Just another casualty in Britain's long decline

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ECONOMIC decline brings its inevitable social punishment. The argument over the future of the welfare state, fuelled this week by a serious, pungent speech from Peter Lilley, the Secretary of State for Social Security, is the inescapable result of Britain's too-modest industrial and commercial base. Our long retreat is well understood. Now the lament turns to the welfare state, where both left and right have been doing new thinking.

The radical right approach, exemplified by Mr Lilley's speech, is to curb spending on benefits by cutting the numbers of people who get them. This can be done either by means- testing or by encouraging people to buy their own pensions, health care and education. Mr Lilley said: 'Effective structural reform must involve either better targeting or more self-provision, or both.'

By contrast, the left-wing attitude is to raise, or at least protect, the amount of taxation that finances the welfare state. In both cases, the new thinking reflects old prejudices. The right, by instinct, cuts. The left, by instinct, taxes.

In the taxation camp, the in-word is an ugly one, hypothecation, which merely means raising specific taxes for specific purposes - a health tax, a transport tax, a parking tax, or whatever. The idea is that people will be keener to pay, for instance, a National Health Service tax than the 14p in the pound's-worth of income tax that the NHS currently absorbs.

The independent think-tank Demos recently made hypothecated taxes, backed by referendums, the central theme of its first pamphlet. The more leftish Institute for Public Policy Research (IPPR) is also deeply interested in hypothecated taxes. So is the Labour-backed Social Justice Commission, which aspires to produce a 'new Beveridge report' next year. One leftish dissident dubs hypothecated taxes 'a bad idea, whose time has come'. Bad idea or not, the future of the welfare state will depend on arguments about means-testing, opting-out and hypothecated taxes.

Targeting, or means-testing, is now widely regarded as a simple necessity if welfare spending is to be cut. But good targeting will require exceptional political courage because it will mean removing benefits from the middle-class voters whom both big parties see as central to their electoral strategies. We are talking about mortgage interest tax relief, child benefit, and tax relief on pensions. The coward's way out, hitting poor voters but leaving better-off recipients alone, would simply reproduce old problems, from unrest to poverty traps.

Encouraging middle class opt-outs is no more of a panacea. Fine for some benefits: but when it comes to the big state services, including health, opting-out breaks the welfare state's central compact, the belief that the public good is everybody's good.

But isn't that merely a socialist dream, swaddled for too long by sentimental politicians, which deserves to die? Well, the results of its death would be noted by more people than political sentimentalists. A public education system that most middle class parents opt out of deteriorates. There is no ideology in that statement: it is mere common sense. The more the public system deterioriates, the more people struggle to opt out of it, so the worse the system gets.

Once outside, the voter, understandably, will be less enthusiastic about paying taxes to support the residual state provision. The taxes may in theory be lower because fewer people are using state schools. But support for the taxes will be lower, too. Family X, struggling to pay private school fees, starts to look askance at neighbouring family Y, still in the state system but with spare cash for foreign holidays. 'Why should we be paying for education twice,' wonder the Xs, 'once for our children and again, through income tax, to educate that feckless lot next door?' The logic applied through different areas of state spending does not produce the demolition of the welfare state, but slowly, persistently, erodes it.

Politicians on the left who turn to hypothecated taxes as the answer will run into trouble just as quickly. The classic case against such taxes is that they remove government's ability to choose its spending priorities.

More important to this case, though, is that hypothecated taxation may lead to just the same trends as radical-right solutions such as opting- out. Breaking up income tax into a health tax, an education tax, a public transport tax, and so on, would be reminding middle-class voters in the private system that they were paying specific charges for services they no longer wanted. Hypothecated but compulsory taxes are not an easy way out: they could quickly become even less popular among key groups of taxpayers than income tax.

A government of the left that was ruthless enough to squeeze the middle classes out of private education, private health care and private pensions could still, in theory, defend the old welfare state. In that system, hypothecating taxes would perhaps be a useful PR exercise. Similarly, a single- minded Tory government could defend the welfare state by stripping away all the peripheral benefits and tax breaks from its own supporters, and keeping up a fairly high level of income taxation.

But the truth is, we are unlikely to be governed in the foreseeable future by either kind of government. Instead, today's benefit-cutting and tax-raising ideas are merely different routes of retreat. As the public finances worsen and the economy fails to deliver the automatic increase in wealth we used to expect, the dream of a single, interwoven system that involves us all is becoming just another of the casualties.