Towards a sensible welfare system

This post was originally published at Liberal Democrat Voice.

Where is the development of Lib Dem welfare policy? It’s hard to see any. Even the recent living standards policy paper (pdf) said “we do not believe that this paper is the appropriate place to determine a Liberal Democrat approach to welfare reform. [...] this is an area that needs further debate within the Party.”

We all want a society in which technology, employment, education, high pay, low inequality, progressive taxation and cheap homes reduce the need for means-tested benefits, but this long-term goal must not prevent the party battling for a sensible and supportive welfare system. That Universal Credit is expected to cover 30% of households should show how important it is to get right.

Aside from the question of how generous or stingy benefits should be, there are many design problems that need to be tackled.

Bring Council Tax Support (CTS) within Universal Credit

The government localised Council Tax Benefit (CTB) and cut its budget by 10%, deciding not to merge it with the 6 other means-tested benefits in Universal Credit (UC). This year, 2.34 million low-income families will pay an average of £149 more in council tax than they would have under CTB.

UC is designed to limit marginal rates and clarify how much better off you’d be from additional earnings: the government will (above an allowance) claw back 65p for every £1 you earn. CTS undermines these goals by adding complexity and local differences and by further reducing work incentives. In some areas, CTS withdraws 30% of extra income, after the 65% UC withdrawal and after taxes. A select committee report (pdf) warnedrecently that with CTS and current benefits, some “stand to lose 97p for every extra £1 earned”.

This affects Lib Dem income tax cuts too. Under the new system a £100 tax cut would, for poorer families, lead to a £65 UC cut and up to a £10.50 CTS cut – leaving less than a quarter of what was intended.

CTS’s exclusion from UC was in large part about making savings faster than could have been done with UC. The poor decision was apparently a victory for DCLG over DWP, and the IFS concluded (pdf) that “It is difficult to think of reasons why the government’s original plan to integrate CTB into Universal Credit was inferior to what is now being proposed.”

Relink Local Housing Allowance to current local housing costs

Many changes have been made to the Local Housing Allowance (LHA), which determines housing benefit (and UC) in the private rented sector. This previously increased in line with local rents. The government has changed this so that each area’s LHA will now rise with CPI inflation. This is a cost saving measure, given that rents will generally rise faster than CPI.

Whether or not such cuts are welcome, there is an absurdity here. It would make sense to have a uniform, national housing allowance (or indeed to do away with earmarked housing benefits). It would also make sense (as used to be the case) to link local allowances to current local rents. But what the new rule means is that in 2032, LHA will vary across the country based on the distribution of rents in 2012. This needs changing as soon as possible, as it will get ever harder to fix as the distribution of rates drifts ever further from reality. Average LHA spending could still be limited to match CPI, but changes in each area’s LHA would once again be proportional to changes in rents.

Other changes

The Lib Dems should also look at increasing (rather than continuing to cut) the UC disregards or ‘work allowances’, which are analogous to the income tax Personal Allowance. This could counteract the 65% withdrawal of Lib Dem tax cuts from poorer households. And as party policy suggests, we should look at introducing a separate disregard for second earners. Ensuring UC rolls out successfully should of course be a fundamental goal.

Finally, we should scrap the well-intentioned but ineffectual bedroom tax, as well as the new budgetary ‘welfare cap’ and the £26,000 benefits cap – both of which are political gimmicks that break the link between needs and support. The latter cap limits the total amount any family can claim in benefits. But if the argument is that there should be a limit to how many children one can claim for, that should be fixed through the child benefit or child tax credit system. If the argument is that benefits shouldn’t pay for people to live in inner London, then the housing benefit system needs changing. The benefits cap is therefore at best a blunt and confused solution to the symptoms of other design flaws. And if the argument is that families should be better off in work than out, we should exclude from the cap those benefits that are available both in and out of work, which is in fact most of them.

The Lib Dems can be proud of Universal Credit as a structure – if it works: building a far simpler benefit system with reductions in poverty (when considered in isolation) and improved work incentives (complementing higher tax allowances and childcare help). And there are legitimate debates about the balance between cash transfers and public services. But in the party’s desire to paint Labour as economically incompetent, it must not favour tough-sounding gimmicks and welfare austerity when what we need are intelligent improvements and fair support.

* Adam Corlett is an economics researcher at CentreForum, the liberal think tank, and vice-chair of the Liberal Democrats for Drug Policy Reform.

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