My answer to the welfare crisis

Balancing the national budget presents a double challenge for Labour. The first challenge is economic; the second political. For 50 of the 64 years since 1948, governments of both parties have run budget deficits. The current deficit, although larger than at any other time, is no new phenomenon. Our political culture has settled into a dangerous rut whereby governments promise more in public services than they can finance from tax revenues. This presents a challenge to our political system but particularly to Labour.

The 1960s Labour revisionists won the argument that Labour’s objectives were bound up with achieving greater equality rather than implementing Clause IV, which promised public control of our means of production, distribution and exchange. Equality would be gained by high public expenditure being paid for by redistributory taxation. Greater public expenditure there has been, but the electorate has shown resistance on the tax front. Now, public expenditure totals are under attack from the coalition government and would be from a Labour government too.

The government, with little grace, is on course to implement the budget reduction timetable Alistair Darling put in place before the 2010 election. But New Labour’s strategy that high public expenditure could only be sustained if the middle classes are given their share has turned out to be a political boomerang. At the first rumblings of middle-class discontent, governments and opposition have quit the battlefield, showing themselves terrified of tackling middle-class welfare. Yet this is the same group that has long dug in its feet against any increase in taxation, let alone a programme of greater fiscal redistribution.

Much of the revisionists’ strategy was based on the rather naive assumption that the goal of greater equality would somehow be automatically achieved as the social wage budget continued its happy, inexorable upward trajectory. That strategy has failed and therefore part of the new politics must be to direct attention away from the simple input calculations to a much more careful consideration of outcomes for each tranche of taxpayers’ money. We already have more than enough evidence to show how effective the middle classes are in using their sharp elbows to get to the head of the queue of any public expenditure programme.

The second budgetary challenge, but one which affects Tory and Labour alike, was set out in an article in Prospect by Paul Johnson, director of the Institute for Fiscal Studies back in February 2012. At a time when money markets are pressuring the government to cut public expenditure, demographic changes will increase expenditure totals, and this comes just as the government’s revenue base is crumbling on a number of key fronts.

The health and pension budgets, according to the IFS will, on current trends, command 50 per cent of all public expenditure by 2060. The National Health Service budget is on course to explode from 7.4 per cent to 15 per cent of GDP by that date. The same demographic changes will see the pension bill rise from its current 5.5 per cent to 9.8 per cent.

At the same time the government has to deal not only with stout resistance from individual taxpayers, but from companies too. The tax base from fuel duty is also crumbling as the green movement gets underway. What might governments do, caught as they are between an unwielding resistance from taxpayers to higher levels of taxation on the one hand, and on the other the current insatiable demand for even better public services?

Those on the right point to the pioneering role of Sweden and Canada in reducing public expenditure and doing so without falling back into a near state of barbarism. Yet both countries have been blessed with strong economic growth that may defy governments here for some time. So is there a realistic alternative to cutting health and welfare programmes for an ever growing proportion of vulnerable citizens? I believe there is, but it requires politicians to seek a new tax contract with the electorate.

Here two key goals of welfare reform come together. Since 1948, welfare has increasingly been offered on terms of need (or low income) rather than on the original conception of eligibility for welfare being based on contributions. Voters wish to see contributions play a much more decisive role in access to the welfare state. And by that they mean a national insurance based welfare, as a recent YouGov poll shows. The easiest way to concede control over additional resources would be through a reformed contributory or insurance based welfare state.

New funds would need to be established to cover welfare, pensions the NHS and care needs. Likewise, these mutual insurance funds need a form of governance that stops politicians from digging their sticky fingers into the new revenue honey jar. Challenging yes, but these are manageable issues compared to the politics of ever decreasing welfare budgets at a time of an exploding demand for access to these forms of life support.

The governance of the insurance mutuals should be based on a John Lewis model. The membership of the national schemes would be represented as part of the “shareholder” governance. These representatives would have the power to advise trustees and to remove them. But the membership trustees would not have the power to privatise the schemes’ collective assets.

The same principles should be applied to health. The demands for the latest health innovations are driven in part from the wish to remain healthy, but, in a growing secular age, with the view that nothing follows this life, keeping the Great Reaper at bay for as long as possible has an added attraction. But this ever-expanding NHS price tag is not connected directly to voters. An NHS financed by insurance would link demand for improved health to the cost of providing it. Trustees would have a duty of setting out how improved services must be linked to higher contributions.

An impossible scenario? When Gordon Brown was forced in 2002 to finance a further tranche of new health money, he paid for it by a direct national insurance increase. It turned out to be the most popular move he made, although beforehand he (and Tony Blair) were terrified of how voters would react.

The governance structure for health would be the same as for welfare where there would be credit in arrangements for citizens who couldn’t pay the insurance contribution. Membership would be earned by financial contributions, residency and other activities of which the community approves.

Embracing such a welfare and health reform programme would be the clearest sign yet that Labour had learnt the lessons of its welfare reform failures, and that it alone of the three parties knows how to ride two political horses at once. One horse is driven by the money markets demanding a greater alignment between tax and expenditure totals. Driving the second horse is growing voter demand for more generous pensions, care and health.

It was Churchill who described insurance as bringing “the magic of averages to the rescue of millions.” Working out what this means in practice to meet the circumstances of the 21st century should be one of Labour’s main tasks for the second half of this parliament. The rewards could be great. Success on this front could result in the prize of a clear majority at the next election. All great journeys, as Lao-Tzu, the founder of Taoism observed, begin with taking that first crucial step. Over to you Mr Miliband.