Opinion: Towards a sensible welfare system

Piles of money. Photo credit: czbalazs - http://www.sxc.hu/photo/1236662Where is the development of Lib Dem welfare policy? It’s hard to see any. Even the recent living standards policy paper (pdf) said “we do not believe that this paper is the appropriate place to determine a Liberal Democrat approach to welfare reform. […] this is an area that needs further debate within the Party.”

We all want a society in which technology, employment, education, high pay, low inequality, progressive taxation and cheap homes reduce the need for means-tested benefits, but this long-term goal must not prevent the party battling for a sensible and supportive welfare system. That Universal Credit is expected to cover 30% of households should show how important it is to get right.

Aside from the question of how generous or stingy benefits should be, there are many design problems that need to be tackled.

Bring Council Tax Support (CTS) within Universal Credit

The government localised Council Tax Benefit (CTB) and cut its budget by 10%, deciding not to merge it with the 6 other means-tested benefits in Universal Credit (UC). This year, 2.34 million low-income families will pay an average of £149 more in council tax than they would have under CTB.

UC is designed to limit marginal rates and clarify how much better off you’d be from additional earnings: the government will (above an allowance) claw back 65p for every £1 you earn. CTS undermines these goals by adding complexity and local differences and by further reducing work incentives. In some areas, CTS withdraws 30% of extra income, after the 65% UC withdrawal and after taxes. A select committee report (pdf) warned recently that with CTS and current benefits, some “stand to lose 97p for every extra £1 earned”.

This affects Lib Dem income tax cuts too. Under the new system a £100 tax cut would, for poorer families, lead to a £65 UC cut and up to a £10.50 CTS cut – leaving less than a quarter of what was intended.

CTS’s exclusion from UC was in large part about making savings faster than could have been done with UC. The poor decision was apparently a victory for DCLG over DWP, and the IFS concluded (pdf) that “It is difficult to think of reasons why the government’s original plan to integrate CTB into Universal Credit was inferior to what is now being proposed.”

Relink Local Housing Allowance to current local housing costs

Many changes have been made to the Local Housing Allowance (LHA), which determines housing benefit (and UC) in the private rented sector. This previously increased in line with local rents. The government has changed this so that each area’s LHA will now rise with CPI inflation. This is a cost saving measure, given that rents will generally rise faster than CPI.

Whether or not such cuts are welcome, there is an absurdity here. It would make sense to have a uniform, national housing allowance (or indeed to do away with earmarked housing benefits). It would also make sense (as used to be the case) to link local allowances to current local rents. But what the new rule means is that in 2032, LHA will vary across the country based on the distribution of rents in 2012. This needs changing as soon as possible, as it will get ever harder to fix as the distribution of rates drifts ever further from reality. Average LHA spending could still be limited to match CPI, but changes in each area’s LHA would once again be proportional to changes in rents.

Other changes

The Lib Dems should also look at increasing (rather than continuing to cut) the UC disregards or ‘work allowances’, which are analogous to the income tax Personal Allowance. This could counteract the 65% withdrawal of Lib Dem tax cuts from poorer households. And as party policy suggests, we should look at introducing a separate disregard for second earners. Ensuring UC rolls out successfully should of course be a fundamental goal.

Finally, we should scrap the well-intentioned but ineffectual bedroom tax, as well as the new budgetary ‘welfare cap’ and the £26,000 benefits cap – both of which are political gimmicks that break the link between needs and support. The latter cap limits the total amount any family can claim in benefits. But if the argument is that there should be a limit to how many children one can claim for, that should be fixed through the child benefit or child tax credit system. If the argument is that benefits shouldn’t pay for people to live in inner London, then the housing benefit system needs changing. The benefits cap is therefore at best a blunt and confused solution to the symptoms of other design flaws. And if the argument is that families should be better off in work than out, we should exclude from the cap those benefits that are available both in and out of work, which is in fact most of them.

The Lib Dems can be proud of Universal Credit as a structure – if it works: building a far simpler benefit system with reductions in poverty (when considered in isolation) and improved work incentives (complementing higher tax allowances and childcare help). And there are legitimate debates about the balance between cash transfers and public services. But in the party’s desire to paint Labour as economically incompetent, it must not favour tough-sounding gimmicks and welfare austerity when what we need are intelligent improvements and fair support.

* Adam Corlett is an economic analyst and Lib Dem member

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  • Ruth Bright 4th Apr '14 - 3:03pm

    London is not just “an expensive life-style choice”. For millions London (or one of its many “villages”) means community, roots, family heritage and support networks. Why should poorer Londoners be forced to forsake these precious things all because of the house price madness that surrounds them through no fault of their own?

  • Philip Rolle 4th Apr '14 - 6:01pm

    I understand that some 30 million people are assisted by some form of state handout. That seems to me to be about 10 million too many.

    We must start from the principle that the state should assist only those who need help. That means that, as well as there being a cap in the benefits a family can receive, there must be income and capital limits above which assistance is not provided.

    For example, I get free prescriptions because of the conditions I suffer from. My income and capital is ignored for this purpose.

    Or the millionaire pensioner gets not only free prescriptions, but a bus pass, a TV licence and a winter fuel allowance.

    This must all stop and instead more must be paid to those who are in poverty, who at present are badly treated.

    I would also phase out child benefit completely over five years and gradually bring some additional assistance within universal credit.

  • Jonathan Brown 4th Apr '14 - 10:08pm

    Really good article. I think welfare reform is a huge issue that we’ve been really stupid to pay so little attention to, and to leave in the hands of others on the populist and conservative left and right.

  • Dave Gorman 5th Apr '14 - 11:53am

    Really glad to see this being raised- a good article and a good call for us to have a think what we want and where we are going. I made a new for a ‘new Beveridge Commission’ at Scottish Conference manifesto roadshow because I think its time to step back and consider what we think welfare is for and what principles we think it should follow. Generosity verses coverage, age profile of benefits, the role of means testing or the contributory principle. Whether we continue to use the system to subsidise working people, or focus more on low pay etc. A Dilnott or Turner style commission seems the way to go for me, and meantime no further cuts…

  • I agree that Council Tax Support should be removed from Local Government and covered within Universal Credit. I also agree that Universal Credit disregards (the amount you can keep before one loses benefit) need to be increased. I would link them to inflation or transport cost inflation if it is higher as these are likely to be most of the extra cost of working. We should ensure that couples can keep twice the single persons amount. Hopefully the majority of the party supports the ending of the bedroom tax.

    Adam Corlett makes an interesting point about the benefit cap and that it can often effect those families with lots of children. It would be possible to end all child benefit say for the fourth child and this would affect everyone. However if the adults of a family can’t work for a long period of time and they have five children say this would mean that they wouldn’t be able to feed their family then this is wrong. Would the children be taken into care if they were not getting enough to eat for months on end? If so this would cost more than the savings in benefit.

    However I disagree with Adam over the Local Housing Allowance, because linking it to CPI inflation in any way would lead to the gap between average rent and the LHA in an area increasing over time. The old system of linking LHA to local rents should be restored.

    There are really no quick fixes on welfare reform because as liberals we should be committed to supporting those who need to claim welfare benefits. The only way we should try to reduce the bill is by structural changes such as increasing the Minimum Wage, having a separate Minimum Wage for London and having different Minimum Wages for different sectors. Having full employment would also help in two ways, directly reducing those who are unemployment and by increasing wages if demand for labour was higher than the number than could be supplied. These measures would ensure work paid and would reduce the amount the government subsidizes employers, which as liberals we should see as wrong.

  • Adam Corlett 6th Apr '14 - 1:19pm

    @Joe, You make a good defence of the benefits cap. The government would effectively say that the benefits system can help even if you have 3+ kids, live in London or have been out of full-time work for some time – but can’t help with all of these at once. But to a large extent, none of those may be choices (and the government hasn’t used this argument). Half of the families affected are single mums.

    On bedroom limits for private rent, I would have thought the other big differences were that it’s easier to find a smaller home in the private sector (not sure about that though), and that social housing tenants are generally more disadvantaged and far more likely to have health problems that require special consideration.

    @Philip, Rather than viewing all benefits as “state handouts”, you could consider many as social insurance: we agree to pay in we can, and then take out when we need to (when we have children, when we’re inbetween jobs etc.). It all looks very different from that perspective.

  • Jenny Barnes 6th Apr '14 - 2:29pm

    It would be far simpler to start with a citizen’s income, initially set at JSA level. All income would be taxed from the first £, and state pension reduced by the citizen’s income amount. Then add necessary benefits as required.

    ” UC – if it works”. But it doesn’t, does it? It’s another scheme where the client (in this case IDS) refused to understand that IT is not a magic wand, that you need to actually think through the detail of what it’s supposed to do, exactly, before you attempt to automate it. Oh no. IT is easy, as can be seen from all the wonderfully successful major IT schemes run by HMG.

  • Chris Manners 6th Apr '14 - 2:44pm

    “Why should a working person on an average wage in Sheffield be subsidising a lifestyle choice they can’t afford for themselves?”

    It’s not a lifestyle choice. London is where people come from.
    You’re talking about lots of single parents too- generally they didn’t set out to be stuck with several children themselves.

    As nasty as IDS.

  • Chris Manners 6th Apr '14 - 2:45pm

    And that’s before we even start looking at the issue from the children’s point of view.

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