Saturday, 24 April 2010

A Fairer Benefits System?

Time to reform benefits?

In the UK we are rightly proud of our benefits system and that nobody needs to starve.

I believe that the time has come for it to be improved and made much simpler, fairer and cheaper to operate. For some time now I've been mulling over and chatting with people about how we could make our benefits system operate much more efficiently. Of course someone else might also have had the same ideas as I have, in which case I would be interested to know who they are. This is the first time I've tried to write it all down in one place, it's a bit ragged around the edges but I hope the principle is clear.

The Current Problems

As I see it, here are the main issues we face right now:

  1. Poverty Trap. People currently claiming benefits have no incentive to work, because of the way that benefits are withdrawn once you get other income.
  2. Fraud. There are apparently many individuals claiming benefits while working, maybe to get around point 1 above.
  3. Stigma. Those claiming benefits are clearly in a position where they are looked down on by others and suspected of being idle or useless.
  4. Complexity. There are very many benefits and the number of forms, procedures and rules associated with claiming are a hindrance to having a smooth efficient system and, no doubt, a cost.
  5. Cost. According to one article, we're paying out nearly £200 billion a year in benefit handouts, and none of that money actually encourages people to work.
The Current System

All of these flaws come from the way our current system divides the potential workforce into, essentially, two types of people. Namely:

  1. Workers. These people are in employment (although they may claim benefit as well if they are on a low income). They also have another benefit, which we refer to as a "tax free allowance".
  2. Non-workers. These people are purely on benefits which aim to meet their most basic needs. We refer to these benefits are "means tested" because if you are earning above a certain level (often a very low level) they are lost.
Really there is a third group: People who are returning to (or trying to return to) being workers after being non-workers. Often people in this group are worse off than non-workers because they have got to the point where their income level removes a benefit. There are attempts to solve this problem but they seem to cause wrinkles in other places. They might not get the full benefit of the tax-free allowance because they may not be earning enough to use it.

Proposed New System

Here is the main principle of this system, which attempts to solve these problems:

Pay everyone the benefit.

At first this seems self-evidently stupid - people who are earning large amounts of money don't need a benefit, so why give it to everyone? However every tax payer already does effectively get a benefit - the tax-free allowance, which some technically do not need, they may also get some other non-means-tested benefits, such as child benefit.

The point of doing this is:

Giving the benefit to everyone means that there is never a stage when you lose income.

so that:

The universal benefit becomes a platform on top of which your other income from working is added.

So how would this system work?

As I've pointed out earlier, every worker in the UK has a tax-free allowance. This is the amount of their salary that they don't pay tax on. Note that if a person's tax-free allowance is £6000, and the basic rate of tax is 20%, then the real benefit to them is £1200 per annum. Effectively the state gives each taxpayer this amount back in their salary.

So my first step would be to effectively remove the tax free allowance - fear not better things are coming in its place.

Now, some people in the UK are claiming benefits because they are out of work. The actual amount you can claim depends on the number of children you have, your National Insurance situation and other circumstances. People may also be claiming benefits such as housing benefit to cover the cost of renting accommodation while they are unemployed.

So my next step is to get rid of all these kinds of benefits.

Having got rid of all the existing benefits, I propose that we replace them with:

A universal payment.

So instead of either giving people a tax-free allowance or benefits, we give everyone a lump of money each month. This could be payed directly into the individual's bank account, just as the current child tax credits and working family tax credits are. The actual amount of payment would need to be worked out, however I propose that the amount would be somewhere between the current average benefit payout and the effective benefit gained from the tax free allowance. I suggest that following principles are applied:

  1. The amount wouldn't really be enough to live on in the long term. The idea is to encourage families and individuals to take some work at least to make up the shortfall, so the expectation is that there is no "benefits for life" situation and that just about everyone will need other income.
  2. There will be an increase in revenue from taxation (because of the removal of the tax-free allowance) but a net cost to the exchequer because the benefit is paid to workers. This would be met by (a) the fact that more people would be brough into the taxation system who were previously not working (b) the reduction in payments to those previously on the older style of benefit (c) savings in administration of the benefits system (d) if necessary a small increase in the rate of tax (this wouldn't be bad for poorer working families because effectively their tax-free allowance has already increased)
Now although I call it a "universal payment" it wouldn't necessarily have to be the same for everyone. I'm thinking specifically of people with disabilities or illness who cannot work. For those people I believe there should be a sliding scale based on their ability to get any kind of work, so someone who really couldn't work at all could have a large benefit which would cover all their needs, potentially forever, whereas someone with a minor disability or illness who could work part time, or even full time but would require help to do it, would have a smaller payment.

The principle though remains that every adult would be entitled to this benefit in their own right [see below for some variations as to how this could be calculated]. So a student could see this as a grant, a working single parent could see it as help with childcare, etc etc.

Benefits of the system

Here's what I think the benefits would be of using this system over the current one:
  1. It eliminates the poverty trap - every extra £ you earn gives you an increase in income and so encourages people to take any low paid work that comes along
  2. It enables people who are unemployed to quickly get back to work
  3. There are no forms or procedures associated with unemployment or needing to prove that you are looking for work before you can claim benefit
  4. It eliminates fraud - everyone is entitled to the payment, so nobody can claim it fraudulently (maybe except by inventing a new person somehow)
  5. It simplifies the whole system tremendously
  6. It takes away the idea that some people are spongers - in this system every able-bodied gets the same benefit
  7. It encourages everyone to take responsibility for their own financial situation
  8. Everyone easily knows where they stand
  9. Nothing changes when you go in and out of work
  10. I think it would make the job market more stable and make it easier for employers to recruit to some types of job
Possible flaws:
  1. Obviously the sums are not done - I'm hoping someone with a better grasp of financial modeling could work on this
  2. There might need to be some interim arrangements and/or phasing in as some people are very reliant on their current level of benefit and might get a shock
  3. I'm not sure how the housing element should be catered-for. Maybe child benefit would need to be increased, so that families who need larger accommodation are not disadvantaged too much by the system.

Having said that I don't really know how much the benefit should be set at, I'm just going to give a possible example . Apparently median earnings in the UK are somewhere around £2000 per month.

Let's suggest an amount of £300 per month as the universal payment for adults, and make child benefit be £100 per month per child. This means a family of 4 gets £800 in benefit. In order to reach the current median earnings the two adults would only need to earn another £1200 between them.

To put it another way, the amount of benefit they get is similar to having an extra full-time minimum wage worker in the family.


By and large, people can make choices about how they want to live. Given a system like this some might try to live in squalor on the basic benefit and not work at all. I think they should be allowed to do that if they want. I'm fairly sure that the vast majority will soon start to see that a little bit of extra income here or there will help, and so will soon start contributing tax to the system.

I think the whole thing stands or fails on what the taxation system would have to look like for people who earn in order to accomodate the new payment. However with benefit payouts in the realms of hundreds of billions of pounds per year, the potential savings from the reduction in these are enormous.

1 comment:

  1. So long as the fine detail required to deal with special cases does not re-introduce all the complexity this concept removes I cannot readily see a flaw in this argument. I think it should be tested by an open minded current MP or two.