Don't Blow Welfare Reform

MONDAY, AUGUST 23, 2010

Don't Blow Welfare Reform

No more turning of backs

Indolent Tyler is still away, undergoing therapy by serial holiday. But the recent leaks on welfare reform demand a quick post.

The story seems to be that George and IDS had a stand-up row over the latter's demand for an extra £3bn pa funding for his welfare reform programme. It apparently went like this:

IDS: "You ******* little ****. Give me the ******* money, or I'll ******* have you."

George: "**** off Grandad."

Although the Telegraph reports the exchange thus:

IDS: "I am not prepared to tolerate the appalling way you treat my department. Your officials must show more respect to my staff. They do not deserve to be treated in such an arrogant and rude way."

George: "If you come up with proposals that work, they will be treated with respect. Find £10 billion of welfare cuts – or I won't give you £3 billion for your new scheme."

We've blogged this issue many times. Alongside Gove's schools reforms, welfare reform is by far the most important long-term legacy Cam could leave. Unless we can make work pay, the inexorable growth of Britain's underclass will eventually drag us all under.

The key is to cut the horrendous marginal tax rates faced by the poor. Benefit withdrawal means that many of our poorest citizens face effective marginal tax rates of 60, 70, and even 80% - well in excess of the rates faced by the richest bankers. They have no serious financial incentive to work. That can't be right, and must be changed. Even the maddest of the mad Labour leadership candidates seems vaguely aware of that.

The problem, as we all understand, is money. To reduce the rate at which benefits are withdrawn is horrendously expensive. Calculations based onour recent TPA study suggests that to cut the effective marginal tax rate rate by 10 percentage points would cost £10-15 bn pa. Which means that the real question is what gets cut to pay for the reform?

IDS seems to have argued that the cuts should all fall on other departments - ie his department simply gets an extra dollop of cash. But with DWP already getting well over a quarter of all public spending, that was never a serious runner.

More realistically, he may have been hoping that he'd be allowed to keep the savings he makes from cutting universal benefits (aka middle class welfare). We have long argued for such cuts, which as we said last September, could easily save £12bn pa. True, that £12bn includes cuts to items that are outside DWP's budget (such as free bus passes, free TV licences, and the student loan subsidy), but our biggest item is the abolition of DWP's universal Child Benefit, which would save £8.5bn pa net of additional help for poor families. And £8.5bn would give IDS just the money he needs to tackle the welfare trap.

Neat.

Except of course, for two things.

First, whacking the middle class to improve incentives for those famous dole scroungers and single mums might prove a tad "controversial".

And second, there is no money.

Let's just repeat that second point in case you missed it.

There is no money.

Or to put it another way, DWP has to contribute to the overall cuts package. The overall welfare bill - around 30% of total spending - has to be cut. IDS may want to keep the savings he makes on cutting universal benefits, but George can't afford for him to do so.

Which only really leaves the third option - the one we argued for in ourwelfare reform paper. We have to cut the poverty line. We have to recognise that we simply can't afford to fund welfare targeted at 60% of median income while at the same time making work pay. And our proposal was that we should redefine the poverty line down to 50% of median income.

If we did that, IDS would have plenty of cash to work with. On our estimates, setting the poverty line at 50% rather than 60% saves £20-30bn pa just on the welfare paid to working age households (ie leaving pensioner welfare untouched).

So is IDS thinking about that?

We certainly hope so. Although clearly he won't want to divulge as much to those penny-pinching accountants over at HMT.

But whatever the arguments, and whatever the heat, the most important thing is that IDS sees this through. We simply can't afford another wibbly wobbly government whose only solution is to spend even more on welfare and leave us with even more dependency.

PS Tyler must confess to being shocked when he heard that Matthew Elliott is moving from running the TPA to heading up the no2av campaign. Matthew is a real star, and has been the driving force behind the TPA's growth and success. Of course, he will do an outstanding job with the new campaign - and if anyone can stop this self-serving dilution to democratic accountability, he can. So naturally we wish him every success. Besides which, he will be returning after the AV referendum. But the TPA is bound to miss him. The bright side is that he will be leaving the TPA in the more than capable hands of Matt Sinclair, currently Research Director. Tyler knows Matt well, and never fails to be impressed by his ideas and energy - he has big shoes to fill, but he has the big feet to match. So the very best of luck to him, and to everyone else in the team.

PPS The HMT official who upset IDS so much is one Miss Lombardelli.According to the HMT organisation chart she is Head of Labour Market Policy. Not quite sure what that entails, but with a wonderfully scarey name like that, I'm betting she routinely makes officials in the spending departments offers they can't refuse. HMT has always featured a sprinkling of strong scarey women. During Tyler's time, he worked directly for one, and had frequent dealings with another. The thing about them is that theyhave to be strong. It's a robust environment where wilting isn't allowed - Tyler can still recall the shock of transferring there from the sedate cosy world of a spending department. And for women it's probably even tougher - even in 2010, not one has ever made it to Perm Sec. Sounds like IDS's officials need to get real.