Leading article: Reform on the cheap will not work

The Coalition's great welfare reform effort is taking shape. The Work and Pensions Secretary, Iain Duncan Smith, announced at the weekend that a "universal credit" will replace the existing cat's cradle of different sources of financial support available to those in need.

The Prime Minister, David Cameron, yesterday argued that the new streamlined system will reduce the incidence of fraud and error. But the primary aim of the overhaul is to ensure that people do not become materially worse off (or only marginally wealthier) when they move off benefits and into low-paid work.

The motivation behind the effort is sound. The achievement of the previous Labour government (and Gordon Brown in particular) in keeping a lid on inequality through tax credits and other fiscal transfers should not be overlooked. But one of the malign consequences of those laudable attempts to maintain the incomes of those at the bottom was the reinforcement of a benefits trap. Some individuals were effectively discouraged from finding work by the scale and nature of the financial help available to those without it. This was not only inefficient and expensive for the state – it left large numbers of people unmotivated and demoralised.

Mr Duncan Smith estimates that there are 600,000 households in this dire situation. That figure might, or might not, be correct; it is impossible to judge with any accuracy. But no one seriously disputes that welfare dependency is a significant problem. And it is a problem that Labour failed to solve, despite some hard work in this area from Mr Duncan Smith's predecessors at the Department for Work and Pensions, James Purnell and John Hutton.

It would be wrong to characterise Labour, in the wake of its election defeat, as bereft of ideas on springing the benefits trap. The big idea of the new Labour leader, Ed Miliband, is to create not just a minimum wage, but a "living wage", too. Mr Miliband is right to argue that it is crucial to ensure that work pays adequately in order to encourage people to move off a life on benefits. Yet the two ideas are complementary, not in opposition. The goal is the same: to enhance the incentives to take paid work.

So how practical does the Coalition's welfare reform plan sound? Mr Duncan Smith aims to move everyone off the old benefits system over a decade. That timescale seems appropriate. Rushing the process is only likely to create problems, especially at a time of high unemployment. It makes no sense to demand that a glut of benefits recipients be instantly absorbed into a manifestly weak labour market.

But there is still an ominous question mark over money. The priority of the Chancellor, George Osborne, as he has repeatedly argued, is to slash the public deficit quickly, not to reform welfare. Housing benefit was cut without consultation in June's emergency Budget and Mr Osborne has said he wants substantial further significant savings from the £194bn annual welfare budget by the end of the Parliament.

But Mr Duncan Smith's new system will entail considerable upfront costs. And the bulk of the savings to be reaped from lower levels of welfare dependency are only likely to materialise over a longer period. So this financial circle will need to be squared somehow. The means testing of existing universal benefits is one potential way forward. But this will be politically contentious. Many wealthier people will not look kindly, for instance, on their child benefit being taken away in order to pay for higher fiscal transfers for the working poor.

Yet whatever the political challenges, this effort needs to be properly funded or it risks discrediting the whole idea of welfare reform for a generation. The test of the Coalition's progressive and reforming credentials is likely to come down to the delivery of hard cash.