SUPPLEMENTARY MEMORANDUM SUBMITTED BY
RT HON FRANK FIELD, MP (CP 30A)
TWO CONTRARY
VIEWS ON
WELFARE REFORM
Two views about the future of welfare are now
before the country. One view is set out in the Government's green
paper on welfare reform, New Ambitions for Our Country: A New
Contract for Welfare. Here welfare is seen as an inclusive
agent and one which increasingly should be based on the idea of
contract. Welfare costs should be much more clearly marked and
who picks up the price tag made much more transparent. Transfers
to the poor should be clearly identified as support gained from
taxpayers by an appeal to altruism and as a reward for good citizenship.
One assumption upon which the green paper was written was that
only by building up an insurance based welfare, with entitlement
based on contributions would it be possible to maintain universal
provision.
A contrasting vision is presented by the emerging
tax credit system. It is now clear that the Working Families Tax
Credit (WFTC) is not a one off initiative, but the start of the
most major recasting of the welfare state for people of working
age. A Disabled Persons Tax Credit is in place and the Child Care
Tax Credits are already part of both the Disabled Persons' and
Working Families' Tax Credits. Persistent leaks in the media suggest
the Government would like to abolish Housing Benefit and Council
Tax Benefit for non-retired claimants, replacing these benefits
with a Housing Tax Credit.
The scheme is nothing if not ambitious. A single-earner
couple with 2 children under 11, for example, could be still be
receiving WFTC with earnings up to around £370 per week.
This is just over 90 per cent of the average earnings of all full-time
adult employees. Relevant childcare costs and/or different family
composition could push this figure even higher.
The Select Committee cannot now sensibly view
the future and potential of national insurance without also considering
the emerging tax credit system.
There is a fundamental division between these
two approaches to reform which centres on how each group sees
welfare functioning, particularly how welfare impacts on human
behaviour. Tax Credits are old wine in new bottles. Despite the
change in name the Credits are a means tested benefit. As with
all means tests they penalise success. Under the Tax Credits system
the lower a person's income (at least for the purposes of filling
in the claim form) the higher will be the taxpayers' subsidy.
The opposite is also true. Gaining higher incomes will be rewarded
by a lower credit.
For millions of people low paid jobs are the
only option currently open to them. But in deciding how to assist
this group should the overwhelming drive be to reward only on
the basis that people stay on low income? Should we provide financial
disincentives for people who work harder and raise their income?
Is failure an outcome which governments should subsidise? And
the use of the word subsidy in this context is right, for the
tax credit will be paid from general taxation, and not by contributions.[12]
While some people will be on low income, and will rightly gain
help, the whole emphasis of this approach to welfare changes is
to penalise success.
The WFTC sees the reintroduction of the Speenhamland
system of subsidising low wages. Employers are currently opposing
running the tax credit, but it will not take long for even the
dimmest amongst them to realise that the Government is offering
them the right to draw upon large sums of taxpayers' money to
subsidise the wages bill.
Soon there will be few jobs advertised paying
less than £200 per week—the guaranteed minimum income
the Treasury claims for the Working Families Tax Credit. Employees
enquiring for work will be offered first the WFTC application
form. Employers will increasingly pay only the minimum wage at
£3.60 an hour and draw the rest of the £200 wage from
the Exchequer. Indeed, would it be sensible for them to do otherwise,
given the system the Government is establishing?
For the millions of single workers earning above
£3.60 an hour but less than £200 per week life will
become tougher. Their wages will be squeezed towards £3.60.
The alternative for some of them will be to boost wages by lying
that they have a family. The Inland Revenue are responsible for
checking the veracity of claims. Judging by the evidence given
by the Inland Revenue to the Social Security Select Committee
it looks as if the Inland Revenue will use similar anti-fraud
measures as have been used for Family Credit. Regrettably the
main benefit review of Family Credit was dropped by the Benefits
Agency following the decision to transfer the benefit to the Inland
Revenue. The Working Families Tax Credit will attract large numbers
of new claimants to a benefit of uncertain security.
The WFTC will push down wages. No employer will
be able to offer a higher take home pay for a wage between the
minimum rate of £3.60 an hour and the £5 per hour guaranteed
under the WFTC. The estimated bill for the tax credit will quickly
soar, while the distribution of earnings towards the bottom end
of the scale will take a marked downward shift. The only plus
for the scheme is that currently the WFTC is available only to
those with children, although a pilot for childless couples is
being run. Childless people will find it harder to gain work for
they cannot be offered the new weekly £200 minimum wage.
The minimum wage has been a success beyond all
expectations. Wages have increased for the lowest paid without
unemployment rising. Surely the approach should be to operate
on this success and begin a review of the minimum wage. For the
reasons I have just given, the advent of Tax Credits now largely
undermines any future gains which could come from increasing the
minimum wage.
A full blown tax credit system cannot survive
in the longer run. Without any contribution based benefits the
evil effects of means testing will become ever more disastrous.
The only question is how long will taxpayers be prepared to foot
an ever escalating bill resulting from people naturally working
the system and, to a lesser extent, from fraud.
2 November 1999
12 The funding of the WFTC through general taxation
contrasts sharply with the transparency of contribution and entitlement
which is so central to New Ambitions for Our Country: A New
Contract for Welfare. Back
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