Rebuilding Beveridge

Our welfare system undermines the value of hard work
September 19, 2012

Protestors in Trafalgar Square (© Jess Hurd/

The longer parties are in power the greater the difficulty they have in breaking free from their time in government—and their former policies—once they occupy the opposition benches. This rule is playing out with a particular vengeance in Labour’s welfare reform programme. Disengaging from the past is not made easier for Labour by the way that the coalition government has copied their welfare approach, tooth and claw.

Such a disengagement is crucial, though, if Labour is to become an effective opposition. It must do so to establish a wider electoral appeal and before the government’s approach fails. Now is the time for Labour to set out the principles that would underpin a new approach.

I always thought Gordon Brown’s aim was to replace welfare’s national insurance bedrock with a plethora of means tested tax credits. Iain Duncan Smith’s universal credit is the logical extension of Brown’s tax credit strategy, which was never more than means testing on speed. Both approaches are misguided.

William Beveridge, creator of the modern welfare state, initially included means testing in his national insurance system thinking that its importance would decline over time. This did not happen, but it was only during the first Wilson government in the 1960s that politicians accepted means testing would have a growing influence over welfare provision. Even then, hopes remained that an alternative approach would somehow emerge.

The universal credit—the sweeping up of six means tested benefits into a single payment—is almost the final destination of Gordon Brown’s tax credit journey. But there are two big problems.

First, it is doubtful that any government can deliver an information technology system that comes close to the expectations which will be placed upon it. With the exception of pension credit, I can think of no government IT scheme that has not turned out to be broken backed. One would have to be brave to put any political capital on the IT of the universal credit proving the grand exception to this dismal rule.

There is for me, however, an even bigger objection. Universal credit is incompatible with the values the public would wish to see thrive in the good society. Here it is important to go back to Beveridge’s first principles. December will mark the 70th anniversary of his great wartime report. Beveridge was part of that elite who had inherited from the late Victorian and early Edwardian period a passion about creating a certain kind of citizen, a passion shared by Clement Attlee, the post second world war prime minister who turned Beveridge’s report into policy. Beveridge and Attlee were part of that political tradition that saw as its primary goal the creation of a good and virtuous society and both of these leaders saw welfare provision taking a pivotal role.

Beveridge saw his welfare proposals as a means of moulding an active, independent citizenry that practiced the virtues of hard work, honesty and prudence. His fundamental principle was that receipt of welfare was to be dependent on what a person had paid into the scheme.

Means testing has, however, had a corrosive effect on this principle. The result is that a welfare state determined largely by contribution has been exchanged, without any debate let alone approval by the electorate, into a system of welfare determined by need.

With needs being met, and with responsibility left unrewarded, is it any wonder that we now witness an array of problems? Welfare spending affects how people behave. Means testing encourages dishonesty and penalises those who save; it flies in the face of the duty-based welfare which Beveridge designed.

This debate has a long history, but I always come back to an example from my constituency when I asked some young people on benefits about their attitudes to finding work. They told me they would not dream of taking a job that did not pay three times the rate they gain on benefits, despite having no qualifications to back up such a wage request. It cannot be right to strengthen a welfare system—with means testing at its core—which can produce this outcome.

During the last Labour government I thought the party was wrong to major on means testing, and resigned because of it. It also put the government at odds with public opinion—which Labour will need to have won over by 2015.

Part of that strategy should include new proposals on welfare, and a manifesto promise to begin rebuilding an insurance-based welfare. Such an approach would ensure that Labour’s traditional ethical approach became more dominant and that a new dialogue would open up with voters.

Benefit receipt should once again become dependent on a contribution record, with higher levels of benefit paid to those who have paid more national insurance contributions and all benefits paid at a markedly higher level than any means tested support.

How should Labour propose to pay for such a scheme? In the whole period since the Second World War governments have failed to persuade tax payers to fund fully the level of public spending they demand as voters. Indeed, deficits have been run for most of these years. Simply advocating more spending on welfare will get nowhere.

Peter Kellner, writing in these pages (A quiet revolution, March 2012) has hinted at the appeal national insurance still holds for voters despite government attempts to persuade them their contributions are little more than a tax.

We should build on this public perception by planning a new welfare state run by three mutual insurance bodies controlling health, pensions and national insurance.

The first would take over existing national insurance benefits. The mutual structure would consist of a pot into which national insurance contributions would be paid. It would be responsible to the membership for its finances and levels of benefit paid.

The second should cover the National Heath Service. Health funding will remain in a state of long-term crisis until we establish a direct link between what individuals demand as potential patients and what they are prepared to pay for as contributors. A separate national health insurance contribution would begin to establish that link, but also give members a direct say over the kind of services they wish to pay for.

Finally the coalition’s long-term pension reforms are in a political cul de sac. A pension system that reduces the need for means testing has considerable electoral appeal, until people realise that the government proposes to pay for it by pinching contributions from other contributors.

So a third mutual entity should incorporate the National Employment Savings Trust, the pensions scheme set up by Labour in 2008. This should ensure that savings over the longer term guarantee a pension scheme with the funds to make payments above means-tested assistance levels. It would have the further benefit of encouraging pensioners to build up other savings to top up their state pension.

Ed Miliband is trying to set out a new, responsible approach to capitalism. The scheme I have devised would seem the perfect fit with his vision. However there is not much time left before the election of 2015. Before then, we must prove that we are a potential alternative government. To do this, we must present fully developed policies that appeal strongly to the voters who deserted us in 2010. The way forward for Labour does not lie in its past.