11 Nov 2010

Duncan Smith unveils welfare reforms

In a White Paper published today, the Work and Pensions Secretary, Iain Duncan Smith, sets out his plans to cut Britain’s £192 billion benefits bill and unveil the new universal credit.

Work and Pensions Secretary Iain Duncan Smith, who announces his welfare reforms on 11 November, 2010 (Reuters)

Universal credit
The universal credit was outlined by Mr Duncan Smith at the Conservative conference.

This will replace the “complex, outdated and wildly expensive system” of multiple benefits and tax credits with a single credit – the amount people receive falling gradually as they return to work.

“For those who want to choose not to work, under this government this will no longer be an option.” Work & Pensions Secretary Iain Duncan Smith

Mr Duncan Smith told delegates: “We will break down the barriers to work and ensure work pays but in return, we have the right to insist that when work is available you take that work and work hard to keep that job.

“For those who want to choose not to work, under this government this will no longer be an option.”

The idea is that the withdrawal of benefit will be so gradual that claimants will always be better off in work than on benefits.

It is an approach that, in its broadest form, has been given the thumbs up by the Institute for Fiscal Studies, although a report also warned: “On the other hand, integrating benefits (with or without tax credits) would give rise to considerable transitional costs to government.

“Past government experience with the child support agency and tax credits suggests that large scale ICT projects bring risks for claimants too.

“Furthermore, the costs to government would be upfront, and the savings to government – reduced administration costs, fewer losses to fraud and error and, possibly, lower spending on benefits and tax credits if more people are encouraged to move into work – would accrue over time, and this financial profile may not be compatible with the Government’s desire to reduce the fiscal deficit now.”

The White Paper is expected to lead to four-week programmes of compulsory community work for the unemployed, with those refusing to take part losing their £65-a-week jobseeker’s allowance for three months or longer.

Mr Duncan Smith has said that the scheme is aimed at people who have lost the habit of getting up in the morning, going to work and earning money.

While the Treasury Chief Secretary, Danny Alexander, has said what is planned owes something to previous Labour policy.

“There are sanctions in the system at the moment that say if people don’t turn up for work-focused interviews and don’t carry out job search responsibilities properly, they will lose their benefit for a period of time. We are seeking to extend these sanctions ….”

The Archbishop of Canterbury has condemned the plans, and studies of workfare in other countries show that the Government cannot rely on these schemes to get people off benefit and into work, particularly if unemployment is high.

In 2008, research published by the Department of Work and Pensions into workfare schemes in the US, Canada and Australia found that “there is little evidence that workfare increases the likelihood of finding work”.

The study added: “It can even reduce employment chances by limiting the time available for job search and by failing to provide the skills and experience valued by employers.

“Subsidised (transitional) job schemes that pay a wage can be more effective in raising employment levels than work for benefit programmes. Workfare is least effective in getting people into jobs in weak labour markets where unemployment is high.”

Child benefit
As the Chancellor George Osborne announced at the Conservative conference, higher rate taxpayers will lose their child benefit from 2013

CB is worth £20.30 a week for the eldest child and £13.40 for younger children – £1,750 a year for families with two children. The benefit is being withdrawn from households where at least one earner pays 40p tax on a salary of £43,875 a year.

To say the new Government has endured a baptism of fire over this policy would be an understatement. When it was first unveiled, there was anger that couples earning £80,000 between them would keep their CB, because neither was a higher rate taxpayer, while couples getting by on one person’s earnings of £43,875 would lose theirs.

Then the Government was forced to explain how the changes would be implemented.

As things stand, CB will continue to be paid to families including a higher rate taxpayer, but will then be clawed back through the tax system, either monthly or at the end of the tax year.

Higher rate taxpayers will be responsible for notifying Revenue and Customs if they receive CB, or risk a fine.

Then there is the issue of evasion. People who are only just within the higher rate tax threshold could opt to take a salary cut, or increase their pension contributions in a salary sacrifice scheme.

And as the IFS has pointed out, the change creates disincentives to earning more for those just below the higher rate tax threshold. Someone with two children could become a higher rate taxpayer after receiving a small pay rise, but lose £1,750 in CB.

Housing benefit
The housing benefit bill has increased from £14bn a decade ago to £21bn, and the Government is looking for savings.

The last government reformed the way HB was paid to private sector tenants through the so-called local housing allowance. Under this system, HB is paid directly to tenants, based on the average market rent in a particular area.

LHAs are set at comparatively high rates in expensive parts of the country, like London, and some families are receiving tens of thousands of pounds a year in HB.

Mr Osborne has complained that some families are claiming £104,000 a year in HB, although a Daily Telegraph investigation has found that there are only three families doing so.

His solution is to cap the amount people can claim – a maximum £400 a week for a four-bedroom house.

Cue a second baptism of fire for the Government, with the Conservative Mayor of London, Boris Johnson, warning that people could be forced out of their homes in the capital in a bout of “Kosovo-style social cleansing”.

A survey of landlords has suggested that 82,000 households – more than 200,000 people – would be at risk of losing their home as a result of the changes, with 60 per cent of landlords saying that they would not lower rents to mitigate for the lower benefit.

The Government estimates that 21,000 households will be affected, 17,000 of them in London.

The headline-grabbing cap has received most of the attention, but the Government is also planning to restrict tenants to the cheapest 30 per cent of homes, rather than the cheapest 50 per cent. This means people living in the private rented sector and claiming HB will only be able to choose the cheapest properties – or make up the difference themselves.

The Opposition
It was the 1945-51 Labour government which introduced the Welfare State, and Ed Miliband has condemned the Coalition’s plans to take away CB from higher-rate taxpayers. But when the White Paper is published, Labour will not criticise every measure proposed.

The Shadow Work and Pensions Secretary, Douglas Alexander, has said he is “interested” in the Government proposals for a universal credit. The former Work and Pensions Secretary James Purnell said he had suggested a similar scheme to Gordon Brown, but was turned down, contributing to his resignation from the Cabinet.

Labour is also willing to consider moving people off incapacity benefit and into employment and will work with the Government on reforms to disability living allowance. Similarly with HB, Mr Alexander said he “could consider” reducing payments if the changes were phased in.