I have just returned from the launch of proposals by the think-tank Reform for changing welfare benefits. The report is called the The End of Entitlement and is surprisingly disappointing. Its main thrust is that lots of money is 'wasted' because it goes to middle-class people. Instead, the money should be concentrated on those who need it.
This is an idea which has been knocking around for centuries. Among the various times, I remember it being proposed by Conservatives in the 1970s. On the face of it, the idea is attractive. Let's save money by only giving money to those who really need it.
Quite absurdly, the name of Beveridge was mentioned in this context and anyone who has a cursory knowledge of the system Beveridge proposed would know that he was against such a thing. His proposal was for a flat rate contribution rate for everyone and a flat rate benefit for everyone, too. Means-testing was intended to play a tiny part.
It is disappointing, to put it kindly, that the people who wrote this report seemed to have little awareness of why the idea has been discredited and why, indeed, Beveridge would have none of it.
What is wrong with 'concentrating benefits on those who really need it'?
Let us say that you decide to remove Child Benefit in order not to 'waste' it on the middle classes and, indeed, the rich. In doing so, you will be under great pressure to make up the loss of this benefit to the poor.
So the pay-out that goes specifically to the poor - who will probably also be unemployed - will go up. But if that poor person thinks of taking a job, that child benefit element of his or her benefits will be lost. Whereas if you keep the child benefit, he or she will not lose it on taking a job. Therefore the incentive to take a job will be reduced. The poor person's reasons to stay on benefits will increase. This will, other things being equal, lead to even more unemployment with all the damage it creates in terms of the poor person's well-being and self-respect and the tax burden on those who work.
This failure to think through the effect of welfare legislation on the incentives affecting the poor has caused the unemployment and unmarried parenting explosions that have afflicted this country over the past half century. It is dismaying to hear them touted as a new proposal.
The trouble always comes from those who think it would be a good idea to save money but have no background in how welfare can go wrong. The Treasury has often been at fault in this way, I suspect. It comes as no suprise that the Reform presentation started with the size of the government deficit as a reason to reform welfare.
If benefits, such as Child Benefit, that often go to the middle classes were removed as part of a thoroughgoing reform of benefits in which the incentives facing the poor were centre stage, there need be no harm. But removing such benefits and replacing them with even more means-testing would be a terrible mistake.
I should say that I have previously and otherwise had great respect for Reform which has done some terrific work. However in this area, I fear they are aiming at the wrong target and could end up doing more harm than good.
Posted by James Bartholomew • Indexed in Reform • Welfare benefits
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Middle class welfare churning is bad because it gives too much power to the state and wastes money in the 'churning' process.
Means-testing leads to a poverty trap. So I agree that targeting also has pitfalls - arguably worse than the pitfalls associated with middle class welfare.
But the Reform report made other suggestions, one of which was a complete change in the way income support is delivered. That might ameliorate the negative effects of means-testing.
BTW the report says that NZ got rid of universal entitlements. Yes. NZ scrapped its universal child benefit in the early 90s but by that time its value was very, very low. The targeting of the needy predictably continued to grow the number of needy. NZ has more single parents reliant on welfare (proportionately) than anywhere else in the world. It has the same problem as the UK with disability pensions, the growth of which never reverses and outstrips the general population growth. But in 2005 the Labour government re-introduced partial universalisation of benefits with the Working For Families scheme which sees a majority of families with children receiving tax credits or benefits. In that respect the report was lazy.
Posted by: Lindsay M at October 25, 2009 08:11 PM
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Is there an indirect benefit though? Specifically, as long as many people can vote for the few to provide transfer payments to them, they will do so. And there is an illusion here for the middle classes who are both paying and receiving roughly the same, with the government taking a bureaucracy "wedge". Even if they would be better off simply keeping more of their own money and spending it for themselves, there is a comfort at the entitlements received. Once these are removed, all that is left are the tax demands, and the relative number of those participating in the welfare state to those funding it decreases, and all these people vote. So can you not argue that this is the beginning of the possibility to see its reduction? The opposite situation, where everyone both pays and receives from the government, and people are scared to lose their specific entitlement which feels very real, is the situation which maximises government influence and welfare state growth. Left wingers should be careful what they wish for.
Posted by: Andrew M at October 21, 2009 04:58 PM