Welfare reform paper sets out sensible ideas for simplification, but ducks difficult decisions

Date: 30 July 2010

The Department of Work and Pensions today published a consultation paper called 21st Century Welfare which sets out ideas for fundamental reforms to the benefits system.

The report presents a number of options for integrating different existing benefits. This has a number of potential attractions: the system could be made simpler for claimants to understand and navigate, cheaper for the government to administer, and provide a more seamless transition when family circumstances change. It could also put an end to the very highest effective tax rates that arise in the current system when people face several benefits being withdrawn at once - though perhaps at the cost of increasing effective tax rates for others. Devils will no doubt lurk in the detail, and the transition to a radically different system is bound to be hazardous. But the existing system is unnecessarily complicated and piecemeal; there are clear improvements available and the approach outlined in the report is promising.

But the report is much weaker in facing up to the age-old trade-offs between redistribution, work incentives and affordability. It is difficult to strengthen work incentives without either spending more money or hurting the poor - neither of which seems likely to be an attractive proposition to the government. In some cases the pursuit of conflicting objectives leads the paper to make proposals that seem to contradict each other. The report concludes that the government could 'improve work incentives by reforming the way benefits are tapered as incomes rise and allow people to keep more of their earnings' (implying less rapid withdrawal of benefits) and, in the next bullet point, that the reforms could be 'targeted to those most in need through tapers which focus payments on those with lowest incomes' (implying more rapid withdrawal of benefits).

More often, the report simply ducks difficult issues, putting them off for future consideration. It says that 'a balance between incentives and affordability would need to be struck', that 'reforms will need to consider the balance between contributory benefits and targeting support on those with the lowest incomes', and that 'at the appropriate stage, we will assess the impact of our proposals on vulnerable groups'. The multi-billion pound question is what the appropriate balance between competing objectives should be, and this is left unanswered.

The trade-off between objectives would be less severe if the government could throw money at the problem. But, come the spending review this autumn, George Osborne will be looking to take billions more out of the welfare budget, not to put billions more into it. This means that any promising structural reforms of the type identified in this paper are likely to be accompanied by financial losses for significant numbers of families now in receipt of benefits.