There is a lot to like about Iain Duncan Smith's new proposals for welfare reform. The chance to move towards a radically simplified benefits system is enormously exciting. As I wrote for Coffee House last week, the current system is a complete mess and failing on just about every criteria. It is so complicated that £4.5 billion a year is lost to error and fraud; working at the minimum wage of £5.80 an hour can be worth as little as 26p an hour; and too many families slip through the net so that the number living in severe poverty has actually increased from 5 to 6 per cent in the last decade. We can definitely do better and it is great news that the Government are planning to overhaul the system properly instead of applying more counterproductive sticking plasters.
"The TaxPayers’ Alliance recently published a report that recommends a reform that brings together a large number of the existing benefits. However, unlike other approaches that introduce a single benefit, it suggests the introduction of a negative income tax.[...]A household’s eligibility for the negative income tax would be based on their characteristics, and set equal to a given proportion of (equivalised) median income. As household income increased from individuals moving into work or progressing in work, the level of the negative income tax would be reduced in such a way that the Marginal Deduction Rate (inclusive of Income Tax, NI contributions and the withdrawal of the negative income tax) was constant until all support was exhausted. This implies that the system does not have a system of earnings disregards."
Not moving the poverty line also means that reforms to improve incentives to work increase the cost of the welfare system. That will mean some difficult decisions for a Government that can ill-afford higher welfare spending, and will go down poorly with a taxpaying public who think they already spend more than enough on benefits.
Matthew Sinclair is research director at the Taxpayers' Alliance.