Tuesday, 3 August 2010

Reforming Welfare (UPDATED)

As Iain Duncan Smith's Department for Work and Pensions (DWP) published its first Consultation Paper on welfare reform last Friday, its probably a good time to look at how Anglesey compares with the rest of Wales in terms of take up of out-of-work benefits (source DWP data here):

Percent of working age population on out-of-work benefits (Click to enlarge)

As you can see on these indices Anglesey is pretty much in the centre ground in Wales and faring far, far better than some of the South Wales valleys where almost a third of the population is on some kind of out-of-work benefits. Even so, with almost 20% of working age Anglesey residents (including this infamous Llangefni family) also claiming we should not kid ourselves that we are doing alright.

So, what does Iain Duncan Smith propose to do about it? One of the most striking parts of his consultation paper is the following chart which shows how, for example, a couple with a single earner on minimum wage and two children can become ensnared in a 'welfare trap' which dramatically discourages further work.

How the Welfare Trap works (Click to enlarge)
The turquoise triangular band at the bottom represents the actual net income of the family, as it rises the various benefits (the bands above it) taper off at such a rate as to make little material difference to total family income, even if the sole worker works more and more hours. This means "that someone at the National Minimum Wage would be less than £7 per week better off if they worked [up to]16 extra hours and earned an extra £92 (an effective wage rate of 44p per hour)". It also means that he faces"a Marginal Deduction Rate of 95.5 per cent on earnings between £126 and £218". As the report quite rightly says "a system which produces this result cannot be right".

The Consultation Paper puts forward five different possible solutions to rectifying this situation with an emphasis on making work more rewarding than benefits.

1. A Universal Credit

All existing benefits would be abolished and combined into one simple to understand and administer universal benefit. The important point would be that people "would be incentivised to enter work by a consistent, reasonable, rate of withdrawal of the Universal Credit as earnings increase. The incentive would be reinforced through a system of disregards, which would leave Universal Credit payments unaffected by the first few hours of earnings". The principle is demonstrated in the below diagram.

Universal Credit (Click to enlarge)
2. A Single Unified Taper

Retains the existing range of individual benefits and tax credits but "withdrawal would be through a taper that would be applied to their overall benefit eligibility, rather than the individual benefits as is currently the case". This would remove the complex interactions that currently cause the high Marginal Deduction Rates we saw in the Welfare Trap graphic above. A diagram of how this could work is shown below, also showing how targeted benefits which would incentivise more hours of work.

Single Unified Taper (Click to enlarge)

The other three proposals (Single Working Age benefit, the Mirrlees model and a Negative Income Tax model) have been put forward by various think tanks  and pressure groups. The most elegant is the Negative Income Tax idea proposed by the Tax Payers Alliance. This model recommends bringing together a large number of the existing benefits - but rather than paying them out as a benefit, the person would receive a kind of tax refund (i.e. a negative income tax) to top up their income if it fell below a certain threshold. This would at a stroke replace a hugely complex system which first taxes income, means tests it, then doles it back out again as various benefits through a large administrative system (and all the costs involved in that). I recommend you read the whole report here (pdf) which is remarkably readable.

I'm sure many may comment that reforming benefits to make work more rewarding is no use if there are no jobs for people to take. However it must surely be right to rectify the welfare system so that those who do want to work - and have work available - are able to benefit both themselves and their families and not get trapped in the current welfare system which effectively penalises work.

UPDATE: I just want to add one more observation regarding the first graphic above (percent of population on out-of-work benefits). The distribution of people who are classified as incapacitated and therefore unable to work should be uniform throughout the country. Yet strangely we find that the percentage of people receiving incapacity benefit (the green part of the bar) is much larger in areas with high unemployment -- indeed it appears that there are almost twice as many incapacitated people in Merthyr Tydfil as there are in Ceredigion or Monmouthshire. There is no reason why this should be so unless previous Governments have cynically sought to reclassify unemployed people as incapacitated in order to make it look like the number of unemployed is less. For example, the official percentage of people classified as "unemployed" in Neath Port Talbot appears to be a very manageable 4.1 percent, yet the number of people classified as "incapacitated" is a whopping 15.2 percent - the second highest figure in Wales (Merthyr Tydfil = 16.1%). Without a doubt something very strange is going on here.

UPDATE 2: On the same topic, I recommend this post by Alwyn ap Huw.

29 comments:

Andy said...

Personally this is long overdue. What appears to have happened historically is that various benefits were introduced and even worse administered by different departments. This resulted in duplication of paperwork, excessive amounts of staff employed in the various levels of government bureaucracy, unacceptable delays to the actual recipient, excessive cost to the tax-payer, over-payments, under payments and to the people relying on thses benefits (usually not the most intelectually-able) so much confusion that in some cases rather than go through the process they elect to do without what is after all their entitlement.

Personally, I prefer the negatiove income tax idea of the TPA. However I am led to believe that this is unpopular in higher political circles in both Labour and Tory because it is too simple and will result in massive redundancies.

I must also add the tax credits scheme needs a thorough overhaul. Two people doing the same job - one single and barely getting by, the other a single parent or family and getting so much in tax credits that they have a mortgage, a car and take holidays abroad. That cannot be right. Tax credits should be so that a family with children can live an equal lifestyle to a single person doing the same job, not a vastly superior one.

Prometheuswrites said...

Thanks Druid. This is the best graphical presentation of how income relates to benefits and work that I've seen.

I wasn't sure about the second graphic. (How the Welfare Trap Works)

I'm assuming that the NI and income tax are a negative income (come off the total) rather than being included on top of the income - but I'm not sure.
As things currently stand (NI and tax coming off of total income it would appear that there is a negative incentive to work more than about 25 hours, as the NI and tax deductions mean that you are actually worse off if you work more than 25-30 hours.

I'm not sure how the negative income tax works for people who aren't earning through work related activities and are reliant on benefits.

How would people stand who can't get work but are able to contribute in the voluntary sector? (The big society idea).

One of the problems in the past has been that people who do over a certain amount of voluntary hours have had teir benefits docked, even though they are providing a free service to the community.

One of the things that strikes me about the first graphic is the amount of people classified as incapacitated. I suspect this is as result of (perceived)tendancy over the years to move people from unemployment benefit to incapacity benefit as it helps massage, (sorry - statistically adjust) the 'unemployed and claiming unemployment benefit figures.'

Think I'll go look at the pdf file.

Old Mona said...

I completely agree with both Andy and Prometheus and I think the Goverment should be congratulated on tackling this problem.

It is quite appalling that this crazy system where claimants are financially better off on benefits than working has gone on for too long and has not been tackled by either the last or previous Governments.Maybe jobs which previously had gone to immigrants will now be taken by British workers

The Druid of Anglesey said...

Prometheus - I can't take the credit for the graphics as they come straight from the report.

"I'm assuming that the NI and income tax are a negative income (come off the total) rather than being included on top of the income - but I'm not sure."

Yes, you are correct.

"I'm not sure how the negative income tax works for people who aren't earning through work related activities and are reliant on benefits."

This is how the proposal is set out by the TPA:

1. Each working-age household would be entitled to a certain percentage of the median income, net of tax and social security benefits (we have calculated the cost for 50 per cent, 55 per cent and 60 per cent), which is the first policy parameter. This would replace most working-age benefits and tax credits, except for the ones listed in the following section.
2. This figure would then be adjusted for the size and composition of the household, with larger households receiving more and the smallest households receiving less. In other words, each household would be entitled to 50, 55 or 60 per cent of the median equivalised income net of tax and social security benefits.
3. If the household had no income from employment, self-employment or investment, then the household would be paid the full entitlement as a negative income tax (NIT).
4. For households with income, the NIT would be tapered away at a certain percentage, which is the second policy parameter (we have calculated the cost for 50 per cent, 55 per cent, 60 per cent and 70 per cent). Note that this overall taper rate would be a maximum taper rate, and for each band of income, the marginal income tax and national insurance rate would be deducted. For example, if an individual had earnings of £10,000, he or she would face a taper rate on the next £1 of earnings of, for example, 55 per cent, comprising 20 per cent income tax, 11 per cent national insurance and 24 per cent NIT withdrawal. If an individual had earnings of £4,500, he or she would face a taper rate on the next £1 of earnings of, for example, 55 per cent, comprised of 0 per cent income tax, 0 per cent national insurance and 55 per cent NIT withdrawal.
5. Households where no-one was undertaking work-related activity, or where individuals were refusing reasonable job offers, would face reductions in the amount of NIT they received. Conditionality would therefore be built into the system.
6. The level of the NIT would be unaffected by holding assets from which income was not earned. Investment and savings income would be treated in the same way as earned income, and would therefore affect the amount of NIT paid out.

You can read the whole TPA report here: http://www.taxpayersalliance.com/welfarereform.pdf

"One of the things that strikes me about the first graphic is the amount of people classified as incapacitated. I suspect this is as result of (perceived)tendancy over the years to move people from unemployment benefit to incapacity benefit as it helps massage, (sorry - statistically adjust) the 'unemployed and claiming unemployment benefit figures.'"

Strangely enough I was thinking exactly the same as I was collating the data. The distribution of people receiving unfit to work through incapacity should be even throughout the population - but strangely there seem to be far more people receiving incapacity benefit in high-unemployment areas (see the 'green' parts of the graph). As you say, the only conclusion is that previous governments have moved people from jobseekers to incapacity benefits in order to make unemployment seem lower. To my mind this is pretty unforgivable/wicked as to be labelled 'incapacitated' would probably remove anyones drive to return to work.

Prometheuswrites said...

Re: Update

One explanation could be that Merthyr Tydfil is an urban industrial and mining area whereas Ceredigion or Monmouthshire are primarily agricultural and rural, which would result in more illnesses arising from dust, chemicals & unhealthy heavy industry work environments.

However I fear you are correct and that there is a manipulation of 'out of work' categorisations and a selective interpretation of statistics.

What are the 'other out of work' in the graph? (the red bar)

Prometheuswrites said...

That should read 'more illnessess in 'Methyr Tydfil'

Anonymous said...

It's well established that from the mid-1980's right up to present that in areas of high unemployment amongst older workers, where there was little likelyhood of a big improvement in prospects, then in order to keep the figures down long-term unemployed were switched to Incapacity thus removing them from the figures.

Lies, damn lies and statistics.

Prometheuswrites said...

I believe that when people were switched from unemployment to incapacity benefit that the rate of benefit was about the same, so it didn’t cost the state too much and people didn’t complain because they weren’t losing income. Now the situation is different with IB paying more than IS (income support or whatever it is we have now), so a switch would save the government money but hurt people financially.

I would have thought that what will happen is that those who are capable will set up as self employed and claim tax credits (or whatever replaces it), which probably will be a good thing overall, (esteem, self discipline, self generated income). My concern would be for those who have a real difficulty (social, medical, educational reasons) in getting useful work or setting up a small business and what will be provided to enable those who find themselves in that position.

Anonymous said...

I have my doubts that people coming off (or forced off) IB will set up as self-employed. They will have precious little cash backing them and the current banking climate - which will last at ;east a decade - precludes any chance of overdarfat and makes start-up loans highky unlikely unless you have something to offer as collateral - such as a house - which is highly unlikely. Government grants will also be far less readily available than they have been for some considerable time to come.

Anonymous said...

I think it was Maggie Thatcher that transfered people from "the dole" to Invalidity Benefit (as it then was) in the South Wales Valleys at least, so it must have happened elsewhere, and it was definately to massage the unemployment figures

The Great Councillini said...

If it is true that there was a statistically-motivated switch to an alternative benefits system, then there should be evidence for that, either obvious or less so. I'm sure it could have happened, but is there any genuine evidence for it?

Certainly, there are factors, already noted, that could lead to significant differences in genuine incapacity levels, so there is perhaps a need to consider those in more detail rather than asserting the rate should be even everywhere - that is overly-simplistic in my view.

It seems to me that in high unemployment rate areas, there is, understandably if there is no work, a feeling of despair which leads to a 'search' for a way out of the misery of poverty. It seems clear to me that local doctors, largely unaccountable to anyone, have in some cases willingly cooperated in helping people get incapacity benefits. You can look at this as fraud, or you can, to my mind more realistically, look at it as a professional person using his/her position to help the community. We can criticise from a position of middle-class comfort, but if you've no work, things are grim, no matter how low your aspirations.

IDS has shown some left-leaning compassion during his time with a think tank, so perhaps he might transfer some of this thinking to government. Then again, I'm not persuaded that the Tories have moved away from smacking the working class over the head as much as they possibly can.

And of course, there is a need to consider genuine cases of incapacity. My neighbour has two very obvious and serious conditions, both of which carry constant life-threatening effects. I understand that she has had to recently undergo a tough interview, which was very difficult for her given a twice-weekly hospital schedule, in order to prove her incapacity. There is a need for demonstrating incapacity is genuine to the state where benefits are being drawn, but I'm not sure that an administrator, who is not a qualified medical person, is the right way to do this; it does rather make a mockery of professional medical staff, whose opinion is effectively ignored. It's too much like 'you can't walk? Let me take those sticks off you and see if you can still stand. Now dance!'

Same old Tories? At least they won't be in power beyond this parliament. The Lib. Dems? They won't get my vote ever again.

Anonymous said...

Same old Tories? At least they won't be in power beyond this parliament. The Lib. Dems? They won't get my vote ever again.

And do you really think Labour will reverse any of this? Currently the ordinary electorate don't blame the tories for doing the cuts - they blame Labour for causing the reasons. The LibDems were always going to struggle no matter who they went into coalition with. It is myth they are left wing. They themselves are a coalition of right wing 'Orange Book' liberals and left wing Social Democrats.

What is clear is that even if the electorate decides to keep First-Past-The-Post as opposed to AV, the redrawing and balancing of the constituencies will still go ahead and will be in place by the next election. That in itself means that invariably we will have a Coalition and invariably the largest party in Westminster will probably be the tories. It will also make England the key battle ground with Wales and Scotland merely sideshows as both will have fewer MPs.

David Milliband will win the Labour leadership and Labour will drift further right than under Blair. They will also lose the next election quite badly. Proposed funding changes will also seriously damage them as they are already in a oprecarious financial position and rely entirely on the goodwill of the banks.

And I say that as someone who has been a Labour member for over 30 years. Labour's core support wants a more openly left wing party and they are not going to support this New Labour style rubbish any longer. What will happen is they void those voters leave will be filled by social democrat ex LibDems which in turn will drag Labour more rightwards and probably see the end of it.

Old Mona said...

Same old Tories? At least they won't be in power after this Parliament.

So the 'Great' Councillini shows his true colours. He obviously lives in a pampered world.

I am unemployed as of 6 weeks ago, I am not claiming benefits and I work at whatever comes along(legally). I ran my own businesss until 3 years ago which unfortunately collapsed and we lost everything. I did not go on benefits but went out to find a job and survived.

Despite my situation I believe the Government have no option but to get this country back on its feet after the vast amounts of our money that the last Govt spent which will put the country in debt for generations to come. This Govt are doing its best to remedy that situation and whilst I might cringe at some of its desicions, they have to taken and people will have to make the best of it.

Whilst there are people like his/her neighbours who get caught up in the system there are also thousands of people who are milking the system and are basically commiting fraud with our money.
Despite peoples preconcieved ideas about the Tories which eventually become left wing myths the Tories have always been a compassionte Party but have had to take desicions that are best for the country as a whole and not just for a select few.

;-) said...

Can anyone post the figures for the cost of benefit fraud against the cost of tax avoidance/evasion?

Then we can see who milks the system, those who receive little money or those who are reluctant to part with a little money.

Puck said...

Maybe low earners could band together under the umberella of a large organisation, then they'd be eligible for obscene tax breaks, much like the Barclay Bros, Paul D'Arce, that nice Mr Desmond (prop. porn UK) and other worthies who complain so bitterly about the poor in our national press.

Pass them apples.

A Change of Personnel said...

Interesting post Druid.

Governments of all colours have always manipulated figures for their advantage, but that’s not to say there is not a lot of ill health in many Valleys communities as a result of the Coal and Steel Industries that you wont find elsewhere. However rural Wales has its own problems in creating employment around transport and other infrastructure issues that haven’t been addressed by previous Government’s either so it’s difficult to compare areas directly.

One of the reason why Incapacity or Sickness Benefit was created by the Thatcher Government was to move the medium term unemployed in post Industrial areas of Britain that subsequently became and remain high unemployment areas from the Official Unemployment figures to prove that there weren’t as many on the dole as many politicians, economists and welfare experts claimed at the time.

Those same reasons still apply today as they did in the 1980’s and 1990’s for any Government, after all even if you accept that half the people claiming IB are capable of doing some type of work then you would suddenly have unemployment rates of 18, 20 of in some cases more than 20% unemployment in many parts of Wales. That is politically unpalatable whatever your leanings and it would also highlight the failures in economic and employment policies for Wales over the past 30 – 40 years that no party will acknowledge.

As I and others knew even before we carried out a major piece of research recently, until long term investment in individual support, training and sustainable job creation in areas of high benefit dependency is a serious proposition then most benefit reform will help a few, but on the whole costs more than is actually saves and amounts to little more than administrative and bureaucratic changes to make politicians of all stripes feel as if they are doing something and getting tough on the so called scroungers.

Old Mona said...

If anyone is guilty of illegal Tax avoidance/evasion then they should face the full force of the law in the same way that people who commit benefit fraud.Ok the amounts are usually smaller but it is still fraud and they should pay the penalty.

Anonymous said...

GOLWG.
NOT TO BE MISSED. Read the article on Anglesey County Council in tomorrows GOLWYG.

The Great Councillini said...

And what of the comparison between tax or benefits fraud against the cost of enforcement? I seem to recall that the Child Support Agency (i.e. benefit claims avoidance agency) used 80p to chase each £1 not paid. That is absurd, and I wouldn't be surprised if the figures for benefits and tax enforcement were similarly unsustainable in their present form.

Anonymous said...

GOLWG.
NOT TO BE MISSED. Read the article on Anglesey County Council in tomorrows GOLWG.

An excellent and very under-promoted weekly magazine that publishes when the big boys shy away under threat from councillors' solicitors. The editor should be given a civil award, really.

Anonymous said...

Clive McGregor has gone off on the sick.
After the editor of Golwg tried to interview him on Friday he shit himself, went home and reported in sick, not to be seen since.

Anonymous said...

I found Golwg360 on-line but couldn't see anything there about IOACC. (Plus it would take me all day to translate)

Can you give a summary on here?

The Great Councillini said...

"I found Golwg360 on-line but couldn't see anything there about IOACC. (Plus it would take me all day to translate)

Can you give a summary on here?"

For commercial reasons, Glowg - the magazine - will contain the juicy stories they report on first. Most of the site is agency news and articles from past editions. It'll take a week or so for this week's stories to appear on the web edition, although not all stories do appear there.

Guess a trip to Asda is on the cards for a lot of us today, then?

Anonymous said...

No copies at Asda, Llangefni. Maybe the Council bought them all?

Puck said...

Errr .... A summary then ... please turn the lights on .... I can see ... take me with you ....

Anonymous said...

The Welsh book shop in Llangefni sells Glowg. Its out today.

Anonymous said...

As Puck says, any chance someone could put up a summary?

In fact Druid, any chance you could stick it up as a blog?

Anonymous said...

Stop breeding for benefits, sterlise single mothers when they have had their first child, it will stop thee culture of benefit breeding.

Men who breed for a roof over their heads and a cushy life breeding, should be castrated.

Anonymous said...

Stop breeding for benefits, sterlise single mothers when they have had their first child, it will stop thee culture of benefit breeding.

Men who breed for a roof over their heads and a cushy life breeding, should be castrated.


And raving right wingers like you should be pelted with dung in the streets.