Will welfare be Blair's Vietnam?

Labour knows now that there's no big-bang solution to welfare state reform. There will be losers in its great benefits crusade - and political dangers lie ahead

THE audience was hand-picked by Baroness Thatcher's favourite think-tank, the Centre for Policy Studies, so it included right- wing luminaries such as Michael Portillo. The lecture was dedicated to Keith Joseph, architect of many of her reforms. But the speaker was a Labour man - Frank Field, the minister for social security, but that did not deter his audience, which listened attentively and concentrated hard.

If this was the lion's den, Mr Field showed few signs of caution. Challenged on his boss Harriet Harman's latest idea - "affluence tests" to remove entitlements from the richest beneficiaries of the welfare state - Mr Field dismissed it as one of "many ideas being considered".

"There is nothing that suggests it has any more status than that," he added. When a questioner suggested that welfare reform was difficult to knit together, rather like a patchwork, the minister's reaction was that his colleagues ought to be sent some hand-made quilts "so we can understand the importance of that point".

The implication was that the Government's welfare reforms have got off to a sticky start, with a divided team heading in different directions. It was not surprising that William Hague should label Tony Blair's welfare crusade as his "Vietnam". What was more worrying for the Government, however, was that many Labour backbenchers last week used similar military metaphors. The reform process, said one, is "like Napoleon's march on Moscow". Another described it frankly as "ill thought through". A welfare rebel, whose opposition to government benefit cuts became public, boasted that he had been congratulated by many colleagues - including several from around Mr Blair's own cabinet table.

THE atmosphere in the political hothouse is febrile, but the week ends with voters having little more idea about government intentions towards the welfare state than they did when it began. One reformer tacitly conceded this. "The Prime Minister has committed himself to reform," he said, "even if it is clear that he hasn't got a clue what he wants to do." All Mr Blair has done is to pose some fundamental questions, starting with the most basic of all: What is the social security system for?

Seen in presentational terms, which is how many in the Government do see it, this debate is a welcome change from headlines about cuts in lone- parent benefit. Even so, the questions disturb assumptions based on nearly a century of Labour history, and they tread on the most sensitive of the party's nerves.

For many Labour modernisers the way benefits are targeted is the new preoccupation. This was the thrust behind the observation, made by both Mr Blair and Ms Harman last week, that child benefit and statutory maternity benefit go to the rich who don't need the money as well as to the poor who do. The reformers see the welfare state as a safety net, a system that protects the poorest. One Labour MP's version of this case is that "even Queen Elizabeth I recognised that you cannot have people starving in the streets". This may be an over-simplification of the Prime Minister's view, although many colleagues detect similarly simple sentiments in his comments. One observes: "When Tony thinks of welfare, his policy instinct is to talk about the poorest and targeting." The Treasury, where the preoccupation is to save money, likes this way of thinking. So does Ms Harman, a close ally of Gordon Brown, the Chancellor.

Old Labour sees a more inclusive role for the welfare state, defining it in terms of citizenship. Its argument is that, for those interested in equality and improving the lot of the poor, the way forward is to draw them into the world of the middle classes. Services such as hospitals and schools that are used principally by the poor tend to be poor in quality. Those that embrace a broader sweep of society tend to be better. There are practical objections to targeting, too. The current National Insurance structure pays out to all contributors irrespective of income if they lose their job, or when they retire. These benefits are seen by Labour's "conservatives" as part of a "contract" with the state.

Allied to this philosophical perspective is a deep Labour hostility to means-testing because of the stigma attached, and the consequent deterrent effect on claimants. Mr Field is in most respects a welfare reform "radical", but he has always argued that means-testing deters people on benefit from taking low-paid jobs, and creates an incentive to lie about their circumstances. In opposition Mr Field described it as "the cancer within the welfare system", while a cabinet colleague, the Scottish Secretary Donald Dewar, speaks of means-testing as a "very frightening prospect for many people".

The practical question is whether targeting can actually deliver the cash that Mr Blair wants to divert to education? If the ideology is divisive, the implementation is hugely complex. Take, for example, the universal child benefit, paid to around 7 million families at an estimated annual cost of pounds 6.5bn in 1996/97. This appears to be the clearest case of wealthy people getting benefits they do not need. But changing it was beyond the ability of successive Tory administrations.

Labour is looking at various options. They include either removing it from or limiting the entitlements of the well-off, perhaps by taxing the benefit at the higher, 40 per cent tax rate. But this apparently simple reform is not as it seems. For a start, it would raise only pounds 300m-400m out of a pounds 100bn welfare bill. Moreover, to work effectively it would breach the principle of independent taxation for women; if it did not, the unemployed spouse of a millionaire could claim the benefit. Finally, the Treasury would come under pressure to concede an alternative tax allowance to families with children on the basis that all tax or benefit systems recognise the cost of having children.

Means - or "affluence" - testing child benefit would circumvent the independent taxation problem because benefits such as income support are often assessed on family, rather than individual, income. But when Labour examined the proposal in opposition, it found that to do so would add greatly to the costs of a benefit which is now cheap, efficient and difficult to defraud. Even if applicants were simply asked to declare that their family income was below a prescribed sum, the system would become much more cumbersome. Checking changes of circumstances or, for example, the financial position of a couple who are co-habiting but not married would be complex. The fact is that, unless the benefit were removed from large swathes of the population, the reform would not be worth the candle.

On the nitty-gritty of reforms like this Mr Blair knows he faces rebellion. Before the election Gordon Brown, then shadow chancellor proposed the abolition of child benefit for 16- to 18-year-olds. The move was resisted by Chris Smith, then shadow social security secretary, and by Robin Cook, then chair of the National Policy Forum. Before Christmas this plan appeared to have been scrapped, but it resurfaced again last week.

MEANS-TESTING disability living allowance, received by 1.9 million people, provoked a strongly worded objection from David Blunkett, the Secretary of State for Education and Employment. An internal letter from the minister, who is blind and therefore particularly sensitive to such cut-backs, was leaked before Christmas. Less contentious possibilities for reform include the elimination of overlapping benefits and help for those with minor disabilities to work.

But the all-important question is the reform of the state pension which consumes 34 per cent of social security spending. Saving money here is fiendishly difficult in the short term. Pensions are linked to prices not earnings and, since earnings are rising faster than prices, pensioners can expect to feel worse off as time goes by. Both Ms Harman and Mr Field agree that the pension budget ought to fall, but they are sensitive to the principle of National Insurance. Taxpayers who have paid into the fund expect to be paid out. Mr Field favours long-term reform, which includes the potentially expensive notion of a compulsory second-tier pension. That could lead people to believe that their new pension funds are just another tax.

Ms Harman is toying with the idea of a reduction in basic state pension for those who have benefited from high earnings. This package, known as "rebalancing" the basic state pension, would result in a perverse formula under which those who had contributed most through National Insurance would gain least in terms of benefit.

A host of problems will be on the table when Mr Blair's new ministerial group on welfare reform meets this Wednesday. But ministers do believe that the debate has at least moved on from the pre-Christmas debacle, when benefit cuts dominated the news. As the months pass, it becomes clear that there is no "big-bang" solution, no undiscovered crock of gold. If they are to spend less, ministers face the same series of simple options as the Tories: to reduce the numbers eligible for benefit, to limit the cash paid out, to means-test benefits or to tax them. Each route brings its own set of "losers" and they alert Downing Street to political terrors ahead.

One politician close to the review said last week: "Some held the view that if someone terribly clever got involved they could save us enormous sums of money. I think they now realise that it doesn't work that way."