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Reining in the welfare costs

by Hugh Cortazzi

The British government spends almost half of its budgeted revenue on welfare benefits, pensions and the National Health Service. This does not include what is spent by local authorities to cover responsibilities that have been delegated to them.

According to the British chancellor of the Exchequer, at the end of November last year, the annual cost of the welfare state had reached £165.5 billion. This was 12 times its cost in 1948, when the then Labour government enacted measures to cover recommendations made by Sir William Beveridge during the war — to ensure “freedom from want.”

In 1948 the cost of benefits amounted to 10.4 percent of Britain’s income. In 2012 they represented 24.2 percent.

The British welfare system that has developed over the past 70 years is a complicated one with separate allowances to cover state pensions as well as unemployment (called the job seeker’s allowance), sickness and incapacity, bereavement, children’s allowances, and housing for those unable to pay market rents. The accompanying rules and bureaucratic regulations aimed at preventing fraud have become ever more complicated and difficult to administer

Sir William Beveridge’s original intention was that welfare costs, including state pensions, should be covered by a system of national insurance with payments by both employers and employees. The national insurance system still exists and involves deductions from wages and salaries in much the same way as income tax.

But it does not cover anywhere near the total costs of welfare and is seen by most people in Britain as another form of income tax that does not, however, have to be paid by retired people.

In the present time of austerity and budget retrenchment, the welfare budget has inevitably been subjected to close scrutiny, and there has been strong pressure to cut costs.

The minister currently responsible for welfare and pensions, Ian Duncan Smith, who has studied the problems in depth, has made it clear that, under his watch, Britain will not allow the unfortunate to go hungry or be without shelter, but he also advocates simplifying and reforming the system.

An important pillar of the policies that he advocates is the replacement of the present multiplicity of benefits with a single system of tax credits. This cannot, however, be introduced immediately as it requires the development of an integrated information technology system.

This means that all the population will have to become computer-literate or at least have access to information-technology support. It is inevitable that there will be losers as well as gainers from the new system, thus leading to vociferous criticism from the losers.

The welfare budget cannot in the meantime be allowed to grow without restraint. The government has accordingly capped housing benefits so that claimants cannot receive more when they’re out of work than those in jobs. In some cases, large families were receiving more in housing benefits than many workers got in wages. The outcry from the losers and their supporters has not so far been deafening. Those in jobs are critical of some of those on benefits, whom they regard as shirkers and scroungers.

The government also decreed that welfare benefit rates should not rise with inflation, as it had before, but should be capped at 1 percent. As public sector wages have been frozen since the government came to power and will be subject to a similar 1 percent cap, the grumbling against the welfare cap has been muted. It is opposed by the opposition Labour Party, but it so far has not been able to state where instead it would make cuts in the central government’s budget.

There has been much discussion in recent months about how to cover the care costs of an increasingly older population, one in three of whom may eventually suffer from dementia or Alzheimer’s. Many others will require care at home or in a residential facility. The costs of such care can lead to many people being forced to sell their homes or call on the help of relatives.

The government has decided that, from 2017, there will be a cap on the amount any individual will be forced to pay for such care. The costs will be covered by freezing amounts free of the inheritance tax. As the new system will not cover the costs of accommodations and food in a care home, and as the cap is set high, most observers think that the new system is inadequate even though it may be all that can at present be afforded.

Old-age pensioners in Britain get certain perks such as free bus travel and winter fuel allowances that are not subject to a means test and are not taxable. Some politicians regard this as unfair and are pressing for cuts in the perks available to wealthy pensioners. It is unlikely that such cuts will be made in the present parliament, not least because the prime minister is publicly committed to maintaining them. It will not be easy for any future government to make cuts, because older people are more likely to vote than younger electors.

The problem posed by the growing costs of welfare benefits is not unique to Britain. In the United States, the Republicans are pressing for cuts in entitlements such as social security (pensions) and Medicare (health costs) for retired people. These have grown with the aging population and the availability of new treatments.

Japan also faces similar problems. In Japan the declining population and reluctance to allow more immigration increase the difficulties.

There are no easy answers anywhere. Simplification of systems would help. In all developed economies, the age of retirement will have to rise in line with life expectancy.

A return to economic growth would alleviate unemployment. Economic growth could also lead to a rise in interest rates that would encourage saving.

Hugh Cortazzi served as Britain’s ambassador to Japan from 1980-84.