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Britain faces return to Victorian levels of poverty

Labour's strategy for tackling poverty has reached the end of the road and Britain risks a return to Victorian levels of inequality, according to a major two-year study seen by The Independent.

With 20 per cent of the population still stuck in poverty, the report calls for sweeping reform of the tax and welfare systems under which higher earners would finance more generous, universal benefits. The £43,888-a-year ceiling on national insurance contributions (NICs) would be abolished, so people earning more would pay NICs at 11 per cent on all their income above that level, instead of the current 1 per cent.

The study, by the Labour-affiliated Fabian Society and Webb Memorial Trust, argues that Gordon Brown's "quiet redistribution" of wealth now lacks public support – and declares that one of the reasons is Labour's tough language about benefit fraud and claimants.

Its criticism that Labour's approach has "failed" is coupled with a stark warning to the Conservative leader, David Cameron. The authors say that, in the long run, Tory plans to reduce payments to the middle classes such as tax credits and target resources on the most vulnerable would undermine the attack on poverty. They warn that moving away from universal benefits would create a "them and us" society, leading to less public money being spent on the poor because people on middle incomes would not support it.

The Solidarity Society, due to be published next week, proposes that middle-income groups retain benefits such as tax credits so they keep a stake in the welfare system, allowing governments to spend more on lifting the poor out of poverty. It says this would end the divide between taxpayers and claimants, pointing to the way the tax-funded NHS still enjoys widespread public support.

But the report says the original goals of Sir William Beveridge, architect of the welfare state, must be rediscovered. Under a new welfare contract, people would have to do "socially useful work" in return for out-of-work benefits, while automatic handouts would be restricted to pensioners. The tax and benefit systems would be merged and simplified.

The authors, Tim Horton and James Gregory, accept that Labour has made real progress in tackling poverty since 1997. But, while poverty among children and pensioners has been reduced, it has risen among adults without children, especially those on out-of-work benefits.

With all three main parties committed to cut spending to reduce the huge deficit in the public finances, the authors are worried that the battle against poverty will suffer. They urge the parties to sign up to a new "poverty prevention strategy" – not for the next Budget, but for the next 30 years.

Mr Horton, the Fabian Society's research director, told The Independent: "We could be at a tipping point that sends Britain back towards Victorian levels of inequality and social segregation, and makes the solidarity which could challenge that social segregation ever more difficult to recover." He added: "Inequality in Britain today, on some measures, is at its highest since the early 1960s. And, despite falls in poverty over the last decade, progress is getting harder.

"Significant cuts in welfare spending would push poverty and inequality even higher. And taking the middle class out of the welfare state would set Britain on a path to a set of 'sink services' for the poorest, with a deeply segregating effect on society. History teaches us that nothing would be worse for the long-term interests of the poorest than taking the middle classes out of the services that the most vulnerable rely on."

Mr Horton said Labour was "hitting the limits of progress" with its current strategy. He argued that redistribution is working – and that more of it is needed. He added: "The Government risks running out of public permission for any deeper attack on poverty. The idea was that using tough language about crackdowns on benefit cheats would make clear that the money was being used well and increase support for tackling child poverty.

"We can now see how much that approach has failed. Fears that unemployment benefit is too high have sky-rocketed, even as the value of unemployment benefit has been falling relative to average earnings. And fears about benefit fraud have gone up, even as the Government has drastically reduced the amount of fraud. It is unlikely the current strategy will generate public support for the more radical policies needed to reduce poverty significantly below existing levels – where around 20 per cent of the population is in poverty. If this is not to be as good as it gets for a generation or more, a new strategy will be needed."

The study found that the countries with more targeting, such as the US and Australia, end up with far less generous welfare states than those with less targeting, such as Sweden, Denmark and Norway. It concluded that the size of welfare spending matters, and that universal benefits redistribute more to the poorest than targeted ones. This is because the amount of redistribution depends not simply on how much of each pound is targeted on the poorest, but also on how many pounds government has to spend in the first place. Targeting makes people less willing to contribute through taxation.

The authors believe that David Cameron's strategy is a threat to the fight on poverty because he does not accept these conclusions. The Tories have announced plans to end tax credits for families with an income of more than £50,000 a year and to restrict child trust funds. The study claims the Tories' dismissal of welfare spending and rejection of universalism stem from an ideological commitment to reducing public spending as a moral end in itself.