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.