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Memorandum to Frank Field, Minister for Welfare Reform on comprehensive review of spending.

Radical reform of the welfare state is the most challenging task the Government has set itself. Unfortunately, there are some unappetising obstacles.

Universal versus means-tested benefits: You have written about the moral corrosiveness of means testing and the dependency culture, created by the withdrawal of benefits when people try to move from welfare into work. But the alternative, universal contributory benefits, are extremely expensive to fund. A large-scale move away from means-testing would require unacceptable tax increases. The challenge for reform will therefore be to target specific groups of people, like lone parents, without means-testing.

Welfare to work schemes: One pitfall is how to make sure the Government does not end up subsidising people who would have found work anyway.

There are already fewer than 250,000 young people unemployed for more than six months, so the Chancellor is having to cast around for other groups to spend the windfall tax on.

Even on the most optimistic costings, it will take at least five years for savings on welfare-to-work schemes to offset the cost.

Expense: Welfare reform is usually a way of spending money rather than saving money. The introduction of housing benefit by the Tories is a good example. It now is the third-biggest item in the social security budget.

The big step in limiting future welfare costs, the linking of state pensions to prices rather than earnings, has been taken. But with pensions still taking a third of the whole budget, the only scope for further savings would be to reduce the value of the state pension even more.

It would also be desirable to limit expenditure growth in income support, housing benefit and disability and incapacity benefits by restricting availability. and targetting particular groups eligible for benefits.