Select Committee on Work and Pensions Written Evidence


Memorandum submitted by Fran Bennett (University of Oxford) and Mike Brewer (Institute for Fiscal Studies)

SUMMARY

  A well-meaning desire to reduce complexities in the benefit system can often be hindered by the difficulties in defining "complexity" and in measuring whether it is falling.

  A more productive approach would be to target directly the outcomes which should improve if complexity is reduced.

  These would include some outcomes already monitored by DWP, such as higher take-up rates, lower levels of fraud and error, lower administrative costs for DWP, a reduced total cost to the Exchequer and a more acceptable distributional impact of the benefit system.

  But the impact of complexity on people receiving benefits is not currently monitored by DWP. The most direct measure would be the time and money claimants spend in claiming benefits, maintaining a claim when circumstances change or benefits need to be renewed, and also in stopping a claim where relevant. This concept can be usefully thought of as the costs of compliance with the benefits system.

  We recommend both that the Committee consider its terms of reference through the lens of the costs of compliance, rather than solely benefit simplification, but also that the DWP considering regularly monitoring claimants' compliance costs, certainly for changes to benefits, but also for the existing structure. Without this, there is a risk that policies will reduce the complexity of benefits as seen by DWP staff without reducing the time and effort spent by claimants.

1.  INTRODUCTION

  1.  We welcome the opportunity to provide a short note to the Work and Pensions Select Committee's benefits simplification inquiry. Whilst we appreciate the boundaries of the Committee's remit, this note also covers tax credits. The main purpose of the note is to suggest that the Committee could usefully consider the concept of the "costs of compliance" of benefits (and tax credits), and that this could provide a more rounded and complete picture of the impact on claimants of the design, mechanics and conditions of benefits/tax credits than the narrower concept of benefit simplification (ie complexity). Furthermore, given the difficulties in defining and measuring complexity or simplification, there are considerable advantages in targeting something which, if not straightforward to measure, is at least one dimensional.

2.  COSTS OF COMPLIANCE

  2.  There is an existing literature on the compliance costs/burden of taxes (Evans, 2003)—ie the costs to the individual (or company) of complying with demands from governments to pay taxes. These include the opportunity costs of the time taken to fill in a tax return (for those for whom this is relevant), the inconvenience of doing so, and any direct financial costs incurred (such as employing an accountant).

  3.  We would argue that this concept of the costs of compliance can also usefully be applied to those who claim benefits/tax credits. It could be argued that people choose to claim benefits/tax credits, whereas they are obliged to pay taxes, and that therefore the two cannot be seen as analogous in this way. However, we would argue that most benefits/tax credits are essential in order to achieve an adequate income, obtain compensation for disbenefits, meet additional costs (for example, of disability) etc. And the existence of many benefits/tax credits also contributes towards broader goals of economic growth, social cohesion etc. to which this Government (like others) is committed.

  4.  Applicants and recipients of benefits/tax credits incur costs—time, financial and psychological—in meeting the requirements placed on them by social security/tax credit law and statutory authorities. These requirements are not only those associated with claiming benefits, but also those involved in maintaining a claim and also in leaving benefit/tax credit where relevant. The requirements could include, for example:

    —  finding out about and applying for benefits/tax credits;

    —  taking part in any interviews required;

    —  fulfilling reporting and other requirements;

    —  receiving/obtaining the money;

    —  dealing with any problems; and

    —  any actions involved in leaving benefits/tax credits.

  Some costs may be incurred by members of their families in addition.

  5.  These costs will obviously vary:

    —  from benefit to benefit (means-tested versus non-means-tested, but also those which require a medical assessment versus those which do not etc);

    —  from claimant to claimant (eg for those for whom English is a second language compared with native English speakers); and

    —  with different circumstances (such as time in the lifecycle etc).

  6.  This means that it would be impossible to arrive at one global figure which could represent the "costs of compliance" for each benefit/tax credit (though means-tested benefits and income-related tax credits are likely to be the most "costly"); and even to arrive at a range of estimates which included such non-quantifiable elements as hassle, intrusion and stigma etc. would be problematic.[1]

  7.  But, however difficult the exercise, we would argue that governments should be interested in these costs, and in trying to measure—and minimise—them. For example, in line with the current Government's "rights and responsibilities" agenda, the requirements of compliance are increasing for some people (eg through penalties for non-attendance at work-focused interviews, non-take-up of work-related activities etc). And sometimes action to solve a problem can be accompanied by increases in the costs of compliance for claimants; for example, the recent 10-fold increase in the amount which can be earned whilst on tax credits before income counts against entitlement (from £2,500 to £25,000 additional income in one year), which clearly reduces HMRC's administration and operational costs, was accompanied by more stringent reporting requirements for changes in other circumstances, which clearly increases claimants' compliance costs. We believe that it is essential to monitor changes in requirements such as these, in addition to any existing complexities of the structure of benefits and claiming processes etc. It should be noted that this kind of monitoring is likely to go beyond the regular surveys of customer satisfaction which both the DWP and HMRC already carry out (Sanderson et al, 2005; Herdan, 2006).

  8.  It could be argued that "compliance" is too loaded a term, in that it is already in use to refer to adherence (or not) to the rules governing benefits/tax credits (the avoidance of fraud). An alternative phrase would be "transaction costs"; this is a common term in economics, and refers to the costs of locating information about opportunities for exchange (transactions), of negotiating terms, and of enforcing the contract. However, "transaction" tends to imply exchanges between equals (as does much of the current government's language about the "welfare contract") and that the costs are incurred at a specific, discrete time; we prefer the term "costs of compliance", despite the problems outlined above, as it implies the inherent inequality of the position in which claimants of benefits/tax credits usually feel themselves to be, and it also recognises that the costs of complying with benefit and tax credits can continue after the initial claim.

3.  REASONS FOR CONSIDERING THE COSTS OF COMPLIANCE

  9.  First, and most obviously, consideration of the costs of compliance can help us to understand the reasons for non-take-up of benefits/tax credits. Indeed, it could be argued that this is the area in which such a concept is already well used (see note 1). The literature on take-up already makes it abundantly clear that complexity is not the only reason why some people do not take up their entitlements. Costs such as stigma, intrusion and hassle may be weighed in the balance against the likely amount of benefit/tax credit to be obtained (Corden, 1999; van Oorschot, 1991; Bunt et al, 2006)

  10.  Secondly, any cost and benefit analysis of changes to benefits/tax credits that ignores compliance costs is necessarily partial. Time spent by recipients fulfilling their obligations is time that cannot be spent engaged in other activities. Currently, government regulatory impact assessments (RIAs) estimate the costs (including time) of new regulations to business, government and the voluntary sector, but not to individuals. But an assessment of the compliance costs to claimants of the operation of particular benefits/tax credits, and of any changes to them, should form an essential part of Government's consideration of whether to introduce or amend social security provisions. The National Audit Office has already recommended that the Government should aim to minimise the compliance burden which its forms impose on citizens (NAO, 2003).

  11.  Analysis of compliance costs can also be used to develop a more rounded measure of the productivity of the benefits system, following recommendations in the Atkinson Review (2005) which suggested that ideally when examining productivity the outcome for claimants should also be considered. (The same could be argued for tax credits, especially when the compliance costs of taxes are already under examination for employers by HMRC.) There is considerable pressure within government to find efficiency savings in the budgets for administering benefits/tax credits (eg the current reductions in staff numbers and the closure of local DWP and HMRC offices), and there is often a trade-off between reducing compliance costs and reducing administration costs. This trade-off will not be openly recognised if no effort is made to assess and measure compliance costs.

4.  CONCLUSIONS

  12.  We would therefore argue that the Committee should consider its terms of reference through the lens of the costs of compliance, rather than solely benefit simplification. Reductions in complexity/benefit simplification may not always be positive, holding other factors constant.

  13.  Instead, the Committee may instead wish to consider the reasons that it is generally thought that a reduction in complexity might be desirable. For example, a simpler benefits system might lead to:

    —  higher take-up rates;

    —  lower levels of fraud and error;

    —  lower DWP(/HMRC) administrative costs;

    —  a reduced total cost and a more acceptable distributional impact of the benefit(/tax credits) system and, we argue; and

    —  lower costs of compliance for claimants.

  14.  We believe that it is these outcomes as end goals which are crucial, rather than benefit simplification for its own sake, and that one of these outcomes must be a reduction in the costs of compliance for claimants. Currently, there could be a policy bias within DWP because some of these outcomes are explicitly measured and targeted by Government, but others—including the costs of compliance for claimants—are not.

REFERENCES  Atkinson Review: Final Report (2005), Palgrave Macmillan.

  Bunt, K et al (2006), Understanding the Relationship Between the Barriers and Triggers to Claiming Pension Credit, DWP Research Report 336, Leeds: CDS.

  Corden, A (1999), "Claiming entitlements: takeup of benefits", in J Ditch (ed), Introduction to Social Security: Policies, Benefits and Poverty, Routledge: 134-55.

  Department for Work and Pensions (2006), Departmental Report 2006, Cm 6829, HMSO.

  Evans, C (2003), "Studying the Studies: An Overview of Recent Research into Taxation Operating Costs", e-Journal of Tax Research, Vol 1 No 1, pp 64-92.

  Herdan, B (2006), The Customer Voice in Transforming Public Services, Cabinet Office.

  KPMG (2006), Administrative Burdens—HMRC Measurement Project: Tax, HMRC.

  National Audit Office (2003), Difficult Forms: How Government Agencies Interact with Citizens, HC 1145, Session 2002-03.

  Sanderson, I et al (2005), Jobcentre Plus National Customer Satisfaction Survey, DWP Research Report 282, Leeds: CDS.

  Van Oorschot, W (1991), "Non-take-up of social security benefits in Europe", Journal of European Social Policy 1(1): 15-30.

3 April 2006







1   Though some of the literature on (non-)take-up attempts to arrive at the "tipping point" where the amount of benefit available outweighs the hassle, humiliation, effort etc. involved in claiming it. Back


 
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