means test”, while the Observer has a letter pointing to £2.5bn of incapacity benefit savings from an unspecified reform.

No final decisions have been taken. But reading between the lines, it sounds like moves are afoot to scale back “contributory incapacity benefit” (which I’ll explain in a second).

If so, it blows a rather big hole in George Osborne’s claim that a he’ll be finding savings from ending the “lifestyle choice” of those determined to “pull down the blinds” and scrounge on benefits. These reforms largely take money from people who have worked and fallen ill, rather than those who’ve allegedly chosen a life on the “sickie”. 

The axe is hovering over the £2.7bn winter fuel payments. But cutting this bung to the over-60s is harder than it seems. Even if Osborne decided, say, to pay out £600m less than Gordon Brown, it would make no contribution at all to cutting the deficit.

How so? The Labour wheeze was to top-off the winter fuel payment with a one-off bonus each year, which was presented as a Gordon’s munificent Christmas gift. Last year it amounted to £600m. The Budget books doesn’t expect this bonus to be repeated, so the future winter fuel payments are only scored as £2.1bn in 2010, not the £2.7bn actually spent in 2009.

The dilemma for Osborne is:

– Find an extra £600m from savings or increasing debt to pay out as much as Brown in 2009, or

– Take the political hit from withdrawing £50 off all pensioners (and £100 off all those over 80), without any upside in terms of deficit reduction.

 

Strange as it seems, if David Cameron succeeds in eliminating benefit fraud, it will probably end up costing the Treasury money. It is one more potential pitfall with the Iain Duncan Smith benefit reforms.

A proper crackdown on benefit cheats is only possible by dramatically simplifying the welfare system — and that will probably lead to an increase in the take-up of benefits.

Here’s the rub. Error and fraud in the welfare system costs about £5bn. It’s a big number. But it is nothing compared to the £16bn worth of benefits and tax credits that are unclaimed each year.

The sad truth is that the complexity of the benefits system actually saves the Treasury money, at least in the short term. Government studies show that convoluted rules and impenetrable forms put people off claiming a benefit, even though they are entitled to it. Up to a quarter of people eligible for housing benefit, for instance, don’t submit an application. 

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. 

Jim Pickard

You may have noted the mock horror from Labour about IDS’s comments to the Sunday Telegraph yesterday that those on benefits may need to travel to work. It’s described by the Labour-supporting Mirror as an “extreme Norman Tebbit-style ‘on yer bike’ policy“.

Here is a link to the interview when Caroline Flint two years ago suggested that unemployed people getting housing benefit should, in effect, be turfed out. She was, of course, the Labour housing minister. It appears to be exactly the same policy. What goes around comes around. 

Back in 1997 Tony Blair famously told Frank Field to “think the unthinkable” in the effort to reduce poverty, rationalise welfare benefits and improve work incentives. When Field returned to Downing Street some time later clutching a plan to overhaul the system, he found his ideas rebuffed. The Treasury had deemed them to be, well, unthinkable. Gordon Brown had his own ideas.

So old Whitehall hands could be forgiven a sense of deja vu when Iain Duncan Smith unveiled the latest project to reform a system that grew still more expensive and complex during 13 years of Labour rule. No one could quarrel with Duncan Smith’s analysis – the present system is riddled with disincentives, unfairnesses and complexities, and the costs are still spiralling. A much simpler system, with fewer benefits and much lower withdrawal rates, would ultimately help more people back into work and reduce the overall bill.