Groundbreaking new research explores what improvements could be made to the benefits system on a tight budget
The TaxPayers’ Alliance sets out for the first time a practical, costed guide to welfare reform. It comes after Iain Duncan Smith, the new Secretary of State for Work and Pensions, announced his intention to simplify the benefits system and improve incentives to work. Critics argue that any overhaul can only be achieved by spending more money, which may not be possible with a crisis in the public finances. But the TaxPayers’ Alliance can now show how a better and cheaper benefits system could be designed and implemented, to stop people falling through the net.
The TaxPayers' Alliance highlights five key failings of the current system, which fails the poorest families:
- It is too complicated, with more than 50 different benefits (the take-up rate for the Working Tax Credit is only 57 per cent)
- It is poorly administered, with fraud and error costing £4.5 billion each year
- It’s unfair on couples because some lose up to £1,336 by living together
- Those who work and progress in work are financially penalised, the minimum wage of £5.80 an hour can be worth as little as 26p
- The number of people living in severe poverty has increased from 5 percent to 6 percent in the last decade
The report describes how the ‘iron triangle’ of benefit reform means it is generally only possible to fulfil two of these three objectives at any one time: directly raise the incomes of the poor, increase the employment of the poor and reduce welfare spending. Employment is the most sustainable way out of poverty, and at a time when the government is trying to save money, reducing welfare spending is essential.
This new paper proposes a single negative income tax, shows how it could be administered and provides a model of costs for various tax levels and taper rates (see table below). High taper rates put people off work, our preferred option is a 55 per cent taper, whilst reducing the poverty line to 50 per cent of median income (costing £62 billion, a saving of £1.7 billion, even before getting more people into work). The cost of the benefits that the proposed negative income tax would replace, under the existing system, is £63.7 billion.
The cost of the TPA’s Negative Income Tax Proposal in 2007-08 (£ billions)
Matthew Sinclair, Research Director at the TaxPayers’ Alliance, said:
“It is an absolute scandal that politicians have failed to reform a welfare system that is trapping far too many people in poverty and benefit dependency. Setting a more realistic poverty target would mean we could stop people falling through the net and break open the welfare trap. Instead they have applied endless sticking plasters that only worsen the underlying problems of a system that is far too complex and severely undermines incentives to work. Taxpayers footing the bill will expect that the Government take this issue seriously and take the tough but fair decisions needed.”
Mike Denham, Research Fellow at the TaxPayers’ Alliance and former Treasury and City Economist, said:
“There is an exciting opportunity for this Government to be a game changer with serious benefit reforms. We are all aware of the need to keep down spending in order to tackle the huge public sector deficit, but there is no need for that to preclude serious efforts to reform the welfare system. It is possible to cut withdrawal rates and the cost to taxpayers so long as we are willing to adopt a more realistic poverty threshold. The Government need to take that step and mount an all-out assault on the welfare trap.”
For further comments, media enquiries and to arrange broadcast interviews, please contact:
Emma Boon, Campaign Manager of the TaxPayers' Alliance, on 07736 065 546 or at [email protected]
To discuss the research and methodology, please contact:
Matthew Sinclair, Research Director of the TaxPayers' Alliance, on 07771 990 174 or at [email protected]
Notes to editors
1) The TaxPayers' Alliance (TPA) is Britain's independent, non-partisan campaign for lower taxes and better services. Founded in 2004, it has over 55,000 supporters nationwide.
3) Severe poverty is defined as living on 40 per cent or less of median income.