Iain Duncan Smith deserves credit for fully understanding the nature and scale of the welfare problem. But that’s the easy bit. Finding a solution with the right balance of carrot and stick and making it somehow affordable in these austere times is the tougher part of the equation. And it’s not at all clear that the IDS proposals have either enough carrot or enough stick.
He has certainly gone some way to tackling the lunacy of huge withdrawal rates – if by entering the workforce your new post-tax pay packet is less than the benefits you stand to lose, then don’t be surprised when an entrepreneurial work ethic fails to emerge in some of the country’s poorest areas. However, even under these new reforms, effective tax rates of 65 percent will be fairly standard. How much of an incentive does this really provide? If you’re only going to be trousering thirty five pence from each additional pound you earn, is this really enough to encourage someone to make a herculean effort to secure gainful employment rather than remaining on state hand-outs? You wouldn’t actually be worse off, but being very marginally better off by taking a relatively boring or unfulfilling full time job.
And this goes to the other element of the welfare trap equation. It’s not enough to remove the financial disincentives to work – you also need to tackle the leisure gap. And, although wrought with difficulties, this is where a workfare programme could help. If able bodied and healthy welfare claimants of working age are basically expected to do some sort of productive labour for the community between nine and five, this could go some considerable way to reducing the attractions of remaining on welfare in order to spend your days as you desire. But the Coalition’s reforms are tentative in this area. It seems that suspected welfare cheats might occasionally be asked to help sweep the streets or pick up litter, but this will be a targeted approach rather than a general requirement.
Making sure that people aren’t financially penalised for taking a job is a necessary step, but not a sufficient one. To reduce the welfare rolls by millions rather than by thousands, the government needs to ensure that no rational person would choose a live on benefits as a lifestyle choice. A small slice of carrot and a gentle occasional prod of the stick won’t be enough. A new report by the IEA out today Transforming welfare - incentives, localisation and non-discrimination looks at how innovations like a Negative Income Tax and localised workfare schemes could be just the answer.
Mark Littlewood is Director General of the Institute of Economic Affairs