How to spring the benefits trap

 

How to spring the benefits trap [ September 2009 ]
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Fraser Nelson reports on how a revamp of the benefits system could finally end the scourge of Britain's mass and hidden unemployment

In the reception of The Spectator's office stands a statuette of a Welsh miner, pick and shovel over his shoulder, above an inscription 'from the townsfolk of Aberdare'. The town had been savagely hit during the collapse in demand for British coal in the 1920s, with almost half of its residents out of work. The magazine launched an appeal and our readers responded with £12,000 - equivalent to £580,000 today. It gave a taste of a mood of national solidarity that was to go on to create a welfare state, to cure what William Beveridge called the 'giant evil' of idleness.

Few could imagine, then, how this welfare state would incubate the very evil it was designed to eradicate.

The 2009 recession has been cruel to Aberdare, with some 25 per cent of its working-age population on benefits. But the real problem was what happened during the boom. At no point in the last ten years have fewer than a quarter of the population of the Welsh valleys been on out-of-work benefits.

The same is true for Glasgow. And Liverpool.

And Hartlepool. And Middlesbrough. And this, even more than the job losses of the last year, is the true scandal of British unemployment. That, for vast tracts of Britain, worklessness is not a curse introduced by the recession but a way of life.

For decades, it has been too easy for politicians to disregard this problem. The poor, in Britain, have proved horribly easy to ignore. Most do not vote. Most do not show up in claimant unemployment figures, which tend to feature less than a quarter of all Britain's jobless. Covering up four million souls is an awesome task, but for the purposes of political debate in Britain it is one that has been successfully accomplished. Gordon Brown has boasted about new jobs - yet, staggeringly, all of the net job creation in the private sector since Labour came to power is accounted for by immigration.

But finally, the silence is being broken.

David Cameron will inherit not just what he has called a 'broken society' but also the most expensive poverty in the world. The boom years allowed Labour to afford having no fewer than five million on benefits at any one time. The Conservative government cannot afford such poverty. There is a fairly simple mission: to remedy a system where the low-paid receive money to do nothing while the economy grows by sucking in the industrious immigrant class.

In recent years, a series of reforming welfare ministers - John Hutton, Jim Murphy and James Purnell - have made serious inroads into identifying and tackling the problem. All 2.6 million on some form of incapacity benefit, for example, are to be recategorised according to what work they can do. Private welfare-to-work providers are being paid by results - and they are getting results. Yet the biggest step change of all is now being mooted: a move to dynamic benefit modelling. And this change could be genuinely revolutionary.

The current benefits system baffles everyone - but, most dangerously, it baffles those who are supposed to be in charge of it. The Department of Work and Pensions has 14 manuals explaining its benefits, which run to a total of 8,690 pages. But this excludes the hideously complex tax credit system, the jealously guarded domain of HM Treasury.

I have spoken to civil servants at the highest level in government who say, with exasperation, that there is no worm's eye view of the 51 different UK benefits. Nor was there, until Iain Duncan Smith's Centre for Social Justice produced one this week.

In a landmark report, which took almost two years to compile, The CSJ has produced a view of the welfare system as it appears to the unemployed - from housing benefit to free school meals. This is so-called dynamic benefit modelling: assembling a whole picture and judging welfare in terms of whether it makes work pay. This demonstrates why work does not pay for so many millions of low-paid. The CSJ proposes a new system, simplifying welfare into one universal benefit, calibrated to make sure that at every stage work pays. The principle has for two years been endorsed by the Liberal Democrats and is increasingly attracting the more forward-thinking Labour ministers. It is an idea whose time has come.

To explain the concept, one need not refer to an economics handbook but to a recent Channel Four documentary named Benefit Busters. It follows the progress of private welfare-to-work providers, who were coaxing women back to employment. As there are so few financial advantages to working, these 'dole clinics' are forced to tug at heartstrings and persuade 'clients' to go to work to improve their self-esteem. It shows the better government reforms in action - but also shows the immovable obstacle trapping so many millions in dependency.

One woman, identified as Yvette, passes an interview to work at a Poundland store in Doncaster but learns that the salary is no match for the benefit paid to a mother of four. 'I was happy enough, ' she is filmed saying. 'But then I realised that, financially, I'm not better off.' Her tutor, Hayley Taylor - paid to get her back to work - admitted defeat. 'The system's not right, ' she tells the camera. 'We're contracted to help people back to work. You book them up into a job, then they find it's not financially viable. And that just seems backwards, really. If that system can't help people who want to work, it just seems bizarre.'

The system, of course, was not designed with the users in mind. Local authorities give out one set of benefits, the Department of Work and Pensions gives out another.

The only poverty measure the government cares about is the number who are below an arbitrary poverty line of 60 per cent of the national income. Labour's policy has involved focusing welfare payments so those just below this threshold are lifted just above it. When this happens - often with just �10 a week - then the person can be described in parliament as having been 'lifted out of poverty'.

The problem with this game of statistical manipulation is that it overlooks the millions who have no chance of crossing this threshold. The poorest 10 per cent in Britain are worse off now (£87 per week) than they were five years ago (£98 a week) but no one notices or cares. Mothers like Yvette do not feature.

To approach the so-called poverty line, they need to start climbing the bottom rungs of the employment ladder. Using dynamic benefit modelling - taking into account all the welfare that lone mothers receive - makes it very clear that there is no incentive to return to work.

Take, for example, a British girl leaving school and imagining a life of lower-paid work. The UK government presents her with two options: employment or pregnancy. If she has one child and no job, the benefit income of £207 a week is more than the average wage for a hairdresser or teaching assistant. With two children, it is £260 a week - more than a receptionist or library assistant earns. With three children, it is £324 a week, more than a lab technician, typist or bookkeeper. Little wonder there are 163,000 women living on benefits with three or more children (and 16,700 women with five or more).

Seen through this prism, there is no mystery about why Yvette dropped out of her job.

The mystery is why she toyed with employment in the first place. Nor is there any mystery about why Ken Livingstone, former mayor of London, was never served coffee by a Londoner. Why were there so many immigrants serving him his morning latte, he once wondered, with half a million on the dole? By using dynamic welfare modelling, the answer is simple.

Let us imagine the cafe pays six pounds an hour. It hires a young man, who had previously been claiming £96 a week (the current mixture is Jobseekers' Allowance, Housing Benefit and Council Tax benefit). At five hours a week, his income rises to just �101 - two thirds of which is retained (but lowered) benefit. If he doubles his shift to ten hours, his income stays at £101 because his extra pay is cancelled out by losing Jobseekers' Allowance. Treble it to 15 hours a week and he loses further benefits so that he is earning £106. Just ten pounds a week more than when he was doing precisely nothing.

All this is not so much econometrics as basic common sense. People work harder to be paid better, and they try to climb up the ladder as best they can. Remove the link between work and reward, and the whole thing fails.

Why break your back on the minimum wage if welfare pays almost as well? Why double your hours, if it will not double your income?

The welfare problem is not one of indolent scroungers, of helpless people awaiting more government charity. The welfare class in Britain is simply responding to clear financial incentives laid down by the government.

Changing these incentives is difficult, politically. It means taking welfare away from some people, at a time of rising unemployment - and facing the protests. This, the cost of fixing the system, is one that has been seen as too high by successive governments.

Tony Blair was one of many new prime ministers who vowed to change the system. When disabled people chained themselves to the railings of the House of Commons, he gave up. The penalties for failing to reform welfare are heartbreakingly weak.

But this time, momentum is building. The lunacy of the welfare trap is now becoming a national scandal - and one important enough to justify a three-part prime-time television documentary. A Commons committee has also called for benefit simplification. The Centre for Policy Studies made its own devastating report in June. The CSJ's contribution could well give this cause critical mass. All it requires is for the Conservatives to make dynamic benefits the centrepiece of what is likely to be a new Department of Social Justice.

As this agenda fits so perfectly with Mr Cameron's narrative of a broken society, it is hard to see any opposition. But momentum is everything - and there is alarmingly little sign of that Theresa May, who succeeded the workaholic Chris Grayling as shadow welfare secretary. She is thought to regard dynamic benefit modelling as an interesting idea, to be examined once in government. This, again, hints at the lack of urgency which has sunk all previous attempts to reform.

Friends of Tony Blair say that one of his biggest regrets is not tackling welfare at the very start of his premiership, when he had political capital to spend. The same will be true for Mr Cameron. His shift can be a simple one: all benefits will be merged. They should be judged by how well they incentivise extra work. The basic equation - more work means more money - should be as true for the poor as it is for the rich. It is not so much economics as a basic issue of fairness.

Mr Duncan Smith has proposed a figure - that the income of the low-paid rises by at least 55 per cent of the extra money they earn. This figure can be higher or lower, but it ought to be an explicit aim of government policy. The so-called poverty threshold should be dismissed as meaningless, and a range of broader definitions - reaching right to the poorest in British society - should be incorporated.

This is, in a way, going back to Beveridge.

In his original 1942 report, commissioned by Churchill, he warns that 'idleness is not the same as want, but a separate evil which men do not escape by having an income.

Idleness, even on an income, corrupts. The feeling of not being wanted demoralises.' It is this, as much as the cost of welfare, which Mr Cameron needs to tackle if he is serious about the broken society. There is a public hunger for change. In dynamic benefit modelling, there is now agenda for change. All the Conservatives need do now is seize it.
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Written by a decent man? I think so.