Patrick Nolan

Conquering the welfare Leviathan

Conquering the welfare Leviathan
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Among the biggest of challenges facing the new government is the need to make welfare more affordable while continuing to support people in need. There is a strong case for lowering the welfare bill. At around £200 billion the government spends more on welfare than anything else. Spending on pension benefits alone is £77 billion and forecast to grow to £240 billion (in today’s money) by 2050. As George Osborne has noted if the welfare bill is not cut then eliminating the deficit will mean that cuts to other departmental budgets will have to be much deeper.

But some of the most important reasons for welfare reform are non-financial. Although the UK has a very expensive welfare system the outcomes for many children are poor, too many families find that work does not pay, too few people make their own provision for periods of life in which their incomes will be low (such as during retirement) and too much money is directed to families who are not in need.

Pointing out that the welfare system is broken is easy. The hard thing to do is to develop workable solutions. It is necessary to, for example, chart a course between providing support to people in need while ensuring they do not become too dependent on state support. Unemployment and demographic changes will push up costs while large savings will be needed to address the deficit. Delivery will have to be simpler and easier for the public to interact with, while efforts to encourage more innovative and diverse providers will mean more, not less, variation in how people are treated.

With this need for welfare reform in mind earlier this week Reform hosted a major conference on reforming welfare, which included presentations from the Secretary of State for Work and Pensions, the Rt Hon Iain Duncan Smith MP, the Shadow Secretary of State, the Rt Hon Yvette Cooper MP, Steve Webb MP, the Minister for Pensions, and Douglas Carswell MP.

The conference highlighted the importance of pursuing welfare reform to not only save money but to also support individual initiative and social mobility. As Iain Duncan Smith noted, the financial incentives in the current system mean that “the poorest in our society see little reason to take the risk of finding a job and losing their benefit.” Yvette Cooper noted the challenge that increasing unemployment holds for welfare reform, and other panellists discussed how welfare reforms need to go hand-in-hand with improving educational outcomes for the poorest, greater emphasis on welfare to work services provided by third sector and private companies and a new approach that harnesses the potential of local initiative and innovation.

But, as Reform has argued elsewhere, the welfare reform agenda should also set out to improve the targeting of spending. Experience shows that poorly targeted spending leads to less generous support for poor families. Even a small increase in the generosity of a universal programme comes at a very large financial cost, meaning resources have to be spread thinly and less is available for poor families. The desire to use welfare to attract votes means that benefits for middle class voters become more generous while poor families are left with scraps. To improve welfare and eliminate the deficit wealthy families need to start taking greater responsibility for themselves.

Patrick Nolan is Reform's Chief Economist