The Government’s screeching u-turn on reforming Personal Independence Payments has distracted attention from a more fundamental problem with Britain’s broken benefits system. Regardless of whether the right people are getting the right kinds of benefits or not, too few of them stop claiming once they’ve started. We’ve got a ‘Hotel California’ system where people check in but never leave.
That means it won’t be enough for Ministers to make it harder for people to start claiming benefits in the first place. They’ve got to make it easier to stop claiming as well, so more people graduate to stand on their own feet and live proudly-independent lives without needing so much taxpayer-funded help from the state. Otherwise we’re ignoring half of the benefits reform problem completely.
The Government is taking a small but welcome step in the right direction with extra help for sick and disabled people to find work. But it still completely ignores the much bigger and more fundamental obstacles that prevent people getting off benefits once they’ve started claiming. Unless and until Ministers face them squarely, they’re ducking half of the problem.
The worst obstacle is that less-well-off households pay far higher overall rates of tax than rich people, because their benefits are reduced for every pound they earn on top of the normal taxes they pay. The combined take can easily reach 70% compared to the 45% top rate of income tax paid by high earners, so benefits claimants have much weaker incentives to work hard than top earners do. Why should claimants react differently to worse incentives than their better-paid neighbours? They’re poor, not stupid.
Even worse, benefits have ‘cliff edges’ where getting a promotion or working a few hours overtime can mean claimants cross hard-to-spot lines where the system suddenly takes away big chunks of help. That can push those 70% overall tax rates above 100%, which means the system is actively penalising people who do the right thing instead of rewarding them. And because the dividing lines are hard to spot, it gets risky to work harder too. We’re making work scary, which cuts incentives still further.
The effects are huge and terrible. Taxpayers face skyrocketing bills because lower-paid people work fewer hours and claim more benefits than if their work incentives were stronger. Employers find it harder to fill entry-level jobs, hobbling our economy by restricting the supply of labour so we grow slower than we could or should. Families trying to climb the economic ladder out of poverty have worse opportunities than their richer neighbours. And our society’s legitimacy and fairness are undermined by higher overall tax takes from low-paid households than from top earners, so the ‘haves’ are being subsidised by the ‘have nots’.
The answer is to reform the way we wean people off benefits, so it always pays to work. That means abolishing all the current system’s complicated withdrawal rules and cliff edges, and replacing them with a single, simple alternative approach where the combined rate of income taxes and benefits withdrawals can never be higher than the top rate of income tax. The new combined rate would apply to every pound of income from work earned by benefits claimants and, once they’d repaid all their benefits, including the value of ‘in-kind’ or ‘passported’ benefits like Motability or Warm Home Discount, they would only pay normal income taxes after that.
The effects would be electric. Millions of low-paid benefits claimants would suddenly have the same strong, simple, predictable incentives to work as Britain’s top earners, so everyone would know that getting promoted or working a little overtime will always pay, no matter how much they’re getting at the moment. And it would slash complicated administrative red tape and bureaucracy in the benefits system, increase opportunities for people to work their way up out of poverty, unlock economic growth as employers found it easier fill entry-level jobs, and make Britain fairer because the ‘haves’ would no longer be subsidised by the ‘have nots’.
Will these changes happen? They could, because rebellious Labour MPs would find them easier to support than cutting benefits for people who could previously have claimed successfully. And they should, because they are economically and morally the right thing to do. But they won’t, unless and until we stop ducking half of the benefits reform problem, and start dynamiting the obstacles that stop people climbing out of poverty to live proudly independent lives instead.
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