Ryan Bourne is the Head of Public Policy at the Institute of Economic Affairs. Kristian Niemietz is Senior Research Fellow at the Institute of Economic Affairs.
“When I say a thing I mean it. When I set myself a task I do it. When I settle on a course I stick with it”. So said Iain Duncan Smith in his 2002 party conference speech. A year later, the ‘quiet man’ had been deposed as party leader. Yet as he grapples with the realities of fundamental reform of our welfare system, we should perhaps remember that his determination to finally do something to overhaul it has become his main political mission.
In the past few days, there have been numerous and substantial critiques of Duncan Smith’s record as welfare secretary. Jonathan Portes of NIESR, for example, believes the flagship Universal Credit (UC) is failing. He and others have also been critical of the disability benefit reforms which they say have left many in limbo and failed to make the promised fiscal savings. Yet there’s a paradox: in terms of net approval, IDS regularly comes out right near the top of the ConHome Cabinet League table; among the general population, the Conservatives lead Labour by 22 points on the issue of welfare. And there’s a sense that this issue of welfare has to a certain extent become depoliticised – all parties believed that something substantial needed to be done going into the last election, and the public have been very supportive of the principles behind measures to ensure welfare is going to only those who genuinely need it. It’s for this reason the Conservatives are likely to hold up welfare as an area of success in the forthcoming election.
This is in part because most fair-minded people genuinely believe that his vision, and principles for reform of the welfare system, are a substantial step in the right direction. Duncan Smith successfully articulated that the incredibly complex £100 billion working-age welfare system he inherited in 2010 was not just incredibly expensive, but was failing many of those it purported to help. Perceived motive is incredibly important in politics, and the way he dedicated substantial time to reviewing poverty and welfare (including setting up the Centre for Social Justice) gave him the credibility and political capital to advance a package of radical welfare reforms. Contrary to how welfare changes are discussed in much of the media, for him the main objective (unlike the Treasury, perhaps) was never about saving money but about taking a more holistic view of the causes of poverty coupled with unwinding the complexity and worst disincentives of the welfare system.
Yet one should not simply brush over the reality of the substantial difficulties there have been in delivery of his agenda. Universal Credit (UC) was meant to be his flagship project, the cornerstone of his overhaul of the welfare system. And yet so far, the rolling out has been nothing but a series of delays, IT glitches and administrative blunders. It’s said that 14,000 people are currently in receipt of the credit, compared to a target of 1 million by this point. UC has become the British welfare state’s equivalent of the Mir, that ill-fated Soviet-Russian space station which was in a perpetual state of disrepair – except that the Mir at least made it into space.
And yet once the system is up and running – and we must hope politicians have the will to see it through – its troubled infancy will probably soon be forgotten. What will remain is the replacement of a horrendously complex system with a halfway logical one, and that will be no mean feat.
The inherited benefit system resembled a confusing chemistry set, containing lots of different elements that interact with one another in lots of different ways. Some elements repel each other with varying intensities, some reinforce each other, and yet others show no particular reaction when combined. Receipt of Benefit A can render you ineligible for Benefit B, but it can also make you automatically qualify for Benefit C. Your income from Benefit A is partially counted against your income from Benefit D, fully counted against your income from Benefit E, while leaving your income from Benefit F unchanged. They all have different taper rates, different thresholds for applying those tapers, and sometimes different definitions for seemingly straightforward terms like ‘income’ and ‘gainful employment’. And then, all the major transfers come with their different add-ons, extra elements and special allowances. Add to that the interactions with the PAYE system, and the mess is complete.
The problem with an unnecessarily complex system is not that it is wasteful, inefficient and annoying. Rather, we know from other areas of economic research that a common response to overbearing complexity is inertia – which exacerbates the dependency trap. For a recipient in part-time employment, it can be quite difficult to work out whether they would be noticeably better off if they took on an extra workday or switched to a better-paid position. For a workless recipient, accepting a temporary position can be risky too: If the job does not turn into a permanent one, they will have to go through the whole benefit application process anew. The initial hurdle can be high, but once it is surmounted, benefit entitlement is essentially open-ended. This combination can create an understandable reluctance to abandon a secure income for an insecure one. On top of this, when two or more benefits are withdrawn at the same time, and the recipient is also liable to income tax and national insurance, effective marginal tax rates of 90 per cent and above can result. You have to be a Calvinist not to be put off by such strong anti-work disincentives.
UC will at least eliminate the excesses of the current system. It has one single taper rate, so recipients will always know where they stand if their financial situation changes. It will make the transition into work a lot smoother, as it does not require separate applications for in-work and out-of-work benefits. And it will eliminate the highest effective marginal tax rates.
But even if it was running like clockwork, substantial problems remain. Though the very highest marginal tax rates will be eliminated, they would still be very high at 76 per cent. Looking solely at the economic incentives then, perhaps the transformative impact on work incentives is over-egged. The welfare system also remains too heavily centralised, and attempts to outsource some welfare services to private companies like Atos has done nothing to change that. Outsourcing the delivery of things like Work Capability Assessments is not the same as devolving responsibility. Without the local knowledge that comes from being close to recipients, tasks like these assessments (which almost all agree are a good idea in principle) become tick-boxing exercises – creating substantial mistakes, leading to a range of successful appeals and to substantial backlogs which can have real effects on people’s lives. The coalition should have followed up on their own rhetoric of localism, and delegated swathes of the welfare state to local authorities while also giving them the tax-raising powers to fund it.
Further, since the welfare state does not exist in a vacuum it cannot be reformed in isolation. DWP needs help from other departments, too. Suppose the disposable income of somebody working full-time on a relatively low wage exceeds the benefit income of a workless person with otherwise similar characteristics by £250. Now suppose rents in the area rise by £100. What happens? The low-paid worker has £100 less to spare, while for the workless person, nothing changes, because Housing Benefit also goes up by £100. Thus, their living standards are now much more similar than before, which means that the payoff from getting a job has greatly diminished. This is the way in which high housing costs destroy work incentives, and that problem cannot be solved by changing parameters of the welfare system; it requires a more joined-up approach that couples welfare reform with planning reform. Taking a supply-side approach to housing and the cost of living generally could substantially reduce poverty whilst actually saving the government money (and make other toxic issues like the so-called ‘bedroom tax’ less potent).
For all these delivery problems and unaddressed challenges, though, a major success has been the state of the labour market. The inherent flexibility of the UK in this area is important here. But it’s clear that there has been a substantial increase in the supply of labour particularly at the low end since 2010 (which can be seen in that we have more people in work and low real wage growth). Welfare sanctions, restraint of benefit growth and the prospect of assessments (alongside the substantial increase in the personal allowance) are all likely to have contributed to this. Whilst other factors (like pensioners reacting to the prospect of lower retirement incomes and falling real wages) are important, it would be churlish to not grant some credit to Duncan Smith for the substantial increase in employment in recent years. The percentage of households where no adults work was yesterday shown to have fallen by 1.4 percentage points over the past 12 months – the largest fall since comparable records began.
Indeed, for all the very real difficulties of delivering on the major reforms promised, this is the main reason why many people believe welfare policy is headed in the right direction. Which brings us back to the quote at the start: unpicking the welfare system which had built up over decades is not proving as easy as the Secretary of State perhaps thought. But the unfinished business of Universal Credit must be seen through – it remains our best hope of truly getting to grips with the incentive problems of our current system.
Yet even then there is much ‘unstarted business’ – as Duncan Smith well knows, manipulating benefits and withdrawal rate reform cannot solve all deprivation. His legacy can thus only really be judged in a decade’s time. Will UC ever be delivered, and if so, will its effects be worth the substantial time and resource to implement? And will discussion of poverty have substantially moved away from an obsession solely with the purported solution of state benefits? If the answer to those two questions is ‘Yes’, he will have had an extremely transformative impact indeed.