Select Committee on Social Security Minutes of Evidence

Examination of witnesses (Questions 161 - 177)




  161. Ladies and gentlemen, may we re-open the final session in public this morning in our inquiry and welcome Andrew Haldenby, who is Director of Studies at the Centre for Policy Studies. Andrew, it would help us, I think, if you spent a moment explaining a wee bit about the background of your organisation, which I know has been doing important and valuable work in this area, and also tell us a bit about what you understand about the future contributory principle. If you could give us a brief opening statement, it would be helpful.
  (Mr Haldenby) Thank you, Chairman. The Centre for Policy Studies is an independent "think tank" founded in 1974 by Margaret Thatcher and Keith Joseph, and we try and present practical policies which are designed to strengthen the free market and enterprise nature of the United Kingdom economy and so promote a decent society. I think in regard to the contributory principle I very much agree with other witnesses you have had previously in regard to what the contributory principle is and in regard to its gradual decline, as it were, since the beginning of the welfare state. Where perhaps I might differ with them is on how we respond to that decline. If I could slightly expand on that, I think the contributory principle was set out very clearly by William Beveridge in his report, Social Insurance and Allied Services, and he used it to mean the general idea that social security benefits should only be received in return for contributions and that was contrasted with means-tested benefits, which one receives on the grounds of one's income. He described this plan as, first and foremost, a plan of insurance, giving, in return for contributions, benefits up to subsistence levels as of right and without means-test, so that individuals can build freely upon it. That is broadly what is understood by the contributory principle and it is important to understand that in Beveridge's conception contributory benefits were going to be at subsistence level, so that if one was in receipt of contributory benefits one would not actually receive means-tested benefits as a top-up. That was Beveridge's idea and other witnesses have obviously given evidence to you already that that has been enormously difficult to implement in practice, and I think one can identify two reasons why governments have found it harder and harder actually to implement the contributory principle. Firstly, the cost: the moment that the welfare state was started in 1948, as we know, contributory benefits were not set at the level at which Sir William Beveridge envisaged; they were set at a lower level, requiring far more people than he desired to claim national assistance and means-tested benefits. Previous witnesses this morning I think seemed to be giving the impression it was a relatively new idea that people are having to top up contributory benefits with means-tested benefits. It is not. It has actually been the way since the very beginning and it was a conscious desire on the part of post-war governments to keep down the cost of contributory benefits and, if necessary, allow people to top up with means-tested benefits. This idea of having to restrain the cost to the Treasury of contributory benefits is clearly one which has recurred throughout the last 50 years and there have been references to the reductions in contributory benefits under the previous Conservative governments and also to the cuts which the current Government are doing, with the main aim of limiting the cost to the Exchequer of the social security system. That cost argument is a political argument but one has to recognise that successive governments have found it increasingly necessary, for cost reasons, to limit the amount of contributory benefits. The other reason that contributory benefits have played a less and less important role is simply, I think, political necessity. As has been discussed, particularly with the previous witnesses, there are some groups who have not been able to build up a record of contributions, in particular disabled people, leading to the introduction of non-contributory, non-means-tested benefits in the 1970s in particular, but also one-parent families, who have tended also since the 1970s to move on to means-tested benefits, and so we have seen since about 1980 in terms of the total amount of benefits paid out under the different headings—contributory, means-tested, universal—gradually the contributory share has declined, means-tested has gradually increased and universal has gradually increased, and those are trends of which you will, of course, be aware. I suggest that there are very good political reasons why this has happened which have to be taken very seriously. So what to do? Other witnesses have suggested to you that in the face of the decline of the contributory principle what is necessary is to re-invigorate it, perhaps by encouraging more people to pay contributions or to pay contributions at a higher level in order to receive contributory benefits at a higher level, or, alternatively, to credit people into the contributory system so that they do not have to make contributions but they can still receive contributory benefits, and this is, of course, where the political argument is at the moment, particularly of Frank Field, the previous Minister for Welfare Reform. I would question that approach on two grounds: firstly, again on cost. It is easy to say that more people should pay contributions or that people should pay higher contributions, but, of course, that, as has already been discussed, is rather like a tax rise and there are problems with that idea. On the other hand, if one is to credit people into the system, thinking particularly in terms of the impact on character which has been discussed, it is difficult to see what difference it will make if, under the current system, somebody does not make contributions and receives benefit, which is called means-tested, and under some kind of new, re-invigorated contributory system one does not make contributions and receives contributory benefit. It is a little hard to see how that changes one's psychology. It is actually remarkably similar. So I would question the people who advocate a reverse of the decline of the contributory principle, but that, of course, is not to say that nothing should be done. As has already been discussed, more and more people find themselves on benefit. The social security system remains by far and away the most expensive part of public expenditure and there is agreement across the political spectrum now—not quite total agreement but there is some agreement—that it may have deleterious effects on character, particularly on work incentives under the social security system. So what might be an alternative? When the Committee sent out its request for evidence, one alternative you posed was tax-benefit integration and that is something that is well worth exploring. The particular reason is to look at the idea of dependence. Another thing that has happened since the beginning of the welfare state is that far more people have become drawn into the processes of paying taxes and receiving benefits, and particularly if one looks at income tax, it is interesting to think that when the welfare state was introduced, for the married man one would have to be earning basically near the entire level of average earnings in order to pay income tax. Now one has to be earning about half of that average to pay income tax, and it is quite a different idea that people on far lower income should pay income tax, and I believe the figures are, for people earning less than £10,000 a year, there are about 14.2 million income taxpayers, including 4.4 million people with an income of less than £5,000 a year, so it is quite a significant part of the population. At the same time, because this population have had some of their income taken away, they have also been drawn into the benefits net and we have seen a significant increase in-work benefits, particularly to top up the income of these households. So we have created a situation where, according to the latest Government estimates, about £30-40 billion is moved between benefits, from households receiving benefits who also give £30-40 billion paying taxes, so there is this overlap and there is no reason really why they should pay it and why there is this enormous overlap with money being passed from one direction to another. The Government is clearly considering dealing with this overlap by performance of tax benefit integration, working family tax credit and moving on to housing benefit. These ideas are discussed in a report which we published recently, The War of Independence. We have advocated that idea should be taken extremely seriously and if the Centre for Policy Studies can be of any help to the Committee and perhaps propose an exercise where you might be able to investigate that idea more thoroughly, we would be very happy to do that.

  Chairman: Thank you, that is very comprehensive. We do want to receive evidence along the same lines and we want to ask one or two questions about that.

Mr Pond

  162. Could I pick up two of the things you said in that presentation. One of the points you made was that over time there was a shift towards greater reliance on means-tested benefits and you made the point that that is nothing new, that has been happening for a long time. You said one of the reasons for that was to limit the cost of the system but just a few moments ago you also reminded us that the cost of the system has escalated very considerably and that social security now takes the biggest single chunk of the public expenditure budget. So surely the shift towards means-testing was a mechanism for increasing the cost of social security, not reducing it?
  (Mr Haldenby) What I was trying to do was to explain the political argument that lay behind those decisions. Obviously this sort of graph of expenditure on social security does not lie. One can see that whatever decisions the Government has taken it has continued to increase until recently more quickly than national income. The key point I was trying to make was that with contributory benefits governments have sought to limit the cost by keeping the cost low and that was a decision taken after the Second World War by that Government and has been taken more recently, and whether one wants to call this a Treasury-driven policy is not for me to say but I think what I am trying to suggest is that there is a consistent policy from the Government to limit the value of contributory benefits, which has placed more people on to means-tested benefits, and one has to understand that really to understand why the amount of benefits paid through contributory benefits has declined.

  163. Beveridge would certainly have believed, and more recently Frank Field certainly believes, that that shift over time from contributory benefits towards means-tested benefits would have an influence on behaviour, character, morality. You also referred to the impact on psychology and character in your presentation a few moments ago. Do you have any evidence that the structure of benefits does influence behaviour?
  (Mr Haldenby) We held a conference recently to discuss our report, The War of Independence, in which Dr Theodore Dalrymple reported on patients whom he treats in his locality, which he characterised as an environment in which people were predominantly on low incomes or unemployment, and, although it is impossible obviously to find causal links, he was quite happy to suggest that particularly the absence of work incentives and the absence, therefore, of work was partly caused by the existence of the system of social security benefits, and led to what Beveridge described as some of the five giants—idleness and want. I cannot provide you with any evidence that specific benefits lead to certain kinds of deleterious behaviour, but it is quite a widely shared view now that for some communities as soon as worklessness, paid for by benefits, subsidised by benefits, reaches a certain level then what one might call the norms of social behaviour break down and social exclusion is the result.

  164. Finally, you also referred to changes in the tax system, the fact that more and more of those on relatively low incomes have been drawn into taxation over time, while at the same time, of course, national insurance contributions have increased quite dramatically but have tended to be concentrated on those on low incomes so that the contributions now raise about 60-70p for every pound raised in income tax, so they are very significant. Do you think that people really distinguish between national insurance contributions and other forms of direct income tax?
  (Mr Haldenby) I cannot really report any sort of formal evidence from which I could say that for sure. I would think they would see national insurance contributions as a tax which also qualifies them for contributory benefits. To what extent that is understood, I would be very surprised if it was understood in any great detail. But the key point, I think, is that national insurance contributions would be seen as a tax, and perhaps one can see this in a political way. It has been politically disadvantageous in recent elections anyway to advocate increases in national insurance contributions and particularly the abolition of the upper earnings limit is an example of how increases in insurance contributions would be seen to be as unpopular as an increase in taxation.

Mr Leigh

  165. May I say what a pleasure it is to have a "think tank" coming before us which was founded by Lady Thatcher and Lord Joseph. It is a rare event in this Committee. Having said that, I totally disagree with your paper but I want to probe you further because I do think that there is a fundamental dispute about the way forward; it cuts across left-right divides. You described the history, and I have read your paper, of why the Beveridge model failed but it failed because governments did not have the political courage to insist on what Beveridge wanted in the first place, which was that if you had not contributed enough for your pension you would not get it. So my question to you is, I would have thought that if you go down the line that you are suggesting, which I suspect is the line that this Government is moving down, you have a completely morally neutral system and whatever you say, I think that would have a devastating effect, without sounding pompous, on the moral fibre of the nation because it would make no difference what contributions you made. That would be absolutely clear. Your income falls below a certain limit, the state steps in and bails you out. Surely a better way forward is that you really do try and create a properly funded contributory system. You have presumably read what the Adam Smith Institute has produced on the pensions front?
  (Mr Haldenby) Yes.

  166. You could start with young people and say to young people, "You will be required to pay so much of your income into your personally funded scheme and you could place reliance on it." This is just a variant of Peter Lilley's scheme. What do you think of Peter Lilley's scheme? All this seems to me a far more satisfactory way of proceeding than your system. You say, "All this is no good because there is no difference. The state is still going to step in and save you and, therefore, you are not going to help the moral fibre of the nation." When we started off this debate, when I first got involved in this debate, we used to have supplementary benefit and, frankly, people did not want to claim supplementary benefit; it was a kind of poor law by another name. So there is a differentiation. People would much rather receive benefits which are their own, as a result of their own hard work and contributions, than receive some kind of supplementary benefit. I am sorry to put it to you in that way but I disagree with your paper, and if I have any influence on Conservative Party policy-making, your paper will not figure and I look forward to the next Conservative government. Is that a fair question?
  (Mr Haldenby) In regard to the idea of private contributions to pensions, it works for pensions and I think it was a complete tragedy that the Basic Pension Plus Scheme devised by the Department of Social Security before the last election was not implemented in this Parliament, the reason being that because of the action of compound interest upon savings in one's own pot, given the growth in the stock market which have been fairly consistent, one's pot should grow to pay a pension far greater than the current state pension provides. So for pensions it works. However, for the other social security benefits—and here Peter Lilley's recent speech to the Conservative Policy Forum is relevant—it is difficult to see how it would work, as the previous witnesses described it, in terms of equity. There will be some people who simply have to pay far higher premia or cannot be covered by insurance and in the private insurance market it is difficult to see how that can be politically acceptable. One could envisage a kind of Singaporean scheme in which we all pay a quite significant chunk of our income into a very large pot out of which everything gets paid—education, pensions, health, you name it—but that is obviously a separate discussion, I think. On your main criticism of our suggestion, which is that what we are advocating basically is a means-tested scheme, that is not quite it. The objective of the scheme, the principle of the scheme, is for the households on low inces that I have described, they are free from the process of having both to pay tax and receive benefit. They should be removed from the system, and the Chancellor has spoken about this in a recent speech as well, which should have quite a significant impact on their work incentives; basically, they are free to earn. That is the idea and so in that way it is not supposed to be morally neutral at all. The question of how the integrated tax-benefit system works needs further research. It could be that the same rules for eligibility still apply under the new system. It does not have to be necessarily a new system, but what I really want to do is concentrate on the principle, which is removing the overlap between taxes and benefits. So I would hope it would strengthen the moral fibre of the nation.

  167. I can understand you are trying to avoid churning; we all try and avoid that, and I understand your argument, which you have put very strongly, about how ridiculous it is that income tax now trips in at a far lower level than it used to 30 years ago, but I suspect that we are stuck with that now, are we not, that such is the level of benefits, unless you want to return to the system that operated 30 years ago, it would be politically impossible, would it not? You are just talking about reducing the level of benefits. That is the only way of doing it?
  (Mr Haldenby) You talked about political courage and I think all the witnesses who have come before you have basically proposed ideas which would require political courage, particularly those who would argue for the re-invigoration of the contributory principle, for reasons I described earlier, that it would be very expensive and there would be some people for whom it would not make very much difference. That would be a politically courageous act itself. So it is to what end one wants to apply one's political courage and what I have tried to suggest in this evidence is that there have been very good reasons for the progress in social security over the last 50 years. It is difficult to see how a different government could ignore those reasons, and so perhaps approaching the problem of dependence from a slightly different angle might be more advantageous, which is why we suggested this.

  168. One last question: you seem to create a lot of savings by merging departments. We have heard all this before. At the end of the day you do not save a lot by merging departments and I suspect that if you did move towards your scheme the savings that you are supposing would be far less than would be hoped for.
  (Mr Haldenby) A considerable part of the decrease in the cost of administration is actually down to decreased caseload. As we have heard, the process of the integration of departments starts it, so it is swimming with the tide, but it is not simply about efficiency gains, cuts in the payroll and that sort of thing. It is actually that, if far fewer people are paying tax and receiving benefits, the caseload is far lower, so we would hope that would happen. Of course, you are absolutely right and we would hope that is a slightly newer and better reason why the notion is worth considering.

Mr Dismore

  169. In your paper, paragraph 29, you say it should be possible to do all this without withdrawing support from individuals and families who are genuinely dependent. Could you define "genuinely dependent" for me?
  (Mr Haldenby) Yes. Forgive me, that is not phrased as clearly as it should be. The idea is to net off a household's tax payments and benefit receipts so as to leave each household, as it were, in a neutral position. This is a process on which the Government has made a start with the integration of working family tax credit and family credit as opposed to continuing housing benefit and benefits for children. What perhaps underlies that is that we are not suggesting the structure of the system in terms of benefit rules necessarily needs to be changed. As I say, it is more to do with the fact that so many people have to pay tax and receive benefits that perhaps contributes to it.

  170. You refer to "genuinely dependent" here as being effectively the test that allows this to work. You must have meant something when you wrote it. I cannot quite understand how that fits in.
  (Mr Haldenby) What I meant by what was that we are not implying that people should stop paying tax and stop receiving benefits, because obviously for a large number of families that would mean those who receive greater benefits than they pay taxes clearly would lose out. What we are suggesting is the removal of the overlap.

  171. How much are benefits integrated?
  (Mr Haldenby) In the same process. The Chancellor has suggested, in fact, that all benefits for children could be integrated within the tax system.

  172. So you would only get child benefit if you were genuinely dependent?
  (Mr Haldenby) No. The idea is the removal of the overlap between the payment of taxes and the receipt of benefits, so if one was earning a certain amount of tax, one's benefit receipts would be decreased in such a way that one would not be doing both. One would either be paying tax or receiving benefits.

  173. Does that not take us into the world of taxes and child benefit?
  (Mr Haldenby) No, I think that is a separate question.

  174. Why?
  (Mr Haldenby) Because this takes us into the world of having, as it were, a single tax code. This takes us into the world of working family tax credit where one has a single tax code which is used both to assess benefit eligibility and tax payments but in such a way that one does not do both. One either simply pays tax or receives benefit.

Ms Buck

  175. How would you do that without touching independent tax?
  (Mr Haldenby) As I suggested in my evidence, and as many of the witnesses who have come before you, these are principles that I am suggesting for reform and that is obviously one of the questions that will have to be considered if such a process were going to be worked up. Having said that, because I feel that the Government are moving in this direction as well, there are questions like that which need to be considered but they are worth considering.

Mr Dismore

  176. So what sort of benefit system would you have left for people who have not paid in or have only paid inconsistently or are unemployed or lone parents, sick and disabled people? What would be left for them? Are they genuinely dependent?
  (Mr Haldenby) Yes. Forgive me. The implication is not that the benefits are removed. The implication is that for these families, if it is felt that it contributes to the dependence of more and more people paying income tax and, therefore, relying on benefits, that in cases where benefits rare received and some taxes are paid, that overlap is netted out, that households which are simply in receipt of benefit will continue to receive benefits. The point is to clear out some of the undergrowth, as it were, from the system and to make administrative savings.

  177. So you would just be left with the means-tested system?
  (Mr Haldenby) No. As I suggested to Mr Leigh, the question of the basis for benefit eligibility under the new system of benefit would remain open. It would not necessarily be affected at all, that all benefits would need to be means-tested. This is an important question which the Government, I think, will hit as they continue their process of integration. There is also a very difficult question of which I am aware about when does one make one's benefit assessment under an integrated system. It is relatively easy with working family tax credit, which is paid out for a period of six months; it is not so easy with benefits which are paid out for periods of weeks or individual months. So what I would like to suggest very much to the Committee is that it is the principle and perhaps it is a problem that is worthy of focus as the revival perhaps of the contributory principle.

  Chairman: Thank you very much. Your ideas certainly are challenging and we will obviously very carefully study them. The Committee is very grateful to you for coming along this morning and for producing the written evidence. Thank you very much indeed.

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