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Business Outlook: No halfway house for Brown's benefit

Strange but true. Princess Margaret would once have qualified for lone family benefit. David Blunkett could have claimed life time income support from the state on account of his blindness. Why even Gordon Brown, the chancellor, who is blind in one eye as a result of a rugby accident, would qualify for some form of benefit if he chose to register his disability. The fact that none of these three have taken their entitlement doesn't mean that others in similar circumstances don't.

The social security budget is the largest part of Government spending accounting for more than 30 per cent of the total; despite falling unemployment, it continues to grow like topsy in cash terms, lone parent benefit, sick and disability pay being the fastest growing elements. Total spending on unemployment may be on the wane, but there are pockets which remain immune to the upswing in the economy. In Britain, the percentage of households where nobody works, at one in five, is higher than almost any other developed country in the world, including Germany and France, where general levels of unemployment are much worse.

Getting these people off benefit and back to work is Labour's big challenge. Gordon Brown is determined to tackle it head on in his first full-scale Budget next month. Obviously it can't all be done in one go and in any case, one key element of Labour's approach to the problem is implementation of the minimum wage, which is still some distance off. All the same, we can expect a whole raft of tax and benefit reforms which push strongly towards this holy grail of social and economic policy objectives. There are still some sacred cows left, a basic state pension for all being one, but not many.

The big mistake of previous Labour administrations has been to give way to social pressures and greatly increase spending the moment they are swept to power. Inevitably this has been followed by economic crisis and sharp cuts as these governments matured. The consequences have then be suffered at the ballot box. That's plainly not going to happen this time round. If there's any leeway in the public finances, it will be held in reserve for use ahead of the next election.

But reform of our system of social welfare is something else. One of the reasons why the US has such low unemployment and is pushing towards a balanced budget is that in the US there is virtually no welfare provision at all. If you want to live, you have to work. Is this really the way Labour wants to go? Obviously not. Even for New Labour, this would be socially and politically unacceptable. The trouble is that in an efficiently functioning free market system, there may be no half way houses. Certainly Mr Brown is going to struggle to find them.