The next welfare settlement

Listening to most commentary about the British welfare state might leave you depressed, fearing that the legacy of Sir William Beveridge’s 1942 report is all but dead. But in spite of legitimate and troubling concerns, ‘follow the money ’ and you’ll see the spirit of Beveridge is alive and well: for the two largest areas of public spending are free healthcare (‘provided for all citizens by a national health service’) and  state pensions, earned by national insurance contributions. Both were recommendations of December 1942, with origins lying in the ideas of early Fabians like Beatrice Webb.

Indeed, for all the short-term pressures of austerity, the NHS and the state pension system are not just alive but thriving: in 1960 the UK spent around six per cent of economic output on health and pensions combined; today it is 14 per cent and on current projections it will be 17 per cent in 2060, assuming no change in policies. What’s more the British public strongly supports spending on both pensions and health. Both are on a far firmer footing today than in 1997, following Labour’s record investment in the health service and major pension reforms since the 2005 Turner report.

The reason for commentators’ melancholy is the state of working-age welfare, which is both a policy disaster area and the subject of deep public hostility. To take one example of hardening attitudes, the British Attitudes Survey reports the number believing that ‘unemployment benefits are too low and cause hardship’ fell from 55 per cent in 1993 to 19 per cent in 2011. In reality, over the same period, the main benefits for adults below pension age declined in value by around a quarter, relative to average earnings.

So while many people believe the cost of welfare is out of control, over the next 20 years spending on working-age social security is actually set to halve as a share of national income, due to the falling value of entitlements. As a consequence, just as in the pre-Beveridge era, ‘benefits amount to less than subsistence’ (unless you are a pensioner or have children) and the system fails to eradicate ‘want’.

Beveridge’s plan was famously rooted not in means-tested assistance for the poor, but in the principles of universalism and contribution. The two terms should not be confused. Beveridge backed contribution-based social insurance but also recommended non-contributory children’s allowances and the small matter of a national health service. Today, while both universalism and the contributory principle are thriving elsewhere, in the welfare state they seem to be on their knees when it comes to working-age social security. Child benefit and disability living allowance (DLA) are being restricted in different ways as part of the cuts, while the coalition’s decision to time-limit contributory employment and support allowance (ESA) is just the latest blow to contributory benefits, which have been on the wane for decades.

The arguments in favour of universalism are more or less the same as in Beveridge’s day. Universal entitlements reduce stigma, administrative cost, and disincentives to work or save. Counter-intuitively they are also better at reducing poverty and inequality since they bind-in people of all backgrounds and sustain public consent for redistributive spending. Lastly universal entitlements smooth risks and costs across our lifetimes, which in many instances is a good in itself, regardless of whether we are at risk of poverty. Together these arguments make a compelling case for universalism in areas such as the state pension and the NHS.

But the benefits of universalism will not always outweigh the high costs. Decisions about the scope and targeting of government provision should be based on changing social conditions rather than ‘foundation myths’, notwithstanding the legacy of figures like Beveridge and the Webbs. For example, when Beveridge proposed children’s allowances, few children lived in rich households and national computer databases were science fiction. Today, with modern technology and soaring inequality, it makes sense to prioritise the ‘progressive universalism’ of child tax credits over child benefit.

But the traffic is not all one way. Beveridge’s proposals were grounded in the assumption that unpaid care was the role of married women: in the 21st century that thought is a historic relic and there is a compelling case for a universal support towards the costs of social care and childcare.

When Beveridge wrote about ‘contribution’ he had a ‘funded’ insurance scheme in mind, but even in his report hypothecation was a chimera and tax revenues were required alongside national insurance. But even if the ‘national insurance fund’ has always been a myth the contributory principle still matters. Firstly, it is important when expanding the boundaries of the welfare state, in order to show that the costs will be borne by the beneficiaries. This pragmatic version of ‘soft’ hypothecation was important for Beveridge’s new social insurance scheme; but it is just as relevant today when thinking about how to win support and raise money for expanded provision in areas such as social care.

Secondly, while most welfare provision is earned and paid for through the taxes we all pay, there are some entitlements where receipt only seems justified when preceded by a sustained and earmarked contribution. In the mid-2000s the Turner commission concluded this was still the case with respect to pensions, and recommended that only people who had spent decades in the UK earning or caring should expect a pension by right.

The same argument could be made by advocates of more generous, contribution-based unemployment and sickness protection. Today people who become unemployed but have savings or a working partner are limited to £1,900 of state support, which does not go far for most families. Restoring a more generous insurance system would be expensive, so could only be a long-term project for after austerity.  But if the British people are prepared to move to a flat-rate pension of £140 per week, for those who have contributed long enough, why not unemployment or sickness insurance paid on the same basis?

Beveridge understood that his proposals would only be affordable with a healthy labour market: the maintenance of employment was one of the ‘necessary conditions of success in social insurance’. Today returning to full employment is an essential pre-condition for a successful welfare system as well as a priority for many other reasons, including the nation’s tax revenues, public health and demographic sustainability. A future government must ensure that jobs and earnings growth are priorities for regulatory, fiscal and monetary policy. Public spending allocations will also need to be more growth-orientated, so investment-style spending on infrastructure, science and education must not be crowded-out by pensions and healthcare.

But achieving high employment alone is not enough. In stark contrast to Beveridge’s time, today more than half of the people in poverty under pension age live in a working household, even though we have tax credits to top-up low earnings. To avoid poverty low-earning families typically need both top-ups from government and two working parents. So the state needs to do more to help second earners stay in work, by improving the incentives in tax credits and offering free or subsidised childcare. At the moment the coalition is going the other way in the way it is designing universal credit and cutting to Sure Start.

It will only be possible to end in-work poverty, by taking firm action on pay, conditions and job-security for low-paid workers. Increasing pay, whether through binding sector-wide bargaining or a national living wage, would mean that more of low-earners’ incomes would come from their employers rather than tax credits; and better protection and training in the workplace would lead to fewer people cycling between benefits and fragile employment. Such a transformation could free-up the money needed to pay for the children’s services and in-work credits needed to drive down poverty, make work pay and equalise children’s life chances.

We should not forget, however, that Labour’s record on employment was positive before the crisis. Alongside tax credits and the minimum wage, Labour’s welfare to work programmes were an unsung success story and even after the recession there are half a million fewer lone parents and disabled people on benefits than a decade ago. Setting conditions for receipt of benefit was always part of Beveridge’s thinking, whose origins trace back to the mutual insurance fund as much as the poor law. In its dying days the last Labour administration went one step further and created a ‘young person’s guarantee’ where anyone out of work aged under 25 was both guaranteed and required to accept a job, training or community work.

Robust conditions matter because they help people meet their own long-term aspirations and also because they shrink the pool of people who relying on state support, thereby opening the way to giving those remaining more help in the future. Better popular understanding of the welfare system’s robust requirements could also be the route to changing the terms of the public debate. For example, growing media reports of the tough policing of ESA and personal independence payment (PIP) may challenge the unpleasant tabloid narrative of scroungers and shirkers ‘on the sick’. And a job guarantee for young people, and perhaps in time lone parents with older children, could help give legitimacy to those who remain on benefits, for what in future might be a time-limited period.

A change in language and attitudes will not happen on its own however, or even just as a result of shifting policy. After all, in office Labour tightened the rules on welfare but also ratcheted up the language, so people thought there was more of a problem not less. To restore faith, politicians must change tack and explain that it is because the rules are now robust, that people can have confidence in the genuine need of those within the system.

A final salutary thought. Beveridge dodged one issue that still bedevils welfare today, what he termed ‘the problem of rent’. The cost of housing benefit today is vast and growing, but this is down to our failure to reform the housing market, not the fault of its recipients. For all the harshness of the coalition’s cuts, the costs will keep mounting while rents keep on climbing. The solution of the post-war Labour government was of course a vast programme of housebuilding in the social and private sectors. Today we probably need the same to reduce the costs of housing benefit.

We should greet Beveridge at 70 as optimists. The Beveridge report is, after all, a reminder that it is possible to imagine and realise visionary yet practical reforms, even in times of crisis and severe financial constraint. The left should rightly celebrate how much of Beveridge’s legacy lives on, especially in pensions and health. But we should also feel inspired by Beveridge’s example to seek out comprehensive solutions to the giants we face today.