Centre for Social Justice

Iain Duncan Smith's Centre for Social Justice have published a report which they modestly claim is "the most far-reaching review of the welfare system in 60 years". It can be downloaded here. At the core of the CSJ’s recommendations are measures to make work pay, and reduce the working couple penalty. To encourage claimants into work, the report recommends more gradual rates of withdrawal of benefits.

It says there should be only two benefits for working age people: Universal Work Credit “earned” through participation in welfare to work schemes, which would integrate benefits such as Jobseeker’s Allowance and Income Support; and Universal Life Credit providing additional income to people with low or no earnings. The report also advocates changes intended to reduce penalties for socially constructive behaviour such as marriage and cohabitation, saving and taking out a mortgage.

Some quick thoughts (and they are just quick thoughts - it is nearly 400 pages long and I've just skimmed it in my lunch break) :

* It's a good idea to reduce marginal tax rates, though the implementation challenges of moving from 57 benefits to 2, and requiring employers to withdraw benefits as employees' earnings rise is, um, challenging.

* The total cost is £3.6 billion, and it would reduce child poverty by 210,000. In contrast, increasing benefits and tax credits by roughly this amount would reduce child poverty by around 1 million. It's not that hard to come up with ideas for spending more money on benefits and reducing poverty, but this isn't the most "cost effective" way of doing so (this is not necessarily a criticism, as there are other advantages to this approach and specifically to reducing marginal tax rates for low income workers, and many people without children would benefit).

* They have developed a 'dynamic benefits model', which they use to predict that their reforms would result in 600,000 households entering work. At a first glance, this model looks incredibly sketchy to me. They calculate the number of people that would enter work as follows:

new number in-work / old number in-work = [ (1- new PTR)/(1- old PTR) ] ^ elasticity

where PTR is the participation tax rate (you can check all this on pp 326-7).

I am very willing to be corrected on this, but it does not seem remotely plausible to me that at the moment the only variable about whether people are out of work or not is whether they could maximise their earnings by working rather than being on benefit. Any model needs to consider supply of jobs, not just demand for jobs, as well as other factors such as access to childcare, transport and so on.

This gets to the heart of the problem with the Centre of Social Justice's approach. They assume that poverty and unemployment is about individuals not taking responsibility or not getting the right incentives to get a job.

But their changes won't reduce overall unemployment at a time when there are many more people looking for jobs than there are jobs available. And economic theory suggests that the effect of increasing the demand for jobs without increasing the supply of jobs will be to put a downward pressure on wages.

* Finally, their argument that the proposals will pay for themselves are entirely fanciful - they claim £622 million savings on reduced crime and £670 reduced spending on health. It is an old bureaucrat game to try to project theoretical savings in other people's departments in order to justify spending increases in yours, but it would be more honest just to be open and upfront that high quality welfare reform costs money (and that this is a major problem for the 'cut spending now' crowd).

There is a lot to like about this report, and genuine attempts by the Centre Right to understand and tackle the problems of poverty in accordance with their own values. But far from being 'far-reaching', the report's weaknesses are that they aren't far reaching enough. They are forced into fantastical claims about the extra spending paying for itself in the short term because the Tory Party which they support won't accept the need for more spending on welfare, and their 'new dynamic models' are based on the old and failed assumptions about Rational Economic Man and poverty being the fault and responsibility of the individual.