Do we need a new mix of private and public money to pay for welfare? Is there a "bottom 15 per cent" problem? Can Labour rebuild the benefit system around the work ethic? A group of analysts consider these questions and the larger dilemma-can we enjoy social diversity without undermining the moral consensus on which welfare depends?by Pamela Meadows / March 20, 1998 / Leave a comment
Pam Meadows: As we get richer and live longer we want to spend more on services (education, health, social care) which are still supplied mainly by the state. GDP per head in Britain has doubled since the 1950s, but there is a perception that the welfare state has become less affordable and less effective, and that we may have to choose between a universal and a safety net system. Labour has launched a high profile policy initiative without a clear idea of what it wants to do. We shall try to help. Let us start with the basic question: can we afford the welfare state?
Ruth Lister: The question should be, “Can we afford not to afford the welfare state?” because without it we would be in a terrible mess. If we look at the figures, the welfare state is not running out of control. We are not spending enormous amounts relative to other countries. Affordability is not the key issue.
Anatole Kaletsky: Pensions could have threatened affordability but Margaret Thatcher dealt with that by driving down the value of the state pension. The other area where cost is driven by demographics, and therefore potentially out of control, is health. The question here is not, “Can we afford the health service?” but is the health service, or indeed the whole welfare state, good enough for a country which has become as wealthy as Britain is today.
Patricia Hewitt: Affordability is not at the heart of the debate. As far as the social security system goes-which is where the most difficult questions arise-the problem is more one of effectiveness: are we doing enough with the very large sums being spent? The social security budget has doubled in real terms, over 18 years, to about ?100 billion but levels of poverty have doubled too, so we have a problem. To take a specific, topical, example: the proportion of lone parents in employment has fallen markedly at the same time as the number of lone parents has sharply risen.
Julian Le Grand: The issue is whether we want to afford the welfare state. It is clear that we are running into some tax-payer resistance. There are surveys which say that people are happy to pay more for health and education (not, interestingly, for social security). But if you dig deeper into those surveys, it usually turns out that it is the person one rung up from you on the ladder who should be paying more.
David Willetts: The welfare state encompasses so many different things. There is the issue of transfer payments and redistribution, which is different from how to pay for health care, which in turn is different from education. We can certainly imagine continuing to devote 20-25 per cent of GDP to all these things which fall under the broad heading of welfare. But I would challenge the consensus by saying that I think we can carry on affording the welfare state provided that we carry on worrying about whether we can afford it. If you leave it alone it will grow like Topsy. If you are not constantly monitoring its effectiveness, then as social circumstances change, it will become less well targeted. One of the disingenuous claims in the welfare briefing papers put out with Tony Blair’s roadshow was that the cost of social security has been rising and rising. In fact Peter Lilley succeeded in bringing social security down as a proportion of GDP-partly thanks to economic growth, but also because of a series of tough decisions. Provided people keep taking tough decisions, it will remain affordable.
Anatole Kaletsky: It is the balance of private and public spending which is key. Clearly certain services-health and education in particular-will not evolve as they should on the basis of current public spending plans. Public money is not the only answer, but it is part of the answer for these services. Then there is pension provision. Public sector pensions may have been reduced to a tolerable level of national income, but they are clearly too low and will become even lower. If we are agreed that we cannot pay higher pensions out of the public purse, then the private sector has to play a crucial role.
David Willetts: It already does, with funded pensions.
Anatole Kaletsky: Yes, but what about the 40 per cent of the population without a funded pension?
Patricia Hewitt: That’s right. The state pension has been made affordable by linking it to prices, not to earnings, so its relative value declines. The last government justified that by putting the money into income support. But we now have 1m elderly people not claiming income support of ?36 a week to which they are entitled. So we have a group at the top with substantial incomes from second and third pensions, and a large group at the bottom in poverty. What do we do? One approach is to universalise the funded second pension. The other is to do something about the basic state pension-either put it up at the same rate for everyone sticking to the contributory principle of national insurance (NI) in which what you receive is linked to what you put in, or rebalance it so that people with little or no second pension get more from the basic pension. But there is a bigger problem. When the basic pension and NI were set up you could assume that the typical working life for a man was 50 years. Retirement, if he lived that long, was only three to five years (a bit longer for his widow). That was easily handled through pay-as-you-go systems run by the state. Now you are looking at working lives of 30 to 35 years and retired lifetimes of almost the same length. To depend entirely on pay-as-you-go carries considerable political risk (in an economic crisis, a government might devalue the currency or cut the pension). It is more sensible to spread the risk with a funded investment too, so you have a mix of capital market and political risk.
David Willetts: I have an instinctive preference for registering claims on future resources via private contracts rather than via the state in the form of tax. The best solution to this problem was the “pension plus” idea of the last government. You move to a system where almost everyone has a funded pension, with the state helping people who do not have the earnings to generate a fund, as well as helping to deal with the transitional problem of the generation which has to pay twice. But because this government so emphatically rubbished that Conservative idea, it has become impossible to borrow it.
Pam Meadows: You did complicate matters by launching a plan for the next 40 years at the start of a four-week election campaign.
Julian Le Grand: There is an important question here relating to state support for private pensions and what we now call the “middle class welfare state.” Tax relief for private pensions is now said to cost between a quarter and one third of the cost of the overall state pension. Over half the benefit in tax relief goes to the top 10 per cent of tax-payers. We have got to think hard about the dangers of getting rid of a middle class welfare state based on direct spending (free university education and so on), only to replace it with one based on tax breaks.
Anatole Kaletsky: The idea that tax relief is a form of expenditure is based on the absurd premise that all income belongs to the government. If the middle class did not benefit from these reliefs there would be greater pressure from the same middle class to lower levels of income tax. It is politically dangerous to bracket tax relief with government spending.
Ruth Lister: On the contrary, it is politically important to do so. There is a danger that cash benefits come to be seen as parasitical, while tax reliefs are barely visible and somehow not real money.
David Green: The best way round this problem is to equalise the incentive across all forms of saving-whether it is a pension fund, an annuity, a house or even a business. People are not all in the same predicament and we need flexible arrangements whereby people can provide in different ways, depending upon their circumstances.
Pam Meadows: Should it be part of the welfare state’s role to promote social citizenship?
Patricia Hewitt: I do not think that the experience of some mothers queuing in the post office to cash a child benefit cheque and others, myself included, having their child benefit paid into a bank account, promotes common citizenship. On the other hand, the shared experience of services-playgroups, primary schools, health centres-does foster social inclusion. Opinion surveys suggest a strong sense of a shared stake in the retirement pension, rather less for child benefit and very little at all for means-tested benefits-for the obvious reason that you are only eligible for them if you are part of a minority.
Ruth Lister: I was talking to a colleague from the Netherlands on this point, who remarked that in Britain we talk about redistribution while in continental Europe they speak of solidarity. I think it is an attractive idea that society benefits from everyone having a stake in the welfare state. But how do we make it real in an increasingly fractured system? Not by building on the least successful and least popular parts-namely, the means-tested parts. Instead, I would go back to the ideas which Patricia and I and others came up with on the commission on social justice, and look at how to modernise the insurance principle. The social security system may have been a badge of citizenship in the past, but it was always an imperfect one, excluding many women and others who did not work standard hours. It has become a platitude, but we need a new system which can adapt to flexible labour markets and more fluid family patterns.
David Willetts: There is a question about whether the welfare state is a cause of shared citizenship, or a consequence. I think it is in part a consequence of having fought two world wars. They helped to create a core of shared values. The basis on which you can extract large amounts of money in taxation and pay it out in benefits, is that most people think that benefit recipients are people like themselves facing difficulties which they themselves could face. If values become more diverse, if lifestyles become more differentiated, then it becomes more difficult to sustain the legitimacy of a universal, risk-pooling welfare state. People start asking: why should I pay for them, when they are doing things I would never do? This is America versus Sweden. You can have a big welfare state like Sweden’s provided you are a homogeneous society with intensely shared values. In the US you have a very diverse, individualistic society and people feel fewer obligations to fellow citizens. This is the real progressive dilemma: progressives want diversity, but they thereby undermine part of the moral consensus on which a large welfare state rests.
David Green: There are two rival versions of citizenship. One is the kind Ruth was talking about: disguised egalitarianism. It worries about whether people have certain consumption opportunities-and if they do not have them it claims they are excluded from society. Citizenship sounds as if it ought to be about giving as well as taking, but in practice, because of the egalitarian influence, it has been more about taking. There is a broader view, spelt out in Tony Blair’s recent article in The Times. First, anyone in genuine need should get help. Second, if you can work you should work. And third, if you can provide for yourself you should. It is a two-sided deal.
Ruth Lister: But that reduces the welfare state to a safety net and, as Richard Titmuss argued, benefits confined to the poor become poor benefits.
Patricia Hewitt: Tony Blair is not proposing a means- tested safety net for the poor with everybody else providing for themselves in the private market. But at the heart of what Labour is grappling with is the tension between a broad, universal welfare state and ensuring that those at the bottom of the pile get the help they need. The reconciliation of these two things is through the primacy of paid work. David Willetts talked about a collapse in shared values. I too repeatedly hear, in the deprived estates that form a large part of my constituency, people who are in work or who have spent most of their lives in work, objecting strongly to their taxes going to people-sometimes their own daughters!-who are not in work and show no signs of getting into work, often through circumstances outside their control. People complain about the lack of clear direction in our reforms-well, this is one very clear principle: to rebuild the benefit system around the work ethic, transforming passive support into active support.
Julian Le Grand: Social citizenship has to be looked at service by service. It is difficult to maintain a sense of citizenship in relation to social security. Even on the health service I am ambivalent. But I am sure that we should hang on to a notion of social citizenship in schools. That brings us back to the old divide between the private and public sectors. I am not for banning private schools, but I think it is still a highly divisive factor. (Incidentally, David Willetts is right about war. I was involved in some comparative research which showed that the countries which had the most experience of war were the ones which tended to develop more solidaristic welfare states.)
David Willetts: We must not forget that universalism can produce losers. Imagine that the government issued everybody with a Ford Escort out of general taxation. If in the private market place you could not have afforded an Escort, you are a gainer. But if you could have bought a Mondeo if you had been allowed to hang on to your money, you are a loser.
Anatole kaletsky: But that misses an important point. There are certain services about which people have a moral view. Many people would argue that you do not have a right to enjoy a better treatment for potentially terminal cancer than somebody who is much poorer than yourself. Many people think that as a result of your citizenship, your humanity or whatever, you have certain rights which ought to be distributed pretty evenly regardless of income-health and education are the big ones. This view is more difficult to apply to cash benefits. It is harder to say that somebody is entitled to ?100 each week which they can then go and spend on the lottery, than it is to say they are entitled to a good education. One of the troubles of the modern welfare state has been the rapid growth of these “low legitimacy” cash benefits relative to the provision of services such as health and education, where spending as a proportion of GDP has been pretty constant. This has helped to undermine belief in the welfare state.
David Willetts: But the advantage of cash is that it is permeable; it can be mixed in and topped up. With services you are much more likely to find that there is a simple standard provision.
Anatole Kaletsky: But from a political standpoint, cash contributes less to a sense of community or citizenship than the health service, or even public transport, parks, museums and so on.
Patricia Hewitt: The war generation certainly feels very strongly, about cash and services. They think they have worked hard and are entitled to a decent pension and to long-term nursing care.
David Willetts: The very fact that they emphasise how hard they have worked for it shows that it is not a citizenship issue but a contract issue-they have paid something in and they want back what they are entitled to. But I want to broaden the discussion again: there are two ways in which we could progress-I hope it is not a caricature to regard them as the Gordon Brown and the Frank Field approach. Gordon Brown wants to target resources on the poorest people, which means a bigger, better means test and perhaps some integration of tax and benefits. Frank Field worries about the effect on character of the means test, which encourages sloth and dishonesty, and wants to build on the contributory insurance principle. Each has advantages and disadvantages, but you can’t do both.
Patricia Hewitt: This is not the primary choice. Everyone agrees that the emphasis has to be on getting people who can work into work. Everyone also agrees that means testing is destructive of work incentives, savings incentives-even relationship building incentives. We tend to think that these are problems of the benefit system and should be solved within the benefit system: more targeting, less targeting, more insurance, less insurance. But in most cases the problems will be solved by action outside the benefit system, reinforced by changes in it.
Pam Meadows: We do know that people who have jobs are better off than people who do not. But it doesn’t follow that the groups of people currently not working would be better off in work. They may have characteristics which make them less competitive in the labour market, which is part of the reason why they are not working. I feel uncomfortable with this “Arbeit Macht Frei” approach. Should the children of lone mothers be forced into unsatisfactory child care to satisfy some conviction that idleness is evil?
Julian Le Grand: And there is a more general issue about how work is dominating our society. Working hours in Britain are increasing and have been for the last 10 to 15 years, especially at the top of the labour market. They have been increasing in the US as well: the average American now works a month longer than 15 years ago. We have a growing number of dual worker families, but I do not think that a society in which everybody is in work for long hours and in which the senior members of the family spend most of their time outside the family is a good society. There is evidence from the US that when both parents are working long hours, the child’s education suffers. If that is true, then we do indeed have to look outside the benefit system, at the workplace, at flexible working patterns to allow families to perform their welfare and caring roles.
Patricia Hewitt: Those of us around this table who fit this pattern probably feel uneasy about it and would not hold it up as desirable. But the answer to the problem of overwork at the top, and to some extent the middle of the economy, does not lie in saying that it is all right for people at the bottom of the economy not to work at all. It is about a rebalancing, about more family-friendly employment-especially for families with precious little employment now.
David Willetts: But the question remains. Who are the people who are expected to work and who are the groups who are not expected to work? One of the reasons why the single parent benefit argument caused the government so much difficulty in the autumn was that it could not be precise on who was expected to work even among this group. Mothers of school age children? Mothers of pre-school age children, too? There is another curious thing about this obsession with work: Britain has, by international standards, a very high proportion of working adults. The government’s favourite statistic about nearly 20 per cent of working age households being out of work tells us more about British households than about the labour market. If you have large numbers of very small households you tend to have a higher percentage of workless households.
Ruth Lister: But we still have a lower proportion of lone parents in paid work than most countries.
David Willetts: Because we have younger lone parents.
Ruth Lister: Partly, but it is also about child care. I want to go back to Pam’s point about work. I am very ambivalent. I believe we should value caring work in the home more than we do in our welfare system. I also think we should expect lone parents of older children to work, in their own best interests; but we are a long way from the sort of parent-friendly infrastructure which makes this possible. You have a real clash between Jack Straw-type home office policies for young people and social security policies. Most people on benefit do want to work. But there are some areas in Britain where the jobs are simply not there. And there are some people who for whatever reason cannot work and deserve support.
Patricia Hewitt: Two groups have been explicitly excluded from the work requirement: those who are so disabled that paid employment is never going to be a possibility, and those who have young children or elderly relatives for whom they are caring. But we have to recognise that, in the social security system at the moment, we have inherited assumptions about the division of labour between men and women which are in the process of enormous change. The system says that if you are a man, in order to get benefit you have to be available for work. It does not say that to the partner of a man, even when there are no children. So you can have a situation where a woman without children can be at home, dependent on the benefit of her partner. This is a curious situation-certainly for anyone below the age of 45-given the changes in women’s roles and expectations. Benefit rules should reflect social norms. In relation to families with children, we have to help them balance earning a living with caring for their children, bearing in mind that even among families with children under the age of five, 51 per cent of the mothers are in some form of employment. And the other thing we must do is reduce the number of very young women who are having babies in circumstances that are quite appalling.
Julian Le Grand: Is that enough work ethic? I want to suggest that we are moving away from a system of fiscal welfare, based on taxes, social security and bene-fits, to something which I call legal welfare, supporting people through legal or regulatory mechanisms such as the Child Support Agency. Such mechanisms will become more intrusive in trying to enforce good behaviour, even within families (making divorce more difficult, for example). We may follow Napoleonic code countries where children have a financial obligation to look after their parents, and parents their children. The minimum wage and the EU working hours law are all part of this.
David Willetts: Mention of the minimum wage pinpoints another area of shoddy social policy thinking by this government: the failure to distinguish between individuals and households. You sometimes hear, from the same minister, the following two propositions: that the minimum wage is an effective anti-poverty measure-although we know that many people who will receive it live in relatively affluent households-and that some people who are collecting disability benefits live in affluent households and therefore should not receive it. You cannot have it both ways. You either say: we are going to focus on the individuals, in which case the individual can benefit from the minimum wage regardless of the household. Or you look at the household and say that for the disability benefit you can have a household means test.
Ruth Lister: I agree that we should be clear when talking about individuals and households, but we have always had this fuzzy mess-we had it under your government, too. And you do, sometimes, have to consider both-because we can’t assume that income is shared fairly in households.
Pam Meadows: Should the state fund some welfare services but withdraw from providing them because it is inherently too inflexible to deliver a more subtle welfare state?
Julian Le Grand: I support bringing market-type mechanisms into the welfare sector. But there is a danger that if you organise things to appeal to self- interest, then doctors, teachers, nurses and so on will lose their sense of professional or public duty.
David Willetts: Being explicit and contractual does not automatically mean appealing to people’s self-interest. There is an important tradition, which David Green has written about, of non-state collective provision. It was wiped out for much of the 20th century, but it is due for a revival.
Anatole Kaletsky: The fact that you have one buyer of, for example, doctors’ services means that their wages are far below what they would otherwise be. If you have a competitive health service it is clear from other countries that doctors’ incomes will be much higher and the cost of the service will be higher.
Patricia Hewitt: I think it is important to have a mixed economy in the delivery of certain welfare services. In Labour’s new deal, we are experimenting with not-for-profit and private sector organisations in the delivery of employment services. This applies more generally to social regeneration in depressed areas-for example, we must shift away from monopolistic state provision of housing estate management. I am less clear about the role of non-state institutions in delivering other parts of the financial transfer system. Frank Field and others have talked about reviving mutuals to deliver a modern social insurance system. But there are very few mutuals left.
Pam Meadows: Finally, what do each of you see as the single most important aspect of welfare reform?
Patricia Hewitt: Look outside the benefit system for the most important solutions to the problems we face with social exclusion and poverty; create a new service which will take over most of the responsibilities of the current benefits and employment services-and offer highly personalised help.
David Green: Do not make state versus market the battle ground. We should be thinking about the state and civil society, about releasing aspects of human motivation-such as the charitable impulse-which have been squashed by a statist welfare state. If I were allowed a single measure it would be to revoluntarise all hospitals, creating not just commercial or charitable entities, but institutions which could be focal points for people of goodwill to give themselves to the service of others. The same could done with schools which ought to become not-for-profit local trusts.
Ruth Lister: My big idea remains the reform of social insurance to equip it for modern employment and family patterns. Short term, I am worried about the proposed working family tax credit. The government says it wants to combine work incentives with family well-being-the tax credit does not do that because it transfers money from the woman’s purse to the man’s wallet; child benefit does. The government should rediscover its commitment to a generous child benefit, funded through taxing it back from the better off or by reviewing the married couple’s tax allowance.
David Willetts: There is still life in the old Beveridge observation that if you define your categories carefully enough you can target benefits without means testing. We should concentrate on the age extremities-the under-fives and the over-80s. We also need a clearer framework of what we expect from the family itself by way of distributing income, for example, from workers to non-workers.
Julian Le Grand: If we are moving single parents and others from welfare to work, we need more family-friendly employment policies, especially on the length of the working day. On means testing we need to move away from a punitive attitude towards welfare beneficiaries and towards a “partnership” welfare state with positive incentives to help yourself. One example is where the state offers to match-pound for pound, or in some other ratio- individual contributions to private pension schemes or to other forms of social security.
Anatole Kaletsky: We need to decide which are the services which for moral or economic reasons the state should fund; and then design the welfare state around these generously financed services. We can do that by taking money away from areas where the state now spends a lot of money, but where individuals and the private sector can spend it better. Pensions is the clearest example of the latter. Growing old is one thing we can all be sure of; and it is incumbent on all of us to save for our old age as best we can.
Pam Meadows: Thank you all very much.