Some of the Coalition’s major reforms of the welfare state begin today.
Two that have gained a lot of attention are the ‘bedroom tax’ which is a reduction in housing benefit for those council tenants who have a spare room and another is the reduction in council tax benefits, although in this case, local councils have some discretion.
It is only later that the real centrepiece of the reforms, the Universal Credit, will come into force.
How important are these reforms?
Together they probably represent the biggest reforms for a generation. I would give them one or one and a half cheers.
Why are they necessary?
They are necessary because the welfare state that was created by the Labour government in 1945-50 – which was not bad at all – became corrupted, particularly, I think, during the 1960s and 1970s. Certain benefits were raised. New ones were introduced. There is no denying that sometimes the changes were politically motivated – intended to make the party concerned look kindly or else to show that it was doing something about a problem.
That is how, gradually and insidiously, the incentive to work for low-paid people was reduced and, in some cases, eliminated. There were thousands of people who were working in the late 1980s who were gaining only 10% more than what they would have got on benefits – this was because of the combined effect of lost benefits and taxation on their income. It was almost heroic that they continued working. But of course many thousands eventually came to the conclusion that it was absurd to work. It was very tempting to stay at home or to take the benefits and do a little work on the side. The system more or less encouraged it.
Since then, there have been some reforms to try to address the problem. One effort has been to pay benefits to people who are in work. But this has various drawbacks. One is the cost. We are paying people who don’t work and also people who do. And to make sure everyone has an incentive, the benefits to those in work have to continue up the pay-scale. Meanwhile, as happened about two centuries ago, employers can simply pay employees less than they otherwise would, knowing that the difference will be largely made up by the benefits (know as tax credits).
It has become incredibly complex and difficult sometimes even for specialists to work out whether someone is better off working or not.
The Universal Credit is an attempt to bring different benefits together into one and make it clearly worth working at all levels of income. It is quite expensive. The incentives to work are still not as big as they ideally should be. But it is progress.
What about the ‘bedroom tax’? This is a reduction in housing benefit for those council tenants who have a spare room. There are lots of aspects to this. I will just mention one which has not received much attention. Housing benefit has been the elephant in the room in welfare. It can strongly disincentivise work. If you take work, you lose your benefit. In which case, it may not be worth taking work. But if the benefit is smaller, then the reduction in your incentive to work is less. So for some people, at least, the ‘bedroom tax’ should increase the incentive to work.
Another aspect of the ‘bedroom tax’ is that there are people who are currently living in overcrowded conditions who could really do with the social housing currently not fully used by the existing tenants. These people deserve our concern and sympathy as much as those whose lives may be disrupted by moving or who may receive less benefit.
What about the reduction in council tax benefit that will be applied by some but not all councils? Obviously it will hit those who are less well off. I am not expert in this benefit. So I will only say that it might be tough for some people but if it reduces the benefit which you would lose if you took a job, then the disincentive to take a job will be reduced.
In both cases, of course, the saving in money means that taxes can be lower than they otherwise would be and that, too, increases the incentive to work.
Incentives are vitally important. They went completely wrong in the lead up to the 1980s. It is a sad and difficult business to improve the situation. But it is vitally important that it is done in order to get more people out of benefits and into work. We have got used to having millions of people unemployed, year after year. It used not to be like that. It should not be like that.
Reducing the disincentives to save is another worthwhile job. But the area which needs more attention is the effort to push people into work more actively and earlier. It is being done all over the world and the effort has started here. But it needs to go further.