Middle classes must lose benefits22 October 2009
Through the years of illusory boom, we tried to have it both ways. The poor could be supported through a generous tax credits system - the well-off could have their weekly bottle of chardonnay on the state. There was of course a huge cost to this. Reform has calculated that benefits going to the middle classes are at least £31bn, with the overall budget spiralling to £180bn. This situation is untenable. The Conservatives, if elected, will have to choose whether to continue with a shoestring universal system or focus the limited funds on those who really need it.
The universal system is on its last legs. National Insurance contributions have not been saved to pay for future benefits and now present a huge liability. Payment levels have remained too low for middle income earners to be able to rely on them in old age or in times of unemployment. There is no ability to top up and people are uncertain whether to save privately as they don't know what the state will provide for them. At the same time there is a large amount of waste. For example 80% of maternity pay and 40% of child benefit goes to single parents earning more than £20,000 or couples earning more than £35,000.
Middle income earners have paid National Insurance without getting a real insurance policy. The poorest have not seen a genuine improvement in their circumstances. Instead there has been a creation of poverty traps and decoupling of work and reward.
Income support provided to the poorest should encourage upward mobility. Yet years of tinkering with national rules has failed to deliver this. Both parties now advocate contracting out welfare-to-work programmes - but this does not give financial incentives at a local level where the effort is required. Instead both the costs and benefits should be handled locally, allowing individual cases to receive the focus they need. This would mean contracting out both payments and welfare provision to social enterprises and companies and seeing which models are most effective in bringing the long-term cost down and improving the lives of claimants.
Most importantly benefits should be shaved from those who do not need them. Instead the middle class should have genuine insurance plans, which they contribute to and have certainty about. In a tight fiscal climate these are not really the people in need of support, as Polly Toynbee has argued. Reform proposes that £14bn can be cut immediately, with further savings made when pensioners are migrated onto new protection accounts. This will not be easy. Even though these benefits cost the equivalent of 8p in the pound, it is always easier to give than take away. Politicians will have to overcome a huge lobby of entitled middle classes. Labour trailed some ideas in September but has yet to follow through. George Osborne said that he would means-test the Child Trust Fund and tax credits in his conference speech two weeks ago but promised to "preserve" £10bn in child benefit, winter fuel payments and free TV licences. In my view he will have to review these at some point or face cutting benefits to those who can't afford it.