Department for Work and Pensions

30 June 2010

The Rt Hon Iain Duncan Smith

Secretary of State for Work and Pensions

Reforming Welfare

Wednesday 30 June 2010

[Check against delivery]

Introduction

Good morning, and thank you to Andrew and the team for organising this morning’s event.

The Emergency Budget gave credibility back to the British economy:

* driving down our record deficit
* cutting the second highest level of debt in Europe – projected to be £149 billion this year – over the course of this Parliament with a clear, 5-year plan
* securing a forecast for steadily falling unemployment
* and producing a plan for sustainable, economic growth.

But the Budget was not just about being financially responsible or top-slicing.

It also laid the groundwork for radical reform.

Phase One of our agenda for change sits across two critical areas:

* Housing Benefit reform
* and the new Work Programme, which includes our plan to get the people who can work off long-term incapacity benefits.

Phase One

The cost of Housing Benefit and Incapacity Benefit has spiralled out of control in recent years and put a great burden on the taxpayer.

But the true cost has been paid by some of the poorest receiving these benefits as they have become trapped in dependency.

Housing Benefit

Taking Housing Benefit first, no-one can really doubt these reforms are long overdue.

In real terms, the cost of working age HB has jumped by £5 billion in 5 years and is projected to reach £21 billion in 2014/15.

This is clearly unsustainable.

But cost is not the only problem.

The scale of these payments has meant that Housing Benefit has become a disincentive to move into work for those receiving it.

In fact, politicians of all parties have recognised the need for major reform. Yet for too long, nothing has been done.

75,000 people get more than £10,000 a year in HB and some get over £100,000 a year – payments that no-one on a low income could ever afford and it has distorted the social rented sector. So:

* we have capped Local Housing Allowance levels to the rate for four-bedroom properties
* we have introduced size restrictions to the social rented sector to make better use of existing housing stock
* and we have changed the percentile of market rents for Local Housing Allowance rates to 30% to help keep rising rents under control.

The reset the balance of incentives to move into work, these changes are vital.

Work Programme

The other key element in Phase One is the Work Programme and the transition to get people off Incapacity Benefit.

The Work Programme was launched yesterday when Chris Grayling opened the competition for the new commercial framework.

For the first time, the Programme offers providers real freedom to truly tailor support for Jobseekers.

No more centralised, one-size-fits-all schemes, but real support to help people back on the path to sustainable work.

To ensure that we are being fair to the taxpayer, the Work Programme will be run on a payment-by-results basis when it rolls out in the first half of next year.

We have to make sure people stay in work over the long term and make sure they get into the work habit.

We will also demand that Jobseekers take personal responsibility for accepting work when it is there, so there is conditionality and sanctions on the benefits side as well.

This is a complete reappraisal of how we help people back into work and involves a major change in the way providers deliver support.

And I want to see the voluntary sector and other groups get involved too.

Incapacity Benefit / Employment and Support Allowance Migration

We are also committed to tackling the huge numbers of people languishing on Incapacity Benefits.

We currently have some two and a half million people claiming inactive benefits – a figure which has remained stubbornly high, costing the taxpayer £7.2 billion.

Despite many of these people wanting to work, people can spend years on Incapacity Benefit without ever being required to have an assessment.

In fact, 30% of those on the old style benefit never had a medical assessment.

Our society should be capable of tailoring support to get people into work.

When John Hutton was Secretary of State for Work and Pensions, he pointed out that if you have been on Incapacity Benefit for more than 2 years, you are more likely to retire or die on it than ever move back into work.

This is why we are starting the process of migrating 1.5 million of those on Incapacity Benefit on to Employment Support Allowance and simultaneously providing intensive, personalised support to help them make that transition back into work.

Phase Two

In next phase of reform will take this forward:

* reforming the benefit system to make work pay
* simplifying the system to make it more efficient and understandable
* enhancing mobility
* and reforming pensions.

Make Work Pay

Benefit reform will play a major part here.

I have been working with David Freud and experts and officials across Government to look at how we can deliver a benefits model that ensures it pays consistently to take work.

In that context, we have asked Frank Field to look at the issue of poverty, beyond the narrow definitions, for example asset poverty.

At present, the poorest in our society see little reason to take the risk of finding a job and losing their benefits.

Seen in the light of the calculation made on the basis of risk and reward, the decision looks rational.

All the figures show that work provides the most sustainable route out of poverty.

However, the complexity and perverse nature of the system have acted as disincentives.

Multiple withdrawal rates have resulted in a regressive tax and benefit system for the poorest.

For someone to seek work for the first time in an area of high economic dependency, there is a cultural issue to overcome, as well as a financial issue.

We are asking them to make a positive decision about their life, but that is more difficult if they have no examples of people in work around them.

It can be a big decision and we have to make sure the risk outweighs the reward.

For as they see it, if they take a few hours work, for every £10 they earn they might lose £7, £8 or even £9 of their benefits.

Moreover, the complexity of the system means too often they have no idea how much they will lose or when it might be clawed back.

The benefit system has to be far simpler and establish a very clear link between work and reward.

A simpler system will also help to reduce administration costs, as well as reducing the opportunities for fraud and error, which today cost the taxpayer billions every year.

This process of reform to enhance the dynamic benefit of making work pay and simplifying the system is at the heart of our reform agenda.

I hope to bring forward more detail on this soon.

Mobility

Beyond this, even as we make work pay and simplify the system, we face another problem.

Britain has one of the highest rates of workless households in Europe.

Worse, we have the highest number of children living in workless households in Europe.

But this is not about a North/South divide.

In my view, that is lazy rhetoric. The problem is more complex.

You can find workless blackspots across the country.

In fact, the gap between wealth and worklessness doesn’t have to be far at all.

For example, jobs growth and employment recovery in cities such as Manchester and Leeds has not benefited the deprived communities within them.

This is in part because the system works against labour market flexibility.

Not just transport costs, but because anyone in council housing who wants to move into an area with work runs the risk of losing their right to accommodation.

Again, it is that balance between risk and reward where we seem to penalise the poorest, yet expect them to take some of the greatest life-changing decisions.

So we will be exploring how we can take the risk out of mobility across wider areas with the Department for Transport and Communities and Local Government.

For too long, we have ignored the plight of those trapped in areas where inter-generational unemployment has become the norm.

Without the capacity to seek work, aspiration and hope become the preserve of the middle classes.

Pensions

We are applying the same principled approach to pensions too.

Steve Webb will be talking more about this later this morning, but the main point to note here is that we are taking responsibility for facing up to the long-term challenges posed by the fact that we are living longer as a society.

That is why, for example, we have already made a start by announcing the end of the Default Retirement Age.

No longer should we have employees who wish to delay their retirement forced out by this sort of mechanism.

However, long-term reform involves providing a solid Basic State Pension that people can start to build on, while creating the right conditions to reinvigorate private savings.

We have made a good start by restoring the earnings link with the triple guarantee for the Basic State Pension.

But we have further to go, which is why we are taking forward the review on auto-enrolment.

I want to reverse the decline in saving levels and ask people to think carefully about how much they will need to fund the type of retirement they want.

We have already said we are committed to raising the state pension age to 66.

At the same time, we have to help people understand why this is the case and the benefits of to them of working longer.

Our figures show that working a single year beyond the current State Pension age and deferring your pension can increase retirement salary by up to 10%.

Just as importantly, working longer is also good for the economy.

If we can extend the effective working life of the country by just one year, it is forecast to increase GDP by 1% – that is around £13 billion.

66 is the starting point for this debate.

At present, there are plans in place to raise the State Pension age to 68 by 2046.

But if we want to be fair to next generation of taxpayers – and be realistic about increasing longevity – then we also need a serious debate about how far and how fast we move forward.

Conclusion

This agenda is, I believe, a bold agenda. But we have no choice.

With the welfare budget ballooning over the last few years, we need to shift the culture which underpins demand.

There is nothing good about a society that accepts people growing up without work, aspiration or hope.

The prize is a society more in balance where work is well distributed and where children grow up seeing work as a normal activity and responsibility is ingrained in them.

A society where people save for their retirement and where we can afford a more secure future for pensions.

My agenda is to make that happen.

Thank you