BLIND EYE TO FRAUD
Frank Field exposes
the government's failure to reform the welfare state
'THE Prime Minister believes you have solved welfare.' These were the words with which Sir Richard Wilson, the Cabinet secretaty, opened the first of two meetings we had on the day Tony Blair first reshuffled his government. While I didn't see the Prime Minister until much later, I was struck immediately by the messenger's choice of phrase. Nothing could have been further from the truth; but the Prime Minister was evidently seeking a means of letting me down gently.
The conversations Tony Blair and I had before the 1997 election now seemed as though they had happened in another country. Then we agreed on what the strategy should be for welfare reform. A new seriousness had entered our conversation when we discussed the size and growth of social-security expenditure. For the first time the future prime minister realised that welfare was not only the largest of all items of government expenditure, and remained the fastest growing, but that this huge budget was undermining rather than strengthening decent behaviour.
As if the Prime Minister doesn't have enough problems on his plate — with education, health and transport reforms stalling — he is about to learn that welfare is far from being solved. It is true that the New Deal is reshaping the welfare culture among a significant minority of claimants who have not, traditionally, seen working as the legitimate option. But will these welfare reforms work in the economic downturn? Despite 1.25 million new jobs since 1997, 266 constituencies now have a lower employment rate than when the government was first elected.
The strategy of 'making work pay' is a clear example of how the government has forgotten all the talk, before 1997, that welfare reform should work with, rather than against, human nature. Picking up the full Working Families Tax Credit package can make many working families substantially better off, and some find that the credit is worth three times their original wage packet. The trouble is that the poorest families who gain most help can now never improve their income by their own efforts. More effort, working longer hours, or acquiring greater skills can only result in fewer tax credits. Interviewed on television after the last budget, a low-paid worker expressed thanks for the tax credit boost, adding, ominously, that he could now never improve his family's living standards by his own efforts. That could now be accomplished only by politicians. There could be no clearer example of the shift from independence to dependence.
Eighty-five per cent of families with children are eligible for the WFTC. From now on, the tax credit bill will surge as claimants understandably work the system. They will be joined by employers who see that a not insignificant part of the wage bill can be shifted on to taxpayers' shoulders. Within a single year the tax credit bill has doubled. At £7 billion, and rising, it is already equivalent to 3p on the standard rate of tax.
So far a blind eye has been turned to WFTC fraud. Such is the effort to sign up
claimants and achieve Whitehall's absurd 'targets' — that revenue staff, appalled about what is going on, have leaked me details of the fiddles. The tax credit is frequently paid out, even though the claimant's wage is (allegedly) below the minimum wage level. Employers also write to describe the impact on their firms of catapulting the least skilled recruit into the top echelons of the pay hierarchy once WFTC is added to his pay cheque. The credit is paid in the wage package after all. This policy is unsustainable.
Human nature has also been forgotten when the government has come to reform pensions — the biggest single item in the welfare budget. While the weekly retirement pension stands at £72.50, pensioners with an income below £92.15 have their pension raised to the Minimum Income Guarantee, or MIG for short. At least that is the theory, Receiving MIG passports entitles pensioners to nil rent and council tax payments. These passports can in some instances double the value of the MIG. Many pensioners who saved now find themselves ineligible for MIG and worse off than those who couldn't or wouldn't put money aside for their retirement.
Not only does MIG penalise yesterday's savers, but it has holed below the waterline the government's flagship stakeholder pension reform. Most low-income workers will not be able to save anywhere near enough to make themselves better off than if they simply spent every penny now and relied on MIG in retirement. Calls to make stakeholder pensions compulsory can only compound the injustices in the strategy. Such pensions will in no way guarantee a pension above what the MIG level will be, as the MIG is indexed to wages. To force the low-paid to buy stakeholder pensions would result in cutting their living standards now and probably leave them worse off in retirement.
Three months before resigning I had been invited by the Prime Minister to contribute to a pension-reform working party which, despite 15 months' work, had yet to come up with a workable scheme. When the working party did report, it took as its model the personal-pension schemes introduced by the Tories.
It was clear to me that this approach was not designed to deliver adequate pensions to those on low income, For that to be achieved, redistribution to low-paid workers is required, and the safest way to deliver this redistribution is to do it openly within the new pension scheme itself. But contributors will only foot the redistribution bill if there is something in it for them — selfinterest again plays a key role in sustaining the reform. For this new product to succeed it has to offer what most people couldn't buy elsewhere, i.e., the nearest any society can get to offering a guaranteed pension.
After leaving government, I put together the Pensions Reform Group, which has representatives from all parties, as well as experts from across industry. It has just published the results of its two-year study. The Universal Protected Pension would offer a pension above means-testing for all fully-paid-up members. Any scheme which offers adequate pensions will involve increased contributions. The UPP does not duck this issue. But the scheme, which is a company-pension scheme for the whole nation, does plan to abolish pensioner poverty. Because it plans for this objective, it makes decisions about savings simple: all additional savings will be kept in full. Because the new pension is linked to earnings, members are guaranteed an income above means-tested assistance, so there is no need for savings to be annuitisecl unless savers wish this. And because the scheme abolishes pensioner poverty, the means-test welfare bill falls dramatically — enough to abolish income tax for pensioners. The UPP costs more, but the gains are considerable.
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