Work of the Department for Work and Pensions - Work and Pensions Committee Contents

Examination of Witnesses (Questions 1-72)

Rt Hon Iain Duncan Smith MP and Sir Leigh Lewis

15 September 2010

Q1 Chair: It's very nice to see such a full house. Can I welcome everyone, and in particular the Secretary of State and the Permanent Secretary, to the first oral formal evidence of the new Work and Pensions Select Committee. We have quite a full agenda in front of us today so just a very brief welcome to you both, and thanks very much for giving up your time. Hopefully you will find the Committee—I was going to say "friendly", but I am not quite sure if that is quite what you want from a Select Committee.

Mr Duncan Smith: That worries me.

Q2 Chair: But certainly, obviously part of our job is to make sure that the Department for Work and Pensions gets its decisions right and we are part of an important role in scrutiny in this place. So thank you very much for coming along. To begin, there were quite a lot of questions over the weekend about departmental spend and on one of the TV channels last night you were denying that there had been a major bust-up between yourself and the Chancellor, but, the way that these things work, I know that there will have been some robust discussions about the Departmental budget, so can I ask the question: who won?

Mr Duncan Smith: I think there is always a nature of robust discussions between the Treasury and various Departments about the way to do things. The fact is I came into Government only a few months ago and we recognise that we face a significant problem. We have to get the deficit down, so every Department has to play their part in that and of course we have the extra issue of the scale of welfare spending. Not all of it, as you will know, is in my Department. It is often forgotten that some of these ones are within the Treasury themselves or certainly at HM Revenue and Customs (HMRC), coming out of the Chancellor's own brief. So, tax credits and child benefits that are often asked of me are the Chancellor's remit, not mine, so while I may make suggestions to him he makes the final decisions on those. The rest of the benefits area is mine. So I have to look at the departmental spend and figure out whether or not what we are spending is being effective, could it be more effectively spent in different ways and is there any scope to reduce the expenditure while at the same time improving outcomes. The reality for us is that, within that problem of the very large deficit, we also have a problem with a system that, I believe, on both sides of the House, we now recognise has become so incredibly complicated that the very people it serves quite often are ill-served by it. That complication, particularly for people going back to work, means they are often unable to understand quite how well off—or if they will be better off as they enter work. There are of course issues for people who have various disabilities to know quite what they should or should not be receiving. So there is a whole scope of issues.

I must say, though, that within that context, I did read some wonderfully exotic articles over the summer about these: an official from the Treasury with a wonderfully exotic name and secret meetings and various other bits and pieces. I don't recognise all of that, to be fair. I'm sad that I don't but, nonetheless, it made interesting reading and was fun to read, too—after all, we have to have something to look at in the summer. But my only advice to the Committee is: you shouldn't always believe everything that you read in the newspapers. I say that rather carefully looking across to my right.

Q3 Chair: Perhaps, in terms of what we read in the newspapers, you might be able to clarify the figures because I am finding that quite confusing. The figure of £11 billion savings from your Department has been bandied about as being part of what was in the Budget and then, over the weekend, there has been £4 billion and £2.5 billion. Are these additional? What is the figure with regard to your own Department?

Mr Duncan Smith: It breaks down into two parts: those things that are public, which were in the Budget, and I think the £11 billion figure you refer to refers to that. Of course, that you need to look at and I am sure the Committee will know that £11 billion figure relates to 2014-15 and is a cumulative figure. These figures are in the public domain and are as a result of various changes that were brought forward in the Emergency Budget—again, not all to do with my Department, a large chunk of that is due—

Q4 Chair: What is the time scale for that? Is that within the period of the Government spending review?

Mr Duncan Smith: It's within the Government spending review, and the point about this is: we should see this in the round because we are in the middle of the spending review right now. So any other figure that references the spending review I obviously can't confirm because—I will be quite honest with the Committee—we haven't reached any conclusions about this at all; not at all. I can't even whisper something to the Committee. As regards figures like £4 billion, I simply don't recognise that figure at all.

I also let the Committee know that I was away in Oslo on Sunday attending an International Monetary Fund-International Labour Organisation (IMF-ILO) conference, so I only picked up the story that was in the Sunday papers at the last moment and I think it was referring to a letter. First of all, I couldn't remember the letter. It took me ages to find out what that letter was but that letter had nothing to do with our present discussions at all and should be disregarded. It was the view—if it exists at all—of an individual, but it didn't necessarily refer to anything; in fact, it doesn't refer to anything that we're doing at the moment.

Q5 Chair: But there is no doubt that, over the period of the comprehensive spending review, things are going to be very tight for your department and you are one of the big spending departments in Government. So the other thing was on Monday, during the Urgent Question, the Chancellor was talking a lot about working-age benefits, but Incapacity Benefit is only £13.6 billion—only; it is a huge amount of money. But when you look at your own departmental budget, the Chancellor is saying that one third of all Government spending is on welfare, but well over half that—almost two thirds—goes to people of pension age, not people of working age. So because of the concentration—a lot of the stuff that has come from your Department being mostly about working age—are you not limiting your ability to make the kind of savings that you and the Chancellor want?

Mr Duncan Smith: We have to make savings. That is absolutely clear. But my view about this over the period of the spending review is that we will make savings by reforming the system. That is the critical part of the whole of the area of discussions that we have, which is that reform is the key way. I have witnessed too many Governments come and go, Labour or Conservative or coalition now, that have attempted to deal with the welfare bill by simply pressing down from the top saying, "Well, we can just cut this"—I think the last Government attempted to do that at the time—and each Government has seen them, by and large, balloon back up again. So a lot of these savings end up being temporary savings and often are not delivered. So my point about this is that reform is the key.

That we have to make savings I agree, and it is good that you remind everybody that pensions are a very significant part of the overall spend of the Department, and quite legitimately so. We have a pensions reform programme, an agenda, which no doubt you will want to talk about later on, but that of course arguably has a bigger bearing on finances than anything we do on working-age benefits. So I accept that but, yes, no one said this process was easy at all. Anybody sitting in my position today would much rather that they were sitting in the position 10 years ago when we had time, scope and money to make reforms. I wish the last Government had attempted that seriously and not left us with this mess.

Q6 Chair: You are right, we do have lots of questions about those reforms, but quite a number of them will initially cost more money. In order to enact reforms it will cost money, which you would hope to then recover as savings further along the way. But that is not the basis of your discussions and arguments with the Treasury because that means pump-priming of some kind.

Mr Duncan Smith: As I said last night—you are referring to an interview I gave on Sky—if our roles were reversed I would be saying exactly the same thing as the Chancellor says to me: quite rightly, he wants me to be able to demonstrate that the reforms that I propose work. I believe they do. I believe we can demonstrate that, and that they will, ultimately, both save money and improve the situation, in the sense that we have a better process of getting people back to work.

After all, at the end of it, when we look at our joint—everyone on this Committee—commitment to ending child poverty by 2020, it is my strong view that we will not do that while Britain remains one of the worst countries in Europe for workless households and children born into workless households. We have a staggering number; nearly 20% of all British households are workless[1]. That is, no adult works in them, and about 16% to 17% of all children born live in workless households. So the Government has spent a lot of money—the last Government—on eradicating child poverty and to some degree had some success. But what they found is they hit the buffers because the persistent problems with poverty lie in these workless households.

So the reforms I hope to be able to bring forward will save money, I believe, because we will start to get at those households where there is persistent worklessness.

Q7 Chair: But the most recent figure suggests that there are more children living in poverty in households where there is someone in work than there are children living in poverty in workless households. Even getting people into work is not going to solve some of that problem because of low wages, so they still need the help from the Government in terms of Housing Benefit, council tax rebate and tax credits. So it is not an obvious complete saving over the whole welfare bill.

Mr Duncan Smith: For the reforms that I was talking about—and I was not going to go into detail now because of your specific questions about these discussions—the reality is that part of that process is to make work pay. That is critical and that is your best way of eradicating child poverty.

Chair: I am sure my colleagues will come back to you on that. We have some questions now on the subject of your document, "21st Century Welfare", and the proposals for a single working-age benefit. Sajid Javid?

Q8 Sajid Javid: Yes, good morning. The stakeholders have broadly welcomed the document, "21st Century Welfare", but it is fair to say there is some concern about the time scale of delivery of some of the thoughts in here and the process for implementing the change. Can we just ask: what are your plans once the consultation closes for taking this forward? Do you plan to produce a White Paper or a draft Bill or do you think it will go straight to a final Bill at the start of the new year?

Mr Duncan Smith: No, the plan is that we will complete this early consultation and we have had a lot of submissions from politicians as well as from think tanks, and from the media too—they do not make official submissions but they have certainly made commentary. So a number of groups, different groups as well as various poverty groups, et cetera, have made responses. We have talked to the trade unions; we have had pretty wide consultation. That will be reflected in the next phase, which is to go to a White Paper in the autumn that will bring together those consultations and flesh out a bit more of the detail about how we intend to implement this.

To be fair, this document you have in front of you is some way behind where we are in the Department. I want to say something early on about this, if I could use this opportunity: the Department has been excellent since I arrived, the way they have grabbed this issue and run with it. I am full of praise for their focus. Quite often civil servants get blamed at the moment and attacked, so I want to put it on record that I think the Department's officials have been second to none in their determination to make some of these reforms work and, to that extent, they are working very hard at the moment on the White Paper.

Chair: Richard?

Q9 Richard Graham: Thank you, Chairman. Good morning, Secretary of State. I appreciate what you said, that the outline approach in the "21st Century Welfare" document is some way behind where you all are in the Department in working out different options. One of the most striking things in the meetings that we have had so far is that everybody buys into the direction of the journey that the Department wants to go on. But within this document, obviously, there is very little that sheds much light on the different costs of the options that you are looking at. Is it possible to share with us today some of the different costs likely to be involved in looking at things like Universal Credit and the Single Unified Taper, and what sort of estimates you have submitted to the Treasury in terms of what this is likely to cost? Especially at the beginning of the programme where the cost will be up front and the benefits, the savings, are likely to come through later.

Mr Duncan Smith: I cannot specify today the costs because, as we work through this and make some advances in the modelling—and the modelling is quite extensive now—we are finding, by and large, that the original estimates of costs are falling. One of the things it is doing for us quite well is to help us understand the nature of who is not claiming benefits and why. That understanding has been very poor up until now. In fact, a by-product of it is to understand these groups far better and, as we understand them far better, we understand some of their rationale for why they have not been claiming, so that is becoming much clearer to us and that will become clearer in the White Paper.

The cost issues: if you do not mind I will slightly bypass those because a lot of the figures being bandied around in the media are by and large incorrect. Some of them are based on the original Centre for Social Justice paper. Things have moved on some distance from there and we are much clearer about take-up rates and things like that, and that is becoming clearer all the time. So if I was to put a figure out now the chances are that within a month or two that would be wrong. Rather than putting out wrong figures, I will wait until the White Paper before I can give you a proper set and a proper analysis.

Our general, absolute clear belief is that what this system will do, most certainly, is to save money in one area, which is to do with overpayments and fraud, particularly, in the tax credit area, which has been bad and poor since tax credits were brought in, whereas DWP has borne down on its fraud area. There is still work to be done and we are going to—as you saw in the Budget—maximise our efforts in that area. We are going to bring in some more fraud inspectors, et cetera, and we believe we can make a better fist of that. We know the tax credit area has always struggled and the HMRC will be the first to tell you that. So we think this system coming together like this will have a major bearing on that wasted money, which could be better spent and costs an awful lot to manage.

Q10 Richard Graham: But in general, of the areas where the Department is hoping to generate the £4.7 billion savings that you have said you will achieve by 2014-15, presumably if you have arrived at that figure there is some breakdown between what you hope to save from reducing fraud, what you hope to gain by simplifying the system and what you hope to gain from reducing the numbers of people, for example, on Incapacity Benefit? There must be some form of breakdown of the savings areas from which you hope to generate them?

Mr Duncan Smith: There are two areas: first of all, I have made no commitment to savings in the spending round yet, because that is a matter of discussion between myself, Treasury and Downing Street, generally. So I do not accept any particular figures in the run-up to October 20th—for obvious reasons—when these matters are being decided.

Of course the Universal Credit idea, plus any of the others, is part of that mix because of course it will start, and the idea will be brought in within the time scale of the review. Whether it is all within that time scale or not is a matter, as I say, for further discussion and will be the subject of the White Paper. That is why it is very difficult to say at this point, specifically, to what degree it will have a bearing or not on those spending figures—not those figures but the figures we will eventually arrive at.

Q11 Richard Graham: So how was the figure of £4.7 billion, which I think was in the Department's briefing, arrived at?

Mr Duncan Smith: I am talking about the overall inclusive budget and spending review figures, which will become clear on the 20th. So, the Universal Credit will have a bearing on that overall figure. I am not hanging on to £4.7 billion, but the reality of what we say, going ahead over the whole spending review, will be the Department's budget. So it is probably better to wait for that point, then we can get a much clearer sight of how that works.

Q12 Richard Graham: The Comprehensive Spending Review (CSR) comes before the White Paper, does it?

Mr Duncan Smith: Yes, absolutely. The White Paper will be in the autumn but, for obvious reasons, it is better to come after the spending review because then you are dealing with facts rather than a negotiation.

Q13 Richard Graham: So, to what extent will the recommendations in the White Paper alter according to the amount of money that is made available in the CSR? For example, is there a department plan A, in terms of what you would do on Single Unified Tapers if the results from the Treasury is X, and if you get rather less money then there is a plan B which has a different approach to the taper?

Mr Duncan Smith: No, there is only one plan, which is that, after discussion and analysis of the various options, we will agree which is the best option. That of course will also be agreed as to whether that has any costs—it may or may not—and if it does what those are and how that will be funded, and then we will take that forward. There will be no point in leaving options out there: what will come forward in the White Paper will be our preferred position on this and the figures around that will be quite clear.

Q14 Richard Graham: There is not a particular option at the moment that the Department has already modelled, which shows that it is easier to access, simpler to administer and likely to produce better results over the next period, which you would advocate?

Mr Duncan Smith: Well, I can only personally go back to the position that I originally took: I think the Universal Credit is the best way forward but we are dependent on the consultation and the discussions with others. The Universal Credit was the thing that I came to the Department with, essentially, and the Department has worked hugely on it, but there are other options, and we are looking at them all and proving them or disproving them, as the case may be.

Q15 Richard Graham: What will be the impact if the Universal Credit were to go ahead? What would be the impact in terms of IT systems that will need to be developed by the Department? How confident would the Department be that there could be an IT system robust enough to make that work, bearing in mind all the various other IT hazards we have seen over the years?

Mr Duncan Smith: This Department, historically, under the last Government as well, has a pretty good record about managing and installing IT systems, so of all the Departments out there—I say this with reference to my Permanent Secretary who I am sure will be happy to take you through some of their success stories, if you wish us to do that—the reality is the Department is accepted in the Treasury, HMRC and everywhere else as being probably the best department for implementing IT programmes.

The second thing is that I do not believe that there is the necessity for a major IT programme associated with this. I will not explain to you today about that because that will become clear when we do the White Paper. But, should we go to the Universal Credit, I believe it is a middling sort of IT change that is required, some of which was already anticipated, both in the HMRC and in the Department before I arrived—not on the basis of this but in further changes that will be made. For example, the discussions you have heard about changes to PAYE and various others—these all become part of the same. So I do not think it is on the grand collapse scale that we have seen in the past, far from it, it is well below that. Given the history and nature of the Department in handling that sort of scale, which is medium-size and probably less—lower IT projects—I have huge confidence that we will be able to get this done. There would not be a lot of risk, in fact there is very little risk attached to it.

Q16 Richard Graham: All the costs of that are already built into budget proposals?

Mr Duncan Smith: Absolutely. By the time the White Paper comes forward they will be clear and built into it.

Richard Graham: Thank you.

Chair: I will not mention the Child Support Agency (CSA) and computers, although I have to say the Pension Service was very good. I am going to bring in Karen and Sajid very quickly and then Harriett.

Q17 Karen Buck: Secretary of State, if I understood you rightly, you were implying that the main savings you would expect from Universal Credit would come from fraud and overpayments in the current tax credit system?

Mr Duncan Smith: No, I did not say "main". I said an illustrative area of saving that we believe will come from this change will be in that area, which has been very difficult to control over the last 10 years.

Q18 Karen Buck: Have you reached an agreement then with the Treasury, that any savings that you would make, which would be made from fraud and overpayments in tax credits, would be counted against savings in the DWP budget?

Mr Duncan Smith: We are discussing all of that right now.

Chair: That is the robust discussion. Sajid?

Q19 Sajid Javid: My question was pretty much on the same lines: clearly, if these proposals are implemented the more people are going to work and the less state dependency, and there will be savings across Government in many Departments, not just with what my colleague, Karen, mentioned but maybe in health, education and so forth. Is there a general recognition of that within Government among your colleagues that your Department can generate savings for them all, and in that case is there any less of a silo approach in looking at that?

Mr Duncan Smith: These are discussions and debates that have to be held within Departments. It has to be said that these sorts of savings are always divided into hard and soft savings. Hard savings are the ones that you can recognise within the time scale of a spending review, and those that are tangible: fraud, error, getting people back to work, taking people off benefit. Those are very clear savings that are likely to be made in the course of what I call "hard savings".

The savings that I believe also come directly as a result, and I think are accepted across the piece now among think tanks and others who look at this, are the other connections. One of the points that we have always made is this: if you want to know where some of the greatest call on the health service is, go to the areas of highest unemployment, with lower life expectancy and problems there, and you see the connection between workless households and health problems, depression and things like that. So we believe that the system will be more effective in getting people back to work, maintaining them in work, allowing the worker essentially to be clear that it pays and that it does pay. I am pretty certain that that will have an effect in the longer term on things like health problems and various other issues around it. However, I am not advancing that right now here, I am simply saying that, in the shorter term, we believe the system will be better at affecting the benefit system by getting people back to work and by improving the way the system works right now, which almost every official in the Department has told me they believe is close to being broken. It is difficult to maintain.

In fact, I wonder if I might just ask the Permanent Secretary to relate one story: we do this "Back to the Floor" where officials go to Jobcentres and other locations and work for a week and the Permanent Secretary came back from one a week or two ago. I just wonder if he could relate that because it is illustrative of what the problems are here.

Sir Leigh Lewis: It was really interesting. I was at a Jobcentre in East Anglia and sitting alongside a lone parent adviser. She met and talked to one of her customers who knew her well and had come in to ask for advice. This was a very experienced member of staff; this was not a new member of staff having to work it all out on day one. The circumstances were quite interesting: this was a single parent with four children, I think from somewhere around the ages of six up to about 12, and one of the children was disabled. She was a carer of course for all the children but especially for that child.

Her question was a very simple one: she was already doing some part-time work as a school dinner lady in the school that two of her children went to, and the school had asked her to increase her hours at the start of the new term. Her question very simply to the adviser was, "Will I be better off? If I do that and get this money what will happen to my benefits? Will I end up better off?" It took the adviser three quarters of an hour, even with the technology that they have on their desktop, to go through the "better off in work" calculations. It took the adviser three quarters of an hour to arrive at the conclusion that she would be better off. But it was immensely complicated and it brought home to me just how complex this system has become.

Chair: Harriett?

Q20 Harriett Baldwin: Thank you. The paper outlines the two major problems that you are focusing on at the moment: the complexity and the work incentives. One other aspect of the system that is often mentioned as a problem is the fact that it creates disincentives for couples to bring up children together. I just wondered, which of the proposals you think would have an impact on that?

Mr Duncan Smith: It is always difficult to project forward in that area about the people bringing up children together or apart. I think that it is accepted now. I think Frank Field was the first to raise this, that there is a problem within the benefit system, in the sense that because of the focus—and some would say legitimate focus—on trying to eradicate child poverty by focusing on lone parents who were in the worst situation, it is accepted, the by-product of that, not intended I'm sure, is that there has become a differential on benefits between couples bringing up children and lone parents bringing up children.

Trying to eradicate that without damaging the work that has been done on lone parents is important. I think the system as people go back into work would help that. I think it would help eradicate that by essentially making work pay for whatever relationship was bringing up those children, and I think that would help. What does that mean? That simply means that people will make the choices that they make. It is not the job of the Government to go dictating to them in any way at all. But providing the Government does not skew that process in one direction, then my general view about it is that people will make those decisions in the most positive way they can for the raising of their children. Certainly, being together will take more pressure off the lone parent but that is a decision that they will have to make on balance of their situation.

Q21 Harriett Baldwin: So will an outcome of these potential changes be that you will no longer feel that you are better off apart?

Mr Duncan Smith: I think the best way to answer the question is: will it go towards restabilising and equalising that process? I think it gives us the opportunity to do that; how far we wish to go on that is dependent on finances and discussions within Government, but the bringing together and creating of a single benefit allows you to manage that in an easier way while sustaining your support for those who genuinely need it.

Harriett Baldwin: Thank you.

Chair: Kate, very quickly.

Q22 Kate Green: Yes, I just wanted to follow that line of thought a little further, because I think the evidence is that, in terms of material deprivation, single parent families still suffer more. So I was reassured, I think I heard you say, Secretary of State, that it was not about skewing the system one way or another.

Mr Duncan Smith: Not at all.

Kate Green: In terms of your thinking about supporting couples to bring up children together, are you particularly thinking about situations where couples may not have both members of the partnership working? Is that a priority for you or are you looking at some sort of evening out of the premium for hours worked for couples?

Mr Duncan Smith: This particular reform is aimed at the process of taking people from where they are through to work, so work is critical within that process. So obviously making work pay for lone parents or couples is quite critical for the household. The one thing about the Universal Credit, which is why this makes it slightly easier if we were to go there—I say "if" and obviously that is still a matter for discussion—is that the Universal Credit allows us to look at household income in a way that the present system does not, so that we can understand better what is happening within a household rather than just focusing on an individual. That allows us therefore to understand the totality of what is going on in that household: who is working, who is not working and what effect that has on their income. So it will allow us to understand better, I think, what is happening to households that are out of work and to what degree that income, or lack of income but income through benefits, affects their lives. So I think the idea of the Universal Credit allows us to understand that better.

At the moment the tendency is to make assumptions that there is no other income coming into the family. Sometimes there is, that household income works and other cases there is not and that income is too low. So the Universal Credit I think will allow us to analyse what is going on in a household far better than we do at the moment. I think it will have a positive effect—that is what I am saying—both for lone parents and couples.

Chair: Did you want to come back, Harriett? No? Stephen Lloyd?

Q23 Stephen Lloyd: Thank you, Secretary of State. As you have already alluded to a number of times on the Universal Credit and the single payment system, I am sure you will be unsurprised to learn that we have had representation from a number of different groups representing people who are in a disadvantaged situation. Although broadly they can see the advantages of a single payment system, there are elements of concern that it will not be flexible enough to cope with some of the chaotic and very changeable situations that do apply to people in that position. Are you confident yourself, if we do end up with a universal payment system, that it will be able to cope with that potentially chaotic group?

Mr Duncan Smith: What I am confident of right now is that the present system does not. It is one of its biggest problems. The reason why HMRC and others have this terrible level of overpayments is because, in attempting to forecast a stable period for somebody, we find people on low incomes will often rotate in and out of work, they have difficulties, they have problems, particularly lone parents get into difficulties. The present system is set up so that there is a constancy over a period of a year and it assumes that; therefore, that is why when you pay someone you are constantly trying to get money back from people. That is also not fair because once you have paid somebody money, trying to get it back off people on low incomes is both difficult and becomes quite oppressive. You can recognise why we have to try and get the money back but it does not make life easy because, as you know, people on low incomes, when you pay them money like this, tend to spend it. You can argue that is the biggest form of money going into the economy because it is spent almost immediately, for obvious reasons, because it is enough to live but it is not enough to save.

So what I believe the present system will do in two areas, is to try and create a real- time system which will allow us, therefore, to stop this process of trying to forecast over a long period but to understand, in reality, what is happening over, say, a period of one month. This will allow us to pay a figure of money to somebody for that month, knowing that the next month things may have changed and so that figure may change as well. That, I think, will hugely improve the quality of life for people on low incomes because, for once, given the nature of often quite fractured processes in their lives, we will be able to track it and understand it better, and it will also allow us to work on something else—which we have not talked about yet—which is the new Work Programme. The unified Work Programme we are bringing in has a very tailored concept of support and help; it has to be. The two would go very well together because now we will understand financially what has happened to somebody. Also it allows the Jobcentres to spot this and get people into the Work Programme at key moments, knowing what is happening to their lives through that finance, rather than waiting for long periods until we figure out that some family is in difficulty. So I think the two would come together and should be a positive reform, particularly for people on low income: it has to be said they are the people who will be most positively affected by this.

Q24 Stephen Lloyd: I would agree. To make that work, though, we are back to the IT, in the sense that you have already alluded to the fact that you are reasonably confident that the level and complexity of the IT needs for this would be manageable. I also accept that in many ways the DWP have handled IT fairly well over the last 20 years, compared to the tax authorities. But, like everyone else around the table, I have had numerous casework from numerous constituents in this area and it can vary or the circumstances can change, literally within a couple of weeks, and that change can be catastrophic because individuals or families in that situation are right on the edge. So I just want to seek further confirmation that, in your view and in the Department's view, this level of IT, as far as you are concerned, is very manageable?

Mr Duncan Smith: I can only give you my view and I will ask the Permanent Secretary to tell you what he thinks from an official standpoint. That might help you a bit better.

My view about this process is that I would not engage on it if I felt in any way that it wouldn't. The key thing, as I keep coming back to with this, is that right now the present system is appallingly bad at helping people who have these very changeable arrangements in their lives. If someone goes into work for a month or two and it does not work out or they crash out for a while, they have trouble getting their Housing Benefit back. We know what goes on. I mean we have all had the endless stream of people coming in saying, "Going to work is a process that makes you worse off if it goes wrong, so I never want to do it again". That is what stands between people then trying one more time. It also means that their income falls before coming back up. So the system itself right now has a major problem, in the sense that for the very worst off it often can affect them rather badly.

So changing this I believe—coming to a real-time process—will allow us to radically change that process. I believe, therefore, that the system is manageable and I also believe that the principle of the system allows us to focus in on those very changeable processes in somebody's life, someone who is at the bottom end of the income scale trying to get into work, particularly, in this case, lone parents. I think they are one of the groups that often find it difficult to sustain work, for reasons to do with care and responsibility and we will understand that far better.

Stephen Lloyd: I certainly wish you every success with that because—like you—I share a complete conviction that that approach is probably the only way that we can move forward with this. Where I am a little more anxious, perhaps, is whether the IT can cope.

Mr Duncan Smith: Perhaps I could ask the Permanent Secretary, rather than hear from me. I am a politician.

Sir Leigh Lewis: Well, simply to say, no Permanent Secretary, I do not think, would ever regard significant IT change lightly, because with any IT change there is always a degree of risk. That is in the nature of the IT business. But we do have a strong record in the Department of introducing major IT change. For example, the introduction of the Employment and Support Allowance required a massive IT re-engineering in the Department, which went successfully. As the Secretary of State has said, if we move to a Universal Credit system, the IT changes are significantly smaller in scale and complexity than that. We do have now—in a way that neither my Department nor, I think, any part of Whitehall had a decade ago—some very professional IT specialists, both inside the Department and in our supplier community. So you never take these things lightly, you never say there is no risk. You plan, you check, you test, you probe. But we do have a very strong IT record and we do believe this is absolutely doable.

Q25 Stephen Lloyd: I certainly wish you good fortune with that, Permanent Secretary.

Another issue that again is something that affects my postbag considerably since the coalition Government was put together—I am sure the same is true for all my colleagues round the table—is that there are always going to be a number of people, including vulnerable groups, such as disabled people, who may never be able to work. How can you ensure that they are not disadvantaged under a system that focuses inevitably on incentivising people to work, and can you guarantee that they will continue to receive benefits at an adequate level in the long term?

Mr Duncan Smith: I think the simple answer to that is, I believe, yes. The reason for that is the way in which we remain committed to the process of support for the disabled, Disability Living Allowance (DLA) and others, and I am sure we will come to that later on in the processes today. But there are also the Work Capability Assessment that we are shaping up at the moment and the Employment and Support Allowance as shaped and as inherited from the last Government. The way we are looking at that will ensure that, rather than simply writing off people on to Incapacity Benefit and then never seeing them, which was hugely the case in the past: people just did not get seen—I think something like nearly 50% of those on Incapacity Benefit had not been asked to be seen by anybody for over six years. Many of them could have been helped by those sorts of interviews.

So with moving people onto ESA, Employment and Support Allowance, knowing that it has these two particular categories, that of support and that of work-related groups, the support group obviously will have to have strong support because they are not capable of work, will not be deemed capable of work but need to be supported and helped. Then the other group of course is the work-related group, which it is believed might be able to do some work. Some of them may be transitory; people, for example, undergoing chemotherapy or whatever, and they may be seen later on as being able to go on to Jobseeker's Allowance. It gives us the flexibility with the Employment and Support Allowance of defining people properly and moving with them as their circumstances change, which is important, I think, even in our general view.

So it is a commitment of ours—I think the Chancellor made it again the other day when he was in the House, but certainly a commitment I would back up—that what we want to be able to do is this: for those who have the greatest difficulty we should support them in the greatest way that we possibly can because these choices are not open to them. So while we are after getting people into work, we are not after getting people into work who genuinely cannot work and that is a matter that will be defined, endlessly and constantly, as we review the process.

Q26 Stephen Lloyd: Presumably, a core part of the Department's thinking will be factoring in the additional living costs of disabled people, which are still going to have to be met from the Universal Credit system?

Mr Duncan Smith: The reality is, things like DLA, they will continue. There is not going to be a change to that, in the sense that DLA is not an employment-related support. DLA is a lifestyle-related support. It is because people, both in work and out of work, need that support to be able to conduct their lives. I think that is accepted by every politician. I think it is an excellent concept and it deals with those particular areas. That is accepted. So it is not part of that process, in so far as this is about getting people Universal Credit or one of the others.

Q27 Stephen Lloyd: So that would include, Secretary of State, things like Access to Work?

Mr Duncan Smith: Yes, all of that of course must be reflected in the nature of what we are trying to reform.

Stephen Lloyd: Right, okay. Thank you.

Chair: Margaret, very briefly?

Q28 Margaret Curran: Can I just ask: are you required to undertake an equality impact assessment for these proposals and are you going to do that?

Mr Duncan Smith: I could not hear you, sorry.

Margaret Curran: Sorry, are you required to undertake an equality impact assessment as part of these proposals and, if so, will they be published at the time of the White Paper?

Mr Duncan Smith: We certainly are, yes. I will have to have a discussion to see how far advanced we are on it, but at some point it will be published, whether it is right at the time or will come out during the process of the White Paper. But you will forgive me if I come back and answer that directly.

Chair: We will move on to questions on the labour market and work incentives. Oliver Heald?

Q29 Oliver Heald: On the face of it, it is quite encouraging. We had 184,000 more people in work in the last quarter, the best result for 20 years. The Chartered Institute of Personnel and Development say that in the south-east, the east, the midlands and London there are very strong recruitment intentions by personnel directors. Are you satisfied that there will be plenty of jobs for people to go to, as you try to move people from Incapacity Benefit and from long-term worklessness into work?

Mr Duncan Smith: Mr Heald, I will give you a heads-up on the figures that were published at 9.30am this morning. You may not have seen them but they are quite interesting. So perhaps I could start the answer to this by reading out some of the figures, which I think are quite fascinating. The figures for the last quarter show that employment has risen by 286,000, which I think is the largest rise since 1971. So, this morning's figures are quite startling. Unemployment is down by about 8,000 in the latest figures, but what is interesting is the claimant count is up by about 2,300. The vacancies are around about 470,000. It has gone down a tiny amount but it is, give or take, within the area that it was when you last looked at these figures.

In essence, what is going on here right now is it's a sign that even at the time of coming out of recession, at the beginnings of this, there are still a number of jobs available. It has to be borne in mind those are advertised vacancies at the Jobcentre over the period. It, of course, doesn't take into account the jobs that were advertised and have been taken, nor does it take into consideration the fact that there are plenty of jobs out there that are not advertised with the Jobcentre and are informally advertised and taken up without any involvement of the Jobcentre. While I am not saying this is a great situation to be in, my general view is that it's at least a reasonable position to be in.

What I do say is that the number of people going back into work is surprising in the sense it's the largest since 1989. We think that is hugely to do with a lot of younger people, students, et cetera, now moving into work directly. It is not, by the way, predominantly women. Immediately people might think that this is a lot of women as second earners in households moving in, but the majority are men and we think, therefore, it is a lot of people who weren't originally on that charge. We think, therefore, that the situation, while not being brilliant, is moving in the right direction. I think that there are jobs available and I believe that the private sector will provide those jobs. As you will recall, the forecast from the Office for Budget Responsibility (OBR) was, including any forecast shake-out in the public sector, that there would be a net increase of jobs in the private sector thus leading to lower levels of unemployment. In answer to that question, my view is that that is the case—that those jobs will be created.

Q30 Oliver Heald: You have visited disadvantaged areas, I would imagine, more than any person coming into office as a Secretary of State. In fact, you even persuaded me to go and work in a homeless hostel for a week up north. Do you accept that there is a problem that many of the people that you're trying to help are in parts of the country where the labour market is traditionally quite difficult, where successive Governments have moved public sector jobs into those areas in order to provide some employment? As we come to the necessary reductions in the public sector, are you going to face a problem in providing the jobs in those areas?

Mr Duncan Smith: It is not my responsibility to provide the jobs in the specific areas, or provide the jobs. I don't create jobs; the private sector will create the jobs. The public sector does provide jobs but, by and large, the growth we have forecast, and the OBR has forecast, is that the private sector will create those jobs. The key question is: why would they create jobs in these areas? When I was looking down the vacancies last night what I was interested in was that, even now, the spread of vacancies from the Jobcentres is pretty even. There is a slight small change between, say, the north-east and other parts but by and large they are pretty much the same. Those jobs that I referred to—those 470,000 jobs or so—are spread pretty evenly around most of the regions, so those vacancies are there. My anticipation is that as more jobs are created those vacancies will be spread in much the same way.

This is what the Work Programme is all about. My responsibility is to make sure that as far as possible my Department can help people be ready for work, ready to take that work, and then ensure that they do take that work. What has happened too much in the past is that people have been written off and forgotten about and left on the side. I think the important thing about the Work Programme that will help with this is that in areas that have traditionally had difficulty, the Work Programme, with its very tailored support, should be able to help get people through their problems—it can be literacy, it can be drugs, alcohol abuse—the beauty of the sort of black box programming of the Work Programme that allows these private and voluntary sector organisations to do whatever is necessary to get somebody ready for work. That is the key bit. Too often in some of these areas people have been out of work for a long time, they've lost confidence, they've lost courage, they've lost any sense of self-worth. What the Work Programme I hope will do will be to tackle that and start to bring them back to the work force and thus we'll be able to make sure that those areas see their employment levels rise, which I anticipate.

Q31 Oliver Heald: One of the concerns about the vacancies—and this is a long-standing problem—has been that many of them are in areas where the skills are not readily available in the work force and so you have jobs that are hard to place because the skills just aren't there. Are you working closely with the Department for Business, Innovation and Skills (BIS) team, and others, to ensure that the potential work force has the skills for the jobs that are out there and which the companies want done?

Mr Duncan Smith: The answer to that is that we are, but I'm always a little bit sceptical about this. There is a tendency for people to say that the problem is the jobs that are coming up are mostly skilled jobs and people don't have the skills. Actually, they're pretty evenly spread and my view, when I look at the jobcentres, is that there are fewer skilled jobs available in those jobcentres as well. Quite often it has been difficult to get people to come and take those jobs. That has been our bigger problem; not so much training them up for this. I know this is anecdotal, but we're human beings and anecdotes sometimes work. The reality is I did an interview last night on Sky and the reason I did it was because it was a follow-up to a programme that Sky had done on Merthyr Tydfil. It was quite an interesting programme, where they were talking to two employers in that area who had both said that they were ready to employ people from the local area in their businesses. One was an open-cast coal mine where he was bringing forward programmes to develop young people into the business and they just couldn't get people to come and apply for those jobs. In the end, they cancelled the programmes.

I'm not saying that proves anything particularly but it does suggest to me—and again I come back to the Work Programme—if we get this right, and I believe we will, the Work Programme allows us to ensure that people are ready. By ready I mean, as I said earlier, sometimes personal issues and problems can stop them; a lack of the right culture to go into work. Some of these kids are growing up in households where no one has had work for a generation or two generations, so you can understand culturally: why would you work? Nobody else works around you, you have no work support. So, dealing with that is critical and the Work Programme should be able to do that. The second part I think it's very important that the Work Programme must be able to do is to get people, as it were, tidied up ready to take work. Sometimes particularly young people will go to interviews without any sense of what is expected of them and therefore do not respond well and employers won't take them. So, getting that sorted is arguably the most important feature.

Generally, serious detailed training should happen once in work for jobs and there I think Government has a role to try and encourage and support industry to get that done quickly so that then their training takes them through into work. While you can train people for specifics outside of work, too often what has happened in the past is organisations have trained people in one area to be, specifically, carpenters, or whatever it happens to be, only to find subsequently there are no job vacancies or anything that needs that skill and so they're back to square one. Their expectations were raised but they can't find it. So the key thing is: making people job-ready is an important process that the Work Programme will do. So my sense of this is if the Work Programme we're doing is tied directly to the changes to the benefit system, those two together will make it work. One without the other will make it more difficult.

Q32 Oliver Heald: One of the problems is that traditionally employers have been rather reluctant to employ people who have been off work for a long time. Is there any work that you're doing, or any reassurance you can give, that somehow it will be possible to persuade employers to take somebody who has been out of work for a long time or who has had a disability? It is a cultural change that is needed, isn't it?

Mr Duncan Smith: It is, and I believe employers have to ante up to this as well. I was in the private sector and know what goes through your head when you see somebody who has not been employed for a while and you question whether they're going to be as focused in work. That, I think, again, is where the combination of the Jobcentres picking the right people and the Work Programme cutting in for the longer term is the point about the Work Programme; it picks up the people by and large beyond a year unemployed, and then can assure the businesses that what they're seeing in front of them is now the product of serious, detailed work to help that individual get back their self-confidence and their purpose and their focus. That is the key: that we should be able to reassure those businesses and talk to them.

After all, the deliverers of this—I am sure you want to ask more questions about this later on—will themselves be private sector and voluntary sector organisations. If we use, as I expect we will, community and voluntary sector groups in the local areas to deliver a lot of this they themselves know the businesses in those local areas. I would expect them to be able to say to businesses, "Yes, this individual has been unemployed for a while but I can promise you the work we've done has restored their sense of themselves, their faith and their confidence, and you will get a very good deal if you take this individual on". So the reassurance at a local level is what is critical rather than from a Whitehall-based individual. Permanent Secretary, do you want to say something on that?

Sir Leigh Lewis: Yes. Could I just add one thing, which is that a programme that is perhaps slightly less well known than it ought to be, is already on offer, can support both Jobcentres and private and third sector providers, and has been there for many years under successive administrations? That is the Work Trial programme, under which an employer can take on someone who is unemployed for a period of some weeks without any obligation on the part of the employer or the individual. That gives the employer a kind of risk-free period. It has very high success rates in terms of the proportion of people who start on that programme who then are hired by the employer.

Mr Duncan Smith: Which will remain.

Q33 Oliver Heald: That is a very good scheme, yes. Finally, on barriers to achieving your aims, one of the things that has been suggested is that if we were to change the arrangements about security of tenure in public sector housing that might be a perverse incentive, that people who were on benefits might not want to get into work and get off benefits because it might put their house at risk in some way. Are you able to give any assurance on that point?

Mr Duncan Smith: I know this because I initiated a little bit of this debate a few months ago. I didn't necessarily plan to initiate it but none the less I did, I recognise that. In the time that I was at the Centre for Social Justice and we set that up and did a lot of work and went round many of the different communities, it became obvious to us that the UK is quite unique, or it's close to being unique, and has this incredibly large number of workless households: as a proportion of all households, close on 20%, which is significant. One of the issues and problems when you talk to people in those areas is that often estates were set up in areas where there used to be a lot of work. In my own area, the other side of Barking, you find the Lee Valley was a thriving area of manufacture: a lot of innovation like the light bulb was basically invented there; a huge, tremendous aircraft industry; Ford was up there doing a lot of manufacture. There was secondary manufacture that followed on from big manufacturing plants with people doing die casting with 20 or 30 people in a small factory. A lot of that over the years has gone as more and more of that manufacturing has moved out or gone abroad.

So the problem for many people living in an area like that is that the jobs that their grandparents used to do are no longer available to them in that sense, and while other work has come in—just going back to the training point—they may not be necessarily ready for that. The second thing is, there may be jobs elsewhere that require them to travel some distance to work and they're put off because they think that the amount of money they get going into work doesn't cover the travel-to-work costs, so that's an issue. The second area is where they find there are areas where they may have some skills and they could meet those even further afield, they might like to move to, and they'll often say, "Why would I take that chance because my family and I have got a house here? I can't do anything about that". I know that the Department of Communities and Local Government (DCLG) is looking at all of this to figure out how we can help and assist people who may want to do that. I don't say everybody will, but I say that the problem at the moment is, because of the way we run all these things, they run together, they mean that people often find themselves locked in against their own interest into areas where they might want to be more flexible about moving. Clearly, it's important for us to try and get work into those areas at the same time but to give people the sort of choice that people on higher incomes have is critical. People further up the income scale think nothing, sometimes, of moving to different areas because, of course, their housing is portable. They can either rent some other place or sell a house or rent it out or whatever, so they're not locked into an area, which allows them to move to adjust their income and to change their job prospects. We need to think more laterally about trying to find ways of doing that for others.

Q34 Oliver Heald: I'm not supposed to ask another question but you've encouraged me. One of the things that does seem daft about our country is that you have something like the creative industries where it's doing very well, and it's expanding, and yet there are skill shortages for the technical back-up jobs that are needed in that industry. You get the situation where there are all these potential vacancies, but they are in the skill shortage category. I do think that as a new coalition Government coming in, trying to solve some of the problems, getting this issue about training the right skills is pretty important.

Mr Duncan Smith: As you know, the coalition made a big commitment to that and there are 50,000 extra places on apprenticeships and more. I think the key is to encourage young people to take up the skills in an area that needs those particular skills. So I was over the moon when the coalition wrote it into their plan that they would increase those at the same time by 50,000. That is a good start.

Oliver Heald: Thanks very much.

Chair: I think Harriett wants to come in.

Q35 Harriett Baldwin: I wanted to slightly change tack on this transition into work topic and talk about, effectively, the behavioural aspects of the current benefit system. You outline in the document about the 96% effective marginal tax rate that someone faces in some circumstances going into work and what a disincentive that is. The document talks about a 75% benefit withdrawal rate, or a clear rate effectively of increase in income that someone would have overall from extra hours of work. I wanted to hear a little bit more about the modelling that you have been doing at a 75% effective marginal tax rate. How much does that increase the behavioural incentive to work and how sensitive is the assumption around that rate to the success of encouraging people, giving a behavioural signal for people to go into work?

Mr Duncan Smith: The principle behind this idea of the single benefit with what we would call the single taper rate is at the moment what happens is you have a number of different benefits, between 30 and 50; it depends whether you count supplements or not. The official one is around 30 but there are additional ones. Often many of them are tapered away at completely different rates. For example, Housing Benefit is tapered away at 100%, so for every £1 you earn you take away £1 of Housing Benefit. Others are tapered away at maybe 70% or 80%, some at 90%. The first problem this would eradicate is that, as the Permanent Secretary said earlier on, an unemployed individual, possibly a lone parent, sits down to look at the prospect of doing anything other than 16 hours—16 hours will be clear to them in a sense because it is particularly influenced by the amount of money that goes in at that point— but behind 16 hours and above 16 hours there are major cliffs of earnings that you have an awful lot taken away for each hour. So it is very difficult for them to figure out whether or not, if they go on to work extra hours or work slightly fewer hours, if there was a job for 10 hours or 12 hours, it would be worth their while doing it because of all these different rates of withdrawal that make it difficult and complicated for them.

I think the first thing that happens is that in simplifying that process you make it much easier for the individual to understand. The Permanent Secretary told us a true anecdote about a lone parent coming in front of this person at the Jobcentre, but for every one lone parent that had the courage to do that there will be many more who simply make an assumption that it's just not worth doing that because it doesn't work out. So there is a big problem in knowing that people won't always go in front of an official, because they might be slightly concerned about what an official might ask them and all the rest of it, so they may not go. For them they will just make an assumption that it didn't work, too difficult to calculate, can't think it will work and won't do it. So the first thing that simplifying it does, just by the very act of simplifying it, is it allows them to make that very simple calculation, "I know they're going to take 75% of what I earn away, this how much I'm going to earn". That simplification helps and that acts as a bonus for them to say, "I can take that decision about taking that work myself and if it's set at that rate I can figure out whether it's worthwhile".

Then you're into the issue about where you set the taper and that, of course, at the end of the day is a political decision. That is a decision made by a Government that decides the balance between making work pay and getting an earlier return for the Exchequer on the money that you already pay somebody on benefit. That is a legitimate debate. I'm not going to give you the optimum rate at the moment, because the White Paper will make that clearer, but that is simply the debate. Obviously the lower the taper, the more somebody retains of their earnings, you could argue there is a point where there is a greater financial incentive. The key question here, that I keep dealing with and people need to understand, is somebody needs to be able to make the decision that going to work is better for them than being out of work, if they can do it, to make that choice. People say they should go to work because it's right—of course, people should go to work because being in work is better than not—but you can't moralise for people who have perhaps come from a background where no one has ever worked because it doesn't mean anything to them. What they think is being out of work is just the way that things are and getting to work may be difficult and a problem. So we have to say, "There is a good reason for being in work. It's because you earn more and you have a chance to change your life and improve it". It seems like that's a logic and I think, by and large—and I may be a bit of an optimist—my view about human nature is that people will always take the decision that works out best for them and their families. If that's the case, if we make that decision a bit easier then they'll take that decision. So we think there's a dynamic effect that takes place once people can see clearly that that change will affect their lives, and the level of that taper is the key.

Q36 Harriett Baldwin: The document mentioned 75%. That would be a pretty big deterrent to most of us, I think, in terms of a marginal tax rate.

Mr Duncan Smith: But even now that would be less than the marginal tax rate for many of them. A lone parent, at 16 hours, can be facing withdrawal rates on average close on 95%, so even that would be less, although there may be an argument for a lower one.

Q37 Harriett Baldwin: How dynamic is your modelling work in taking into account that behavioural shift at different levels?

Mr Duncan Smith: As far as I believe and what I understand, and the modelling that we've done—and by the way, I'm very happy to give the Select Committee a proper view and a presentation with all the modelling to show you how it works. You can test it with questions and we can try and give you some answers about what happens to different groups. We are developing it all the time, but it's pretty much taking most of that into consideration.

Chair: Karen, would you like to come in?

Q38 Karen Buck: I have a quick question. I think we're all completely convinced by the argument that increasing work incentives through reducing marginal rates of deduction is sensible, but how does this square with the fact that the Budget, according to Red Book calculations, significantly increases the number of households who will be subject to the highest level of marginal rates of deduction?

Mr Duncan Smith: Without the Universal Credit, you could argue that would be the case. That is why, in the process of the spending review, my argument, my debate, my discussions, conversations, have made the point that the Universal Credit or the taper, or whatever it happens to be that we decide on, has a massive importance within this. Without it you could end up in a different situation where you are going in the opposite direction. So it will allow you to spread this much easier.

Q39 Karen Buck: It is fair to say, as you have made clear to us already this morning, you haven't completed those negotiations. You don't have yet the money or the commitment on that credit. Do you not accept that it seems a little bit perverse to be having a Budget that takes you backwards while claiming that your whole principle is to move forward on this?

Mr Duncan Smith: Well, Ms Buck, to be fair, I didn't design the position that we're in right now, which is that we have a deficit reduction programme on. Of course I, hands up, would love to be in the situation in 1997-98 when the incoming Labour Government did not have this problem. We have a problem; I have a commitment. We have a wider commitment to the taxpayer, as you know, to rebalance the economy and we're trying to do that. What I have made a commitment to do, overall, is to try and make sure that whatever changes I make, as they stand within the spending cycle, do not materially affect or hurt the worst off in society. I would urge you to look across the balance of the spending review and the Budget. So that's why we're sort of halfway through the process. Most of these measures haven't come in yet and won't come in for a while. That's why it's important for us to get to the 20th of October and see the whole thing in the round. I certainly did not come to this job to see the worst-off suffer more. That's the key.

Chair: We still have lots of different areas to cover. We now have some questions on the Work Programme. I think you've already covered some of it, but I think Shabana has different things to draw out from that.

Q40 Shabana Mahmood: Thank you, Chair. Secretary of State, you have already talked a bit about the Work Programme. Before we get on to the specifics of the framework, can you talk us through how it's going to be funded?

Mr Duncan Smith: The Work Programme will be funded through the Department but at the same time recognising, of course, the purpose of the Work Programme is to deliver more people in work and so as we deliver more people in work there is a benefit saving. This is the origins of the notion of the Departmental Expenditure Limit-Annually Managed Expenditure (DEL-AME) switch, which confuses people quite a lot. They think it's a sort of electronic implement; it's not. The DEL-AME switch is that process in which you spend to save and as you spend a certain sum of money you save an awful lot more in return, and that's the key.

Q41 Shabana Mahmood: How is the DEL-AME, or AME-DEL, I'm not sure of the correct form—

Mr Duncan Smith: DEL-AME.

  Shabana Mahmood: How is that switch going to work in practice, in terms of this concept of investing to save? How confident are you that that is conceptually as well as practically sound, that it will deliver all it is supposed to?

Mr Duncan Smith: That is at the moment part of the discussions that we have with the Treasury who will quite legitimately ask us to be able to prove that concept to them, and once we've done that then these things will eventually be agreed. The reality for us is that the Work Programme is about that, because if there isn't this switch then it just becomes an expenditure item that saves nothing. In other words, if the Work Programme doesn't get people back to work then it becomes a net expenditure and we won't have succeeded.

Q42 Shabana Mahmood: How advanced is your modelling on this?

Mr Duncan Smith: It's pretty advanced. The question is: whether we accept over the period of the Work Programme that the forecasts for that are correct, and you will see those reflected in the Autumn Statement. You'll forgive me again, as often in the course of these questions I'm not able to give you any detail because I am right in the middle of it right now and I don't want to see it on the front pages of the newspapers, not that they would do that.

Q43 Shabana Mahmood: No one's watching. If we move on from that then, what do you see as the role of Jobcentre Plus in the new Work Programme world of getting people off welfare and into work?

Mr Duncan Smith: Jobcentre Plus remains the workhorse of government to get the vast majority of people back to work. That's what it does and it will continue to do that. We will, of course, look for better ways to do it, new technology, everything. It's constantly changing. Within the spending review of course it's changing, but it's changing all the time because we find better ways and better ways with technology to get people to work. There was a time when you had to go in and interview, you had to sit down with somebody, you had to discuss the card that was on the board. Now, of course, you can go into a jobcentre, there's a screen there, you can dial up on the screen, find the job. You don't have to talk to anybody if you see a job you want. It's possible to go to your computer at home, to interrogate it, and that is the whole idea. So, the more you do that the less contact time is available and people can find their own jobs on the basis of the jobcentre. So, Jobcentre Plus remains the workhorse for getting people back to work.

They will also be the gatekeepers to the Work Programme. It's Jobcentre Plus that, by and large, decides who should go across to the Work Programme and at what point, because we do not want to start a Work Programme on somebody who is going to be getting back to work anyway or that Jobcentre Plus can deal with and get them back to work. By and large, most people won't go to the Work Programme until they have been out of work for about a year. Some might go earlier. You might be dealing with ex-offenders who have particular problems; maybe young people, People not in education, employment or training (NEETs), who might go earlier if the Jobcentre Plus thinks that they are relevant. We believe quite a lot of discretion should be built in for Jobcentre Plus but the majority of people won't break through until a year. They might go through a year if the Jobcentre Plus thinks they're in the middle of something that may yield them a job, and they feel confident of that, and I think it's right to give them the discretion to say, "No, they don't need to go on the Work Programme at this point, but these ones do". So that's how it will work with Jobcentre Plus.

Q44 Shabana Mahmood: Jobcentre Plus clearly has a lot of expertise in getting harder-to-help groups back into work. I'm thinking, in particular, of the findings of the National Audit Office and the Public Accounts Committee report into the Pathways programme, where Jobcentre Plus did a hell of a lot better than its private sector counterparts. You talked about Jobcentre Plus still being the gatekeeper. I'm just conscious, though, in the way that the new Work Programme is constructed, that Jobcentre Plus is still able to give that better value­for­money service that it's proven to have given with—

Mr Duncan Smith: Two things about the Pathways programme that the media reported and I think some of it they had slightly wrong. Almost the first thing we did when we came in was to say that we would stop the Pathways programme because we'd already seen the National Audit Office's reports on it and we'd reached the conclusion that it didn't work. The second thing about the Pathways programme was that, remember, it was focused particularly on Incapacity Benefit, it wasn't in the same area that much of the Work Programme is. There are two or three other interesting bits about it that are quite important.

What we're doing with Incapacity Benefit, a thing we inherited from the last Government that I wholly agreed with by the way, was the migration process to Employment and Support Allowance. For the most part—well, in fact it hasn't at all—it hadn't started on the stock of those people. So Pathways was trying to figure out who, from that more difficult group, would it be able to get into work without that migration process and assessment taking place. So, also, the reason why I think Pathways failed was it was rather rigid. You had six interviews. They didn't have a lot of scope—the people doing it—to do very much with you, other than to interview you in a very linear way and not to be able to look at you in a wider sense and figure out what you need.

The last part about it was the payment to Pathways. It was about 30% paid as a statutory payment for doing the work. If you look at the figures for that, about 75% of all the monies received by those organisations taking it on were as a result of the 30% payment, not the remaining 70% that would have been for success: payment by results. So, understanding all of that, the Work Programme, first of all, doesn't deal just with people coming off Incapacity Benefit, although it will deal with those coming in from the new assessments on the migration programme, the Work Capability Assessment. By the way, they're the one group that will be seen immediately by the Work Programme. They won't go through a Jobcentre. They will go straight to the Work Programme because they will be seen as having particular problems from the stock.

But then two other things will be important that allow us to not repeat the mistakes of Pathways, which is quite important. As I understand it, first of all, we will pay them a fee at the beginning, which is a cash-flow fee for taking on this particular individual. Then there's a time lag of at least 13 weeks before they will receive another payment. That's for two good reasons: one is that if people rotate in and out of work, as they might do, then there's no point in paying them money for something that simply didn't work. Secondly, I can't go into too much detail about the contractual arrangements that we've slightly varied, but it allows us to adjust, within those contractual arrangements, whether we think these people might have made work or not. It also allows us to set differentials and they didn't have this for Pathways. For more difficult people, you should receive more money for getting them into work.

And the last bit, which is very important, is that we are going to pay them to keep people in work for three months, six months, nine months, a year. We're still working out how that's done but the reality is it's very important. To me that is almost the most important bit, which is to sustain people in work over a long period, not just get them into work. We've tended to say, "Into work, great; no problems", turn away and do something else. Not good. Into work for people who haven't had work for a long time; you've got to stay with them and we know that from Tomorrow's People, and others, who mentor people into work. They have fantastic results for the more difficult to get into work. So that's basically what the Work Programme will do on the back of the Work Capability Assessment, and this is where Pathways, I think, early on, whilst well-intentioned, we've learned a lot from it.

Q45 Shabana Mahmood: I'll come on to the differential payments in a minute but I'm just conscious that, as you're creating this framework for the Work Programme, it's going to be important. I don't want to rehearse the arguments of the Public Accounts Committee report but basically it's going to be important to make sure that you have a proper sustainable balance between public providers, private sector and voluntary as well. That's the only way, over the longer term, you're going to be able to see whether it's giving you good value for money and compare performance across the different sectors. So how are you going to make sure that you do have that balance?

Mr Duncan Smith: It's inscribed inside me that the voluntary sector, the community sector, will play a very significant part in this and I will simply not allow that this Work Programme goes ahead—and I can give that guarantee to the Committee—if I think that is not going to be the case. So we need to look at ways in which we can ensure this; for good reasons, not just because we want to be generous to the voluntary sector. That's not the point. The real point is I genuinely believe that the more local you are the more you're going to be able to understand: what's happening in the local business area; and what's happening to the individual. That's why all the experience I've had at The Centre for Social Justice (CSJ) and everything else, talking to people in every area, tells me that we need to lock into that local intelligence and understand it.

Of course, Jobcentres are local but it's important that when we contract with the larger companies, which may well be the case, we localise them through that process. So it's going to be very important for them to have within their consortium, as it were, very clear references to those individuals locked into that process. I can't give you the exact contractual details, because we're still discussing those, but I can guarantee to Miss Begg that I will make sure that it's clear to them and maybe the Minister for Employment will be able to come forward on this one as well. But my point is: it's very important that we deliver that way because it will improve the delivery process and will not repeat the mistakes that the Pathways programme had.

Q46 Shabana Mahmood: My impression of the approach so far was that your relationship, and the way the Department views its relationship, is very much with the prime providers and it doesn't go beyond that. So you've had very little to do with the subcontractors who tend to be the local small organisations that do the delivery, especially with the harder-to-help groups. They're the ones that have the coal-face experience. So are you going to be much more proactive then, in terms of your involvement with the subcontractors and your expectations of the primes, and how they're going to work with the subcontractors and how the financial risk is going to be balanced and all the contract bits?

Mr Duncan Smith: Obviously this is a very serious concern of yours, and quite legitimate. I just want to bring the Permanent Secretary in, because he can tell you a little bit more about some of that negotiation and discussion, but just let me assure you that I have already spoken to the Minister responsible for this and I have made absolutely clear to him—and he agrees with me—that this is the case. Why is this an issue at the moment? Well, because at the moment we're dealing with those who have the capacity to take on the contract and, whilst there may be voluntary sector providers or a consortium of voluntary sector providers that may want to do that, by and large my sense is that they may not be of a scale big enough to be able to do that. But that doesn't mean they can't play an absolutely valuable part in it. So at the moment we're talking about the top-level lot but there may be others.

Do you want to say anything further?

Sir Leigh Lewis: Just a couple of things: one is to say that we do and have had a great deal of direct contact with not only organisations, like Association of Chief Executives of Voluntary Organisations (ACEVO), who are representing third sector partners and providers but with many third sector providers. So we do have a continuing and ongoing dialogue. The second is that we already have in place something called the Merlin Standard. Incidentally, I can't quite find—even as Permanent Secretary—anybody in the Department who knows why we called it "the Merlin Standard", but it is there to set out precisely a code of practice; setting out our expectations of how not only we but prime providers ought to work with the third and voluntary sector.

Chair: I am going to try and move on quickly but I'll bring Kate and Stephen in. Did you want to come back with something else?

Shabana Mahmood: I just had an issue about the harder-to-help groups and differential payments.

Chair: Right. I'll bring Kate in and then I'll come back.

Q47 Kate Green: Mine is just a very quick question. Given that a very much larger and mixed client group will be on Jobseekers Allowance (JSA) in the future and then potentially moving into the Work Programme, including lone parents and people who have perhaps undertaken the Work Capability Assessment and been unsuccessful, can we check out whether in the IT system we will be able to flag the way in which people arrived into the programme? It will be important to know how well it delivers, for example, for lone parents or for people who have some level of health problems, albeit not sufficient to get them into JSA in the future.

Mr Duncan Smith: Yes. Two things about that: the first is, of course, just to restate it again, those who have been migrated to the Work Capability Assessment out of Incapacity Benefit into JSA, they will pretty well automatically go on to the Work Programme.

Kate Green: And will we flag them? We will know who they are?

Mr Duncan Smith: Absolutely. I'll go back and check and I will give you an assurance of that. My understanding is that's the case but I will absolutely check on that.

The second thing about lone parents is that, whilst we've lowered the age of expectation for lone parents to school age—approximately age five—I have, however, said that absolutely Jobcentre Plus officials retain the flexibility to make sure that what they ask them to do fits within their caring responsibilities. As you may remember, Jobcentre Plus has that but they will retain that. So you will be able to track that anyway as well. So the key thing is, yes, you're right, there'll be a more mixed group in there. But we'll certainly want to track how that mixed group works, particularly as the one group is going off to the Work Programme straightaway.

Chair: Stephen?

Q48 Stephen Lloyd: Secretary of State, I would also like to seek reassurance that, as well as having some provision specifically for the larger suppliers, to include the voluntary sector, the small and medium enterprises (SME) training companies and employability companies in that area, who also don't have the scale to bid for the large projects but in my experience can make a tremendous difference at delivering, are also part of your thinking, because I wouldn't want them to miss out.

Mr Duncan Smith: It is, unless the Permanent Secretary contradicts me.

Chair: That's a nice short answer. So I'll come back to Shabana.

Q49 Shabana Mahmood: Just a final point on the third-sector smaller organisations. Would the differential payment system and the payment by outcomes—obviously there's going to be a much longer time frame over which the different providers will be paid and money will filter through down to their subcontractors. So some of the much smaller organisations will obviously struggle with the longer time scale for payment, apart from groups, for example, that provide psychiatry services where they expect up-front payment. How are you going to try and protect those and make sure that they're able to operate effectively?

Mr Duncan Smith: Ms Mahmood, you've hit on a very important point. You've obviously been doing your homework on this, and I would also invite you to come and see the Minister to discuss it with him, because it is an area that we are, at the moment, working out. There are two issues we have to recognise: we have to recognise a return for the taxpayer within this but we also have to recognise the incentive to the company. The third area, of course, is recognising also that there is a cash flow issue for companies and for private sector and voluntary sector small organisations.

So those three things come together. I know, having been on the board of companies, how important cash flow is. Some say cash flow is more important than anything else in the management of a company. Cash flow means payments at times over set periods and early periods. So this is still, at the moment, being discussed and figured out. The balance for us has to be that we get the taxpayer and we get the incentives right, but also that they have something that allows them to be able to say, "Well, we can run this and run it well".

One important point is that where there is a larger company that has taken this on we don't want them to try and pass on dramatic amounts of risk down to the lower groups. So that's an area that we are conscious of and we will try and work out within the contract. So it's a complicated process.

Permanent Secretary, have I missed anything out on this?

Sir Leigh Lewis: No. The only thing I'd add is that will be absolutely one of the criteria that we will be taking into account when we get to the point of selecting the large prime providers: what they propose, what they put forward, what assurances they give in relation to the chain of providers below them.

Mr Duncan Smith: Do come in; I'll tell the Minister. And for that matter I say to anybody—if you've got a thought or an idea on it, we're open to it.

Q50 Chair: I think today we're not going to get through half of your remit. So we might be inviting you back here as well for some of these things. I'll try and be very quick. I was glad to hear you say that those who were migrating from Incapacity Benefit (IB) on to Employment and Support Allowance (ESA) will go straight into the Work Programme. But, of course, there's a group of people who won't go on to the Work Programme.

Mr Duncan Smith: Not ESA, JSA.

Chair: JSA, sorry. Yes, who fail to get on to ESA and end up on JSA.

Mr Duncan Smith: Yes.

Chair: But there's a group of people for whom that will not happen and they are my constituents. They will start to get the letters next month to invite them in because the test of that migration from IB to ESA will happen in Aberdeen and, of course, the Work Programme won't be up until a few months after that whole process has been completed. So I suppose the question I am asking is: have you done any work on the numbers you think will fail the Work Capability Assessment, that will end up on JSA and, therefore, on to the Work Programme from the IB cohort? Now, that's going to be totally different from the ones who fail the Work Capability Assessment, who are new claimants, because these people will have already been through a gateway. Do you have you a figure in mind? As you're looking for that, the other thing that worries me is you are only starting in Aberdeen and Burnley next month. Probably it will be November before any assessments are done but you are going to roll it out nationwide by spring 2011. Is that long enough to learn the lessons?

Mr Duncan Smith: First of all, I recognise that particular issue and problem. It's something that I will ask the Minister, Chris Grayling, to talk to you about a little bit more and see whether or not there are interim measures we can take. Of course, as you know, we are trialling Aberdeen and Burnley, two very different cities with very different prospects for many of them. So we should get a very strong early steer about how this is going to work from that but I'll certainly take—

Q51 Chair: So you can't quantify how many are going to fail Work Capability Assessment?

Mr Duncan Smith: Well, I'll give you some figures on this, where we estimate things to be, and I'll just remind everybody where we were. I have the figures in front of me now. Of those who are assessed through the WCA on the flow—and this is the flow on the new group, I agree with you; it isn't an absolute indication—68% have been deemed fit for work, some 23% have gone to the work-related activity group and 9% have gone to the support group.

Now, to be fair, that's the flow, and the flow is an easier group to look at. Of our estimations of where we are, first of all we're going to be trying to get through around about 10,000 a week when it starts. The predicted figures for migration flow are in the order of 23% fit for work—so slightly different from the previous one—58% will move to the work-related activity group and about 19% will head to the support group, so lesser numbers going but still significant numbers across.

These are estimates that are conservative, I think, in the sense that we won't know whether they're a bit too conservative until we start to see what's happening in those two cities.

Q52 Chair: Because obviously the crucial thing is the gateway to get on to ESA, which is the Work Capability Assessment. We have had lots of complaints about Atos Healthcare and how they carry out their assessments. Is Atos going to carry on? Is the contract a long one? Are you in negotiation with them to look again? Lots of complaints about the rigidity of the medical assessment and how it doesn't take into account things like fluctuating conditions, mental health and all of that.

Mr Duncan Smith: I agree. We've already made changes, as you know. We have an external independent review and I can give you the names of the people that are on the scrutiny group, and the Permanent Secretary may want to say a little more about this: Paul Farmer, Chief Executive, Mind; Professor David Haslam, National Clinical Adviser, Care Quality Commission; Dr Olivia Carlton, Head of Occupational Health, Transport for London; and Neil Lennox, Head of Health, Safety and Fire at Sainsbury's. They will be acting as a scrutiny group to Professor Malcolm Harrington, Professor Emeritus at the University of Birmingham, and he will lead the independent review. So they will act as a scrutiny group to him.

They've already recommended some changes that are quite important and we've implemented some of these and plan to do that. First of all, to ensure that individuals awaiting chemotherapy are treated in the same way as those already receiving it, and you'll know that we announced that we'd make that change; expand the support group to cover more people with communication problems and severe disabilities due to mental health conditions; take account of someone's adaptation to a condition of disability and simplify the language of the descriptors. Most of all, basically, try and make the system more responsive to the fact that some people will come in front of the assessors and be different a day later, and to understand more what's in their medical records. I think that's reflected in this but that's the nature of it.

Do you want to add anything to that or have I missed anything?

Sir Leigh Lewis: No, not at all. The only thing perhaps I'd add is that we do, as we do with all of our providers, maintain a very, very active dialogue with Atos Healthcare. We take up individual cases where we have any reason, ourselves, to believe that there's something, prima facie, odd about the decision. One issue that I'm sure every Member of Parliament will know from their own postbag is that, in a sense, we perhaps need to do more to explain to people that the nature of the assessment is not whether Mr or Mrs or Ms Smith has this condition. It is whether that condition prevents them from undertaking some or any work.

So some of the cases that cross my desk—as I'm sure they'll cross the desks of Members—are where, in a sense, there are two different issues. The individual is saying, "But I have this condition; here's the evidence from my doctor, my GP, my consultant", et cetera. But the capability assessment, of course, is not disputing that the individual has that condition. It's trying to assess, with that, what is that individual's capability for work.

Chair: Karen?

Q53 Karen Bradley: Thank you, Chair.

We have received representations and briefings from various charities and lobby groups that represent disabled people and people with mental health issues, and one of the firm recommendations that has come from those groups was that, to help people with disabilities and mental health issues back into work, they would like to see the involvement of their health care specialists, not just the Jobcentre Plus and the Work Programme specialists. And I wondered, first of all, whether that had come through to you in the consultation and also what discussions you've had with the Department of Health on that matter.

Mr Duncan Smith: Again, the Permanent Secretary may want to add to this slightly but, as far as I understand it, there have been ongoing discussions with the Health Department over this. As I made clear, they're looking again very much at the structure of the way that this is assessed to see whether or not there is scope to improve that. Generally, though, the consensus amongst most of them so far has been that this is a reasonable process; that it's not a process that is by and large unfair or unbalanced.

I recognise that occupational health people sometimes are better at assessing people than pure medical people, in the sense that they have a better sense of what their requirements are. So, understanding all of that, the assurance I suppose I can give you is that we will continue to keep that under review and whether or not this becomes a requirement, and if it's one that we can demonstrate would actively improve the system, then we would be wanting to accept it.

I don't know if you want to—

Sir Leigh Lewis: Only to add a little. One thing that was in place under the previous Administration and that the present Government is continuing is the appointment of Dame Carol Black who is one of the most eminent occupational health practitioners in the country, who interestingly has a responsibility to both our Department and to the Department of Health. She reports jointly to both and has been instrumental in creating a change of climate, a change of mind almost; not just within parts of Government but with parts of the medical community.

There has been a lot of work—I'm sure you're aware of some of this—with, in particular, the general practitioners and the Royal College of General Practitioners; looking towards their role in the system, which can be absolutely critical in terms of how a general practitioner responds when someone walks through their surgery and says, "Doctor, I'm under stress", can send someone one way in a rather helpful way or another way in a less helpful way. So all I can say is, certainly, in my time as Permanent Secretary I've not seen greater co-operation than we have today with the Health Department. It's very close.

Q54 Chair: Just very quickly before we leave this, is the Atos contract up for renewal any time soon?

Sir Leigh Lewis: I haven't got that date in my head. So let us write to you.

Mr Duncan Smith: It will be up for renewal but I can't give you the date.

Sir Leigh Lewis: I don't think it's immediately up for renewal, but let us write to you.[2]

Chair: Okay. I'm going to have to invoke this: short questions, short answers, perhaps just to move things along sooner. But Margaret has some questions.

Q55 Margaret Curran: I will be well behaved, Chair. I'll try.

Secretary of State, you have genuinely worked very hard, I think, to tackle poverty and you've got a commitment to that which I think is respected across the political field. Are you worried that that might have been undermined by the Budget and reactions to the Budget? Now, I know what you said to Karen Buck and, of course, none of us want to cut expenditure and you feel obliged that you have to do that. We could argue about that: I'm not going to go into that. None the less, the very reputed organisation, the Institute for Fiscal Studies (IFS), has said the point about the Budget was that it wasn't fair and that it disproportionately affected people in poverty more. Now, doesn't that worry you, particularly, given your energy in this field?

Mr Duncan Smith: Of course it would worry me except that I would, again, come back to a previous answer that I gave, which is to try and see the whole process in the round. That is to say, we haven't quite finished yet. So overall to see the spending review completes the process. Usually you would say the Budget but, as we know, we have the spending review following and the emergency Budget. I think, given the fact that we'll have only been in for a few months, I think you need to see all of that and then we can make a proper judgment. I have seen the IFS figures. I do recognise that. I'm not sure I altogether agree with the IFS because they are making some quite big assumptions in here about areas that they, themselves, admit are quite difficult to calculate and we think, on balance, that they've veered on to the side of being critical for that.

We did put a lot of money into the child tax credit, to alleviate any idea that what we were doing in the Budget would have been in any way damaging to our child poverty targets, and there was a lot of money pushed through on that score. So there's been a constant reminder that we're trying throughout to protect the most vulnerable. I recognise there are some issues around one or two areas but my point is: let's complete this process on 20 October and then I think we can take a much better view. Clearly, I want to protect the most vulnerable within this process because they're the ones that have to, at the end of the day, be best served by this because, at the end, that's what this system is all about; to help the worst off in society, improve the quality of their life and, where possible, to get back to work.

Q56 Margaret Curran: Absolutely. I appreciate that and I do think that some of the organisations are saying that they recognise your commitment to that. It's the practice at the end of the day that we have to examine. I know the Chancellor quoted the Institute for Fiscal Studies when that point was made to him in the House the other day, but unfortunately he only quoted half the sentence that IFS said. He didn't quote the other half which went on to say that most of the losses for the upper half—he quoted saying the upper half had had a hit as well, but most of the losses for the upper half result from pre-announced measures, measures that were introduced by the last Government. So if you just look solely at what your Government has done, the conclusions irrevocably are that it's hit the poorest harder and that's what the IFS would stand with. You're telling me that will be settled when we see the spending review; you'll make up for it in the spending review?

Mr Duncan Smith: Well, two things I would argue with that. First of all, I don't know that it is quite legitimate to separate overall activity in reducing the deficit. So even if the last Government did some work—I mean, to be fair, the key thing is what is the sum outcome at the end of it; not, "If you take this away from that, where does that leave you?" Because I know you can look at things in isolation but the reality for us has to be that when we get to the end of the October process, on balance, across all the work that was done, have we protected the most vulnerable? I believe we will. That's what I'm in the middle of discussions about at the moment and we hope to complete that process and that's where we are.

I mean, after all, your own party in government had plans itself to reduce spending by some 40%. So I think there is a big issue here about where those would have fallen as well. We have choices to make. These are not choices any one of us has relished on arrival in government. I didn't arrive and rub my hands and say, "Whoopee, I can now make some good decisions about cutting some of these benefits". My point is: I've tried to take those decisions on balance to make sure that they protect the worst off and, bear in mind, some of these decisions are, anyway, not within my Department.

Q57 Margaret Curran: Yes, I accept that. But the core test is whether or not it's a fair Budget, irrespective about the—

Mr Duncan Smith: I accept that.

Margaret Curran: Can we assume from your answer, therefore, that the spending review will be fair and will not disproportionately affect disadvantaged groups, from your perspective?

Mr Duncan Smith: Yes, I believe that to be the case. I answer for what I propose and I believe that is in the heart and mind of the Prime Minister, the Deputy Prime Minister and the Chancellor as well. How we achieve that, of course, is the discussion, pleasant conversations, that we have been having over the last few weeks.

Q58 Margaret Curran: To be continued, I think, is probably fair. Can I ask one other question, if that's okay, and that was about the switch to Consumer Price Index (CPI) for the uprating of benefits. You will know that IFS, Joseph Rowntree and many other organisations are very concerned about this. I think Citizen's Advice said it results in a 1% real terms reduction in the value of benefits. Now, if you go to places and say, "We want to tackle poverty", but one of your first acts in government is to, de facto, create a 1% real terms reduction in the value of benefits, doesn't that undermine that?

Mr Duncan Smith: Well, it depends which way, I guess, you look at this. I mean it's possible to look at what we did and just say, "Well, projecting ahead, this means that there is a loss". But the question is: what is that loss? The key point about the difference—and this is where I reached this conclusion when I was presented with the fact—was that, whilst we have been uprating in line with Retail Price Index (RPI), the question is: what does RPI represent in terms of the way that we calculate benefits? There are two areas in RPI. The first is that RPI has in it, which is what makes it so volatile, a dramatic amount of mortgage-based housing costs. Well, first of all, most of the recipients, most of the claimants, most of the people involved in the benefit structure, don't have that as a major issue for them at all. Even when you deal with pensioners, they either, by this stage, own their own homes outright or they're on some form of Housing Benefit. So the housing costs, such as Housing Benefit, in a sense separate housing from the uprating.

The second part, which is important, which I didn't realise, was that I think the interesting thing about RPI was it does not take into account pensioners who receive 75% or more of their income from the state; in other words, in support. It doesn't take any account of that and inside its basket of commodities that they use and calculate what inflation is, they were never in that mix at all. So it wasn't great for pensioners, by and large.

There's a third area too, and I know this may be seen by some as exceptional, but it was only a year ago that RPI plunged below zero. Had we absolutely followed RPI down we would have reduced and literally cut benefits to reflect where RPI was. I've more and more come to the consideration that RPI is a sort of peculiar British measure, that because we have such a housing issue in the way we calculate it, it distorts things. In actual fact, CPI is used by the Bank of England, and more and more in government. I think also, I understand through casual conversations with some of your colleagues in the last Labour Government, that there was a lot of discussion about moving eventually to CPI because there's less distortion and it's clearer, it's international. The basket of items does not change in the way that they do with RPI where they come and go, they change them quite quickly. With CPI it's a much more steady basket, that a Government can't simply say, "We're going to pluck something out and put something in", because being international it therefore is a much more stable version.

So I recognise that when you just look ahead on a projection against that or in some cases Rossi, some groups will look like they're losing money. But, in fact, the question to ask is: at cost of living are they losing? And the answer is: I don't think they are because I think CPI calculates that in a much more reasonable way.

Q59 Margaret Curran: But do you think that shift to CPI will affect the poverty levels? Do you think poverty numbers will increase because of that decision?

Mr Duncan Smith: I don't think that will be the case because, as I said, the benchmark here is: had we lowered it below cost of living then the answer would have been yes, but we're not. What we're doing is we're trying to figure out what is the cost of living. I know the argument will go, "You should have stayed with RPI because they'll get more money", and in a perfect world you might have said, "Yes, you can afford to do this".

Margaret Curran: But they are losing money. People are actually losing money.

Mr Duncan Smith: Looking ahead, are they losing money or are they settled on what is essentially cost of living? My view is: we have to make choices and my choices were that keeping them on a proper measure of cost of living would be the right way of what inflation really is. That, to my mind, is CPI not RPI. I keep coming back to the fact that we have to make choices and the choice that says, "Do you go by a scale that is based on housing costs that aren't, in reality, relevant and does not include pensioner costs for those who are the worst off pensioners?" I think it's a pretty flawed process and whilst a direct calculation will, of course, allow you to make that very simple statement that there is a reduction, my sense is: a reduction against what? And the real calculation that CPI offers us, which I think more and more government generally will move to, is, I think, a reasonable measure.

Q60 Margaret Curran: My final question, Chair, I promise; do you think at the end of the spending review people who are currently on benefits, generally speaking, their benefits won't be going down, it'll be at the same value, if not increasing?

Mr Duncan Smith: I can't guarantee they'll be the same value in the sense that—the key question I want to ask is, are the benefits that we pay people, and I'm not reducing the overall amount that people are paid in benefits; my job is to try and make sure that people who need benefits and support get the relevant benefits and support that allow them to live a life which is supported. Hopefully they can help and change those circumstances and move out of that. That's the key. So, overall, the only guarantee I give is that we will do our absolute level best to protect the worst-off and make sure they don't suffer in the process of this need to find savings.

Chair: I want to try and get some questions on pensions, and we're not going to get to other things, and I am going to try and finish. It might be after half-past, I hope that's all right, Secretary of State, but first I want to bring Karen Buck in.

Q61 Karen Buck: Secretary of State, you referred earlier to some of the areas of what we understand is welfare but aren't actually within your budget, particularly child benefit. Would you be making representation to the Treasury not to, for example, reduce the maximum age at which child benefit is paid to 16, as is being speculated today?

Mr Duncan Smith: It is incredibly tempting to answer that question, but I hope you will understand that tempting as it is to watch you ask that question I will have to, I hope with the acceptance of the Chair, duck my shoulders on that one.

Karen Buck: You don't have a view on it?

Mr Duncan Smith: I have a view but the view is a private view.

Karen Buck: Private view as an individual or private view as Secretary of State?

Mr Duncan Smith: It may become more public later but it is certainly private at the moment.

Karen Buck: But not a private view as a Secretary of State?

Mr Duncan Smith: I'm in a process at the moment that is discussing and negotiating where we go on these things, and I simply say that I can neither stand up or stand down things that I see in the newspapers today or yesterday or the day before, in that process. I think it's only fair to say: it's not far to go until 20 October, when we will see what we actually decide rather than what may well or may not be—

Karen Buck: I'm simply asking you what your view was and whether you would make representations to the Treasury or had made representations to the Treasury.

Mr Duncan Smith: I would love to have a view in this Committee that I would be free to express at this point, but I think, to be fair, my view and the reality of what we do are one and the same.

Q62 Karen Buck: The Chancellor of the Exchequer's view, expressed on the BBC, was that an additional £4 billion would be removed from the Department for Work and Pensions' budget. You said that you didn't recognise that figure and the Chancellor wouldn't be drawn on that on Monday, but he did use that figure.

Mr Duncan Smith: As I understand it, at the interview he didn't give a figure. That somehow this other figure crept into the media—I cannot confirm how that happened but it did—he himself did not actually quote that figure. So the figure itself is not a figure that he has stood up at any stage and, as I said earlier on, we're in the middle of this process so I don't recognise any figures that get into the newspapers, much as it might be interesting.

Q63 Karen Buck: Can I just ask you one or two questions quickly about Housing Benefit, which is an area of enormous concern to me, amongst others. You were saying earlier—and it's a perfectly valid argument—that it's difficult for people in social housing to move to different parts of the country to find work, and it is a genuine dilemma about how one resolves that. But, people in the private rented sector on Housing Benefit—there are 220,000 extra claimants on Housing Benefit in the private rented sector in work in the last two years. Your Budget proposals will for almost all, possibly all of those claimants, make it impossible for them to remain in their homes or leave them substantially worse off. The theory behind this is to make them move to find cheaper accommodation. What is the logic of asking almost 250,000 working claimants on Housing Benefit to move to find cheaper accommodation, but people in cheaper accommodation in other parts of the country are being asked to move to more expensive accommodation to find work?

Mr Duncan Smith: I can understand the concern about the Housing Benefit changes but I think, if you don't mind me saying so, we have to understand the nature of the problem that I faced on arrival, which is that we have a Housing Benefit budget that had ballooned over the last five years—literally rising pretty much close on £1 billion a year and set to rise at an even more accelerated rate. The problem we have within the Local Housing Allowance area of it, was a lot of that's driven by rent rises.

Now, it may be questionable as to what the purpose of the people that own the properties is by pushing up the rents and whether they take into consideration that for them it seemed to be an open-ended prospect with those who were being paid through the Local Housing Allowance—they would simply have to meet that ever extending level of rent.

So the first thing is we have to try and get it under control. The main point to make is—I understand it's not easy—I am not cutting these benefit rates, I am simply bringing the level at which they increase down. They're still increasing. I have been attacked by somebody for not cutting Housing Benefit. What I've done, if you look at the graphs, you will see that it's going at that rate and we're bringing it down to that rate. So we are, of course, planning to save some money on that.

How will that affect people? Well, I recognise there is an effect, which is why I put another £40 million, I think it was, into the—

Karen Buck: That's nothing.

Mr Duncan Smith: We will keep this under review. The £40 million makes it a total of £60 million available now to local authorities for transitional relief, and I am prepared to continue to review that, depending on how we discuss that with local authorities. But the reality for us is, we have looked at this and tried to figure out where this would affect people. Obviously, within London there will be a particular and greater effect because of course the rental levels are higher and particularly so in central parts of London. But there is another aspect which says, "Look, also, the levels of some of these rents being paid to people act as a major disincentive for them to take work because once they take work and start to lose their Housing Benefit, or support, they simply wouldn't be able to afford the property they're in anyway and would probably have to move". There's a second aspect, too, which is: for those who are on a lower income who could never even begin to afford houses in this category who are working, many of them feel it's deeply unfair that they are expected to travel to work, to commute to work, to live in accommodation that is tailored to their own employment levels and the amount they earn, that to them seems deeply unfair.

I recognise there will be some problems and we're asking councils to look at this early and to discuss with us what those problems are, and we'll try and have some sort of remedial process in that. But the reality for us is the last Government—your party in government—I know was looking at this area and there was deep concern in Downing Street, under the then Prime Minister, that these figures were rising at the rate they were rising. Even some of your colleagues, ex-Ministers, told me privately that this is an area they would have had to have moved on anyway. We have to find a way of bringing it back under control, and I'm afraid I've done just that.

Q64 Karen Buck: Last question, I don't think any of us would be happy to defend the extent to which private landlords have enjoyed something of a bonanza over the long term. The question is how you achieve a desirable end without penalising claimants. You didn't, with respect, answer my question about 250,000 working households on housing benefit who are going to be, for the most part, slaughtered by this. But how you do this without a great deal of disruption and hardship, and the primary driver of the increase in Housing Benefit expenditure in recent years has been the shift in numbers from social tenures to private tenures; 100,000 people in the last year alone placed there by local authorities. Almost all those people are going to have a legitimate claim as homeless to their local authorities next year, thereby saving nothing. What discussions are you having with DCLG about what impact this is going to have on homelessness and, indeed, whether those savings are simply going to be false economies, because it's simply going to have to be picked up by another department?

Mr Duncan Smith: I accept all that and that's what we've been looking at, except in the sense that we have to discuss it with DCLG. We're deep in discussions with them, and also individual councils too. We've encouraged them to discuss their issues and their problems with us. I just come back to the simple point, which is: we simply have to find a way of getting this back under control because it is not feasible for any Government now to spend at the rate that we were spending and to watch the explosion. I accept, and you are right, that some of this has been driven by the numbers moving into Local Housing Allowance, who might in the past have been expected to be in social housing where the average rent is lower, although there has been under the last Government a desire to push the rents up in social housing. But we thought and believed, after all the work that we did looking at this—I asked questions in Parliament about what was the best way for us to try and bring it under control to put pressure on the fewest and smallest number of people and find some remedial way in which we can help them—

Karen Buck: I'm sure we will have further discussions about that.

Mr Duncan Smith: I accept that, but I can say honestly, having been in opposition, sat on the Back Benches, of course it's legitimate to complain about this and say this is wrong. The only question I ask is: where else would we have gone to find a way of reducing this and bringing it back under control in the time scales necessary? And that's the real key question. If there's a better idea I'm open to suggestion.

Chair: The Committee will be looking at this as part of its first proper inquiry so we will be, I'm sure, returning to it, although I suspect it will be your junior Minister that will be in the chair rather than yourself in that case. But I do want to get to questions on pensions because it obviously is a large part of your responsibilities in the Department. I hope you're all okay to stay for an extra 10-15 minutes, if that's in order?

Mr Duncan Smith: I'm in your hands.

Chair: You will be out of the door, certainly, before Prime Minister's questions. Karen Bradley?

Q65 Karen Bradley: Thank you, Chair. Secretary of State, you've already touched on the fact that the state pension is a very large proportion of the AME budget of the Department. One of the approaches to dealing with that massive part of the budget is to increase the state pension age. So on that topic, first of all, I know there's been a review: the simple question is when are you likely to be announcing the results of that review?

Mr Duncan Smith: We're not yet. But we will when we complete it, which I think is later in October, if I remember off the top of my head. So we will certainly draw you all in, particularly obviously the Select Committee. Can I just say, I think this is an important debate for two good reasons: the first is that I wish politicians in the past—and I don't mean any particular political party, but all of us—had tackled this earlier, in the sense of trying to get a national debate going about at what age do we think is the age at which people should officially be ready for retirement. After all, when we set this back in 1926, I think it was, I think men never made the retirement age on average and women made it to 70 or 71 on average. Born today the life expectancy of an average male would be 89 years and an average female 92 years. I think one in four males born today will live to be 100 and one in three females will live to be 100. So you can see that there is a dramatic effect. So at the moment, if we don't change anything, you can expect to live about one third of your life in retirement.

Two things are important about that. I don't want to be mean about this and say you have no right to enjoy your retirement, but the reality is we have a smaller number of people in work projected forward that will have to support those who are retired, and that's how it works. So that burden grows on them: in effect, earlier and earlier retirement, de facto. So we have to bear that in mind. My children and grandchildren, as they come forward, won't thank people like me for not taking this decision early.

The second point is, I think more and more people reaching retirement age now are choosing to work because they don't feel like they should simply stop work at 60 or 65. As you know, we are equalising the retirement age by 2020 and then moving to 66. The key point here is that they do want to work and so working is an option we want to give them. Of course one of the key things was to get rid of the default retirement age, which I was pleased that we've agreed to finally get rid of that. I know some businesses, big companies, don't like us for doing that but, frankly, I think many of them have been quite slack about doing this and waited for somebody to reach 65 and chuck them out. My answer is, you now need to figure out the last 10 years of someone's working life and how best to make the most of their talents.

In Germany I see they lock new entrants into work with older people and they get the best out of both of them. They get improvements from them. So it's time for us in Britain to start being a little more flexible and relevant and not just to lose all that talent and intellect that exists at 60 or 65.

Q66 Karen Bradley: You talked about 2020, and I know 2016 has been mooted as the date at which the retirement age may go up to 66. There are bodies that believe that six years is not long enough for people to make plans for the increase in the retirement age, and I just wondered if you could give some comments on that?

Mr Duncan Smith: First of all it's a "not before", by the way—it's not before 2016. I understand the concerns and they've been part of the review generally. At the moment I can't tell you how that review will affect us, but I can say that, so far the balance seems to be that it is workable but it may be that I am not seeing all the responses to the review. So yes, you can argue it's a short enough time, but I think generally most people are beginning to accept that that is a process they're engaged in, started by the last Government obviously, which you've accepted. Further than that, the question is: how far do you go beyond 66 and that's part of the whole discussion, which I think is relevant.

It is interesting of course. Somebody retiring, every effective year that they defer their pension, their pension increases by between about 6% to 10%, and each additional effective year that people work is worth about 1% in GDP, some £13 billion more in national output. You talk a lot about the benefits, but these are much bigger numbers than anything we discussed with working-age benefits.

Q67 Karen Bradley: Just a final point on the increase in the state pension age, and you have spoken about the statistical life expectancy, but there is a demographic that doesn't have that life expectancy and perhaps won't even expect to reach state pension age, and certainly not get many years after that. I just wondered if there was going to be anything in the review or anything in the proposals that would help that demographic?

Mr Duncan Smith: Absolutely right. There are pockets around Britain—in deference to Margaret Curran on this one, I think it was Calton in Glasgow where life expectancy was about 55 or something, appalling really. But they're not alone. There are pockets all round the rest of the UK. It's very difficult sometimes to exactly understand quite how those figures are. It's very difficult. I think what we have to do is make policy for the majority with regards to retirement because it is the vast majority that we project to live much further forward. What we do about those pockets of deep entrenched poverty, ill-health, are issues that my Department has to face up to and try and change that. But we shouldn't set the pension age around those pockets. What we have to do is try and figure out how we change that with the Health Department and ourselves. They have been pretty resistant over the years to work, but I guess we have to do a lot more. I think getting people active, into work, dealing with their health issues and problems is all part of that process, but they're a focus that's separate from the pensionable age, I recognise that. Do you want to answer?

Sir Leigh Lewis: Can I just add one almost small footnote? Of course, as a Department, we're a huge employer as well as, of course, a major strategic and policy Department, and we were the first Department to remove any upper retirement age for our own employees. That's now standard right across the civil service, but we were the first. So now our staff can go on working to any age as long as they're competent to do the job and there's a job for them to do.

At the time when we were discussing this and introduced that, there were real concerns around my top team table as to whether this was going to build in inflexibility, whether we were going to be able to reduce numbers, which we were at the time. There aren't any more. We have around 1,000 people now working on beyond 65 and universally they do a good job, and it has not led to any of the inflexibilities that people were worried about at the time. Interestingly they're very often working on a part-week, part-time basis. They bring a lot of maturity and experience to the people around them and it's been wholly beneficial for us.

Chair: Kate Green.

Q68 Kate Green: I just wondered if you could say something about what you perceive to be the potential implications for occupational pension schemes, of increasing this state retirement age, or removing the defaults for retirement age?

Mr Duncan Smith: We don't think that there will be a major problem for those pensions. We think, by and large, in our discussions, that they haven't raised major issues surrounding that. There will be issues to be settled about it. Many of them have been financing very early retirement in some of those cases, and I think all of us recognise that the days for those very early retirements has gone and one of the reasons why some of the deficits are in place is because people have been funded for earlier retirement, which is simply not affordable. But the discussion so far, there hasn't been a major complaint that we're heading in the wrong direction from them, as I understand it, but again, when we have the review and publish the results, you'll definitely see whether they're complaining about that.

Q69 Kate Green: Do you think there has been any modelling of what different scenarios might result, either by the industry or by you, and will that be revealed in the review?

Mr Duncan Smith: Definitely there's modelling going on, and it might be better for us to try and show you some of our stuff.

Chair: It looks like we're going to have a day doing modelling, we're coming to have a look at your modelling.

Mr Duncan Smith: We can show you all our models.

Chair: Not that kind of modelling. Richard?

Q70 Richard Graham: Thank you. Secretary of State, auto-enrolment and the National Employment Savings Trust, or NEST, firstly what's your view on auto-enrolment and, in particular, does it make sense to introduce it while there are still means-tested pensions?

Mr Duncan Smith: The first thing is that we are, as a coalition, committed factually to the idea of auto-enrolment, so that's written into the face of the agreement, so we will go down that road and make sure we find a way to ensure that it works. We have a review on at the moment, as you know. I can't give you the results of that yet, although they are going to be available pretty soon, I hope. I won't break into what the results of those are, but the key issue is that I can understand the problem the last Government tried to tackle, and I think they were heading in the right direction over this, which is that some 7 million people have absolutely no provision, whatsoever, for their retirement. I recognise, of course, that many of them are on low incomes and, therefore, putting money into a pension long term means, in some sense, them losing some of their spending capacity. So these are issues we have to come to terms with as well, while we're looking at it.

Part of the review is to look at the way it's delivered, which is why we're reviewing whether NEST is the right device to do it, and we will come forward with our findings on that. I think, all in all, the only way I can say this to you is I think, by and large, I can't project forward as to what changes we might make or not make within the pension provision, but even were the present situation to exist my answer to your question is, yes, I do think that on balance it's better to try and encourage as many people to save something towards their retirement, but obviously incumbent on us is to look at pension provision from the state standpoint. That's why I'm enormously pleased that we've re-linked pensions to earnings. I know the last Government talked about it, and we're going to do it now, and locking in with a triple guarantee, so never less than 2.5%.

Q71 Richard Graham: On auto-enrolment, I'm sure we all welcome the triple guarantee and the changes made there in state pensions. But just on auto-enrolment, can I ask: the review will look hard at whether it's going to be compatible with a current system that provides a disincentive to save for lower-paid workers?

Mr Duncan Smith: Clearly, obviously, that is what we have to deal with, with auto-enrolment. But I can't go much further than that because the review itself is looking at how best it's implemented, so that it doesn't damage people's prospects on low earnings but, at the same time, does make sure that we keep that process of people on lower earnings saving money.

I remind you of the three that are on it: Paul Johnson from Frontier Economics; David Yeandle, Engineering Employers Federation; Adrian Boulding from Legal and General. They are rooted in the private sector and in business, so if there is one thing they will be looking at it is the balance that you describe.

Q72 Richard Graham: On NEST, two questions: firstly, do you think it's right that Government try and design and run savings funds and, if you do, what track record is there, especially in this country, of that being done successfully? Secondly, if you don't think that that's an activity the Government should be directly doing, and that it should be outsourced to the private sector, how can the Department help keep it low-cost and, above all, simple so that the primary target market of the lower paid will be able to understand it and benefit from it?

Mr Duncan Smith: I think the best way for me to answer that question, given that the review is looking at all of that anyway, is—to use a double negative—I don't not think that governments should not be in the arena. If you can work that out you're okay, but the reality is I don't sit here in front of you today with a fixed opinion about that because that was the whole point of setting up the review, is what I was saying: whether we have a government-based one or not.

There is some good evidence from other countries who have set this up before, this process of auto-enrolment. There are issues. I mean some argue that only government can do it because the returns are not good enough for companies to do it, but they will also play a part in it, but it needs to be underwritten by government otherwise the risks are too great. Others argue that, as you just pointed out, government normally isn't good in these areas. So we have to get the balance right as to how we do this. But certainly that's what they were doing when they went out to take this review, and we will look at what they come back with and we will make a decision on that basis. So I, again, retain no public view on the matter whatsoever.

Chair: Thank you. Unless any of my colleagues have any final questions? We did have questions on child maintenance and health and safety but we will leave that for another day. Thank you very much for coming along this morning and thanks for answering our questions. A lot of these things will continue as we investigate, particularly, the youth unemployment areas and Housing Benefit and, indeed, the Work Programme obviously as it develops. So, thank you again, to you, and thanks to my colleagues, and thanks to the Permanent Secretary for coming along.

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1   Note by witness: This figure refers to all British households with at least one person of working age (16-65). Back

2   See Letter to the Chair from the Secretary of State, 28 September 2010, Ev 23. Back

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Prepared 2 November 2010