Opinion & Commentary
Britons brace for age of austerity
Tony Abbott is in Britain visiting the Conservative Party conference. Is there anything he may learn from the British government's plans to reform welfare?
British public finances are in a terrible state so the Conservative-Liberal Democrat coalition must slash spending, and that includes welfare. However, Work and Pensions Secretary Iain Duncan Smith plans a dramatic overhaul of the benefits system and needs to increase spending by at least pound stg. 3 billion ($4.8bn) to put his plans into effect. He says this will generate savings in the long run as more people leave welfare for work, but Treasury mandarins are sceptical about claims such as this. The government is therefore cutting middle-class welfare to release the funds needed for the benefits changes.
The middle classes are losing the family tax credits Tony Blair gave them and there is talk of a graduate tax to help fund universities. This week it was announced the child benefit paid to every family will be limited to basic rate taxpayers.
The middle class is seeing the welfare tap turned off and other universal benefits are likely to follow (even though none of this was mentioned in the recent election campaign).
These cuts are making room for reforms to the benefits paid to the five million Britons of working age who live on welfare. At the heart of these reforms is a determination to make work pay.
Duncan Smith believes many people remain on welfare because they know they won't be much better off if they work. In Britain, as in Australia, people moving from welfare to work see their increased earnings eaten away by income tax and by the claw-back of means-tested benefits.
They typically lose 70 per cent or more of every extra pound they earn. Duncan Smith says he cannot force people off welfare and into jobs until he can assure them they will be better off as a result.
Part of the solution is to take low earners out of tax. Prompted by the Liberal Democrats, the government has promised to raise the tax-free threshold to pound stg. 10,000 during the next few years.
This is a policy Australia could emulate (something similar was proposed in Ken Henry's recent review).
Duncan Smith also wants to replace the various working-age benefits with a single, universal credit that will ease the means-test taper. Britain's equivalent of Newstart Allowance, Disability Support Pension, Parenting Payment Single, Parenting Payment Partnered, Family Tax Benefit, Youth Allowance and rent assistance will disappear (in addition to other, smaller payments). In their place, claimants will get a single payment based on their household circumstances.
Australia looked at doing something similar 10 years ago (the McClure report) but rejected the idea. But a single benefit does have some advantages. It should be cheaper to administer one benefit rather than 50. It will also be easier for claimants to understand a unified system. Above all else, it makes it possible to apply a single taper rate to earnings.
There will be a significant earnings disregard (so claimants working a few hours a week will still receive a full welfare payment), and the new, single benefit will be phased out at a constant, reasonable rate so workers always end up better off as their wages rise.
It seems a sensible idea, though critics are worried that it's going to be expensive (the pound stg. 3bn estimate looks optimistic).
There is also some uneasiness about the philosophy behind all this, for the government seems to be saying it's OK to remain on benefits if work doesn't pay you much more than welfare. Duncan Smith says: "It's no good teaching [claimants] about moral purpose or lecturing them about their obligations. The one factor that governs decisions at that level is money." But critics say it shouldn't be a matter of rational calculation but of morals.
People should be expected to work if they can, irrespective of whether this pays them more than they get on benefits.
The government does intend to enforce work requirements on claimants (so-called conditional welfare), but details are sketchy. Single parents with children under seven will be exempted; so will disabled people who genuinely cannot work. (All disability claims are being re-examined, a move Australia may usefully copy.) Most other claimants will be required to do something in return for their benefits (an echo here of Australia's mutual obligation), but most will hang around in the system for at least six months before meaningful conditions are imposed, and it is likely many will still be able to avoid work by enrolling in pointless training schemes. There is no sign of Britain going down the US route of diverting new claimants directly into jobs, nor is there any talk of American-style time limits on welfare.
Australia, rather than the US, seems to be the model, which means PM David Cameron probably has more to learn from Abbott than the other way around. Employment services are being contracted out, claimants will get personalised return-to-work plans and service providers will be paid by results. Work-for-the-dole type schemes are promised and there is interest in Australian-style managed income schemes for dysfunctional families.
But the test of the government's resolve is whether it adopts a serious Work First policy as many American states have done. Public opinion favours it - 82 per cent think claimants should accept work or lose their benefit - but welfare reform has defeated stronger governments than this one. The danger is that Britain ends up spending even more on welfare with little to show for it.
Peter Saunders is a senior fellow at the Centre for Independent Studies living in Britain.
