Why we need to re-think welfare – and it’s about more than saving money

Ryan Bourne is head of public policy at the Institute of Economic Affairs.

"IT IS getting to the stage where our government is doing welfare and little else”. That was the verdict of the Institute for Fiscal Studies’s Paul Johnson at a post-Autumn Statement briefing. You wouldn’t think it from media reports, but the welfare state is becoming more significant in scope, if not in absolute size.

Although the liberal functions of government (like policing, defence, and infrastructure) have seen significant real spending cuts since 2010, overall social protection spending has risen significantly. While largely protecting health and schools spending, the government has expanded its scope in social care, childcare, and in universal school dinners for five to seven-year olds. Despite the fact that debt interest has been rising, combined spending on social protection, health and education (welfare state functions) has gone up from 62 per cent to 69 per cent of total spending in just four years.

Part of this is the result of ageing. But it’s difficult not to conclude that, overall, this shows how entrenched entitlements become over time.

The chancellor seems to recognise that this is unhealthy. That’s why he is looking to set a cap on overall welfare spending. This understandably excludes cyclical benefits, but less understandably leaves out the state pension. Yet there is a bigger flaw. It will inevitably lead to salami slicing of certain benefit levels, providing uncertainty for millions and low levels of benefits to people in genuine need. Benefit levels aren’t the big problem – it’s that eligibility can be too broad. We need a fundamental re-think about what the welfare state exists to do, and whether it does enough to promote personal and family responsibility. This goes beyond the need to find savings.

Despite inevitable outrage, that’s what makes Nadhim Zahawi MP’s proposal to limit child benefit and child tax credits to the first two children for each family so interesting. He’s thinking about what the welfare state is for and who it is designed to protect. For years, child benefit seemed to be a universal entitlement – a cash payment for all children. But that disappeared when the coalition decided to means-test for families where one member earns over £50,000. The payment now seems to represent an unconditional per child cash benefit to those on low-to-moderate incomes.

Yet conservatives have long understood that the left-wing static view of the world on redistribution is misguided. An entitlement which helps to address ex-post instances of need can create ex-ante incentives for families to have children they couldn’t afford without state support. It’s unclear why, as a principle, unlimited state provision here is fair to those who pay the taxes to fund the benefits.

The Left’s opposition to eligibility reforms like Zahawi’s is muddled. They say that benefits both have little bearing on whether families decide to have children, but also that this would have a devastating impact on large families. They assume that people are either irrational or just irresponsible.

In truth, this reform could be phased in over a long period so that it didn’t adversely affect those already in receipt. Yes, there will be difficult cases and some perverse impacts. It was ever thus in public policy, where there are no “solutions”, only trade-offs.

We should not unthinkingly put the status quo on a pedestal. A welfare system must balance the recognition that some people need help with the need to promote self-reliance and be fair to those who pay for benefits. Zahawi’s specific proposal may be crude. But our fiscal condition is forcing us to ask the long overdue question: what is the welfare state for?

Ryan Bourne is head of economic research at the Centre for Policy Studies.

City A.M.'s Opinion pages are a place for thought-provoking opinions and views. These are not necessarily shared by City A.M.

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