William Beveridge, creator of the “welfare state” hated the term, believing that the heavy hand of the state crowded out private enterprise (© Chris Ratcliffe/Bloomberg via Getty Images)
The welfare state began, 70 years ago, with the famous tears of William Beveridge. When he received the request from Arthur Greenwood, the Labour minister responsible for reconstruction, to write a report on social insurance, the darts pricked Beveridge at the back of his eyes.
He wasn’t crying with delight at being offered his chance to erect a monument to himself. He was deeply upset that he had been denied the task he most cherished, to be in charge of manpower on the home front. This tidying up of welfare was a poor consolation prize. In the event, Beveridge’s Report on Social Insurance and Allied Services achieved two remarkable things. It sold over half a million copies and, with the sponsorship of Clement Attlee’s post-war government, it changed the country.
Yet not quite in the way that Beveridge ever envisaged or wanted. The welfare state of 2013 is unrecognisable from the one he thought he was ushering into being. This is in part the upshot of social change that nobody could have foreseen. A large rise in the employment of women and a much older society, the origins of which were happening in the early years of the welfare state, has completely altered the pattern of welfare.
As a result, the welfare bill has mushroomed and consent for the welfare state has begun to fall. In 1993, 55 per cent of people told the British Attitudes Survey that a life on benefits meant a life of hardship. Now just 19 per cent of the British people feel the same way. Thirty per cent say that the poor have brought their poverty upon themselves and even though, at a best estimate, one in 50 welfare claims are fraudulent, the British people think that every fourth claim is a scam.
The problem with welfare is not principally its scale, although in a country struggling to pay off the bills of profligacy the cost is grave. Beveridge’s “Five Giant Evils”—want, disease, ignorance, squalor and idleness—have been replaced by the New Giants of the state pension (£83. 6bn), the NHS (£106bn), housing benefit (£21.1bn) and the earning and support allowance (£9.8bn).
Yet the disillusionment that is found in every focus group on welfare is not principally about aggregate demand. Over a certain number of billions, every budget looks unfeasibly large to the average voter. The point is not how much is being paid out but who it is being paid out to. The argument about welfare is turning up in the old form of the distinction between the deserving and the undeserving poor. To put it in the less overtly judgemental language of modern politics, between those who have contributed and those who have not.
This is a distinction that Beveridge himself would have recognised and endorsed. Beveridge hated the term “welfare state” from the beginning. It wasn’t so much the first word he objected to as the second. In her superb biography, Jose Harris reveals Beveridge’s fury when Attlee’s Labour government resorted at once to the state as its chosen method. As a thoroughgoing Liberal, Beveridge believed that the heavy hand of the state tended to crowd out the voluntary associations which had been the principal welfare providers and which he hoped to see flourish.
The welfare state had begun, starting with Lloyd George’s People’s Budget of 1909, as a pooled insurance scheme. You paid in during the good times and drew out in the bad. The radical Liberal idea behind it was that taxes would capture the wealth that crept into the bank accounts of the fortunate as they slept. But also, as Beveridge wrote years later in his famous report: “Benefit in return for contributions, rather than free allowances from the state, is what the people of Britain desire.”
Beveridge made this point again at length in 1948 in “Voluntary Action,” a forgotten sequel to his famous report. It was always his intention that benefits would be a temporary expedient, a sort of fleeting thank you for a contribution made. There was no appetite, Beveridge said, for a “Santa Claus state” in Britain. It is always worth remembering, as his ghost is summoned up so often in this debate, that the first person to sound the warning on welfare dependency was Beveridge himself.
But ever since then, means testing has waxed as the contributory principle has waned. In 1964, 73 per cent of the social security budget was funded by national insurance. Now it is little more than 40 per cent. One decisive moment in the defeat of the contributory principle was the decision by the Thatcher administration in 1982 to abolish the earnings related supplement, which had ensured that those with strong work records received higher unemployment benefit.
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The Labour governments after 1997 continued to extend means testing, which in its latter years has been rebranded as the less stigmatising idea of “targeting.” In the 13 years from 1997, Labour extended means testing from 13.7m people to 22.4m. The time when nothing was considered more degrading than a visit from the Public Assistance Committee is long gone. The means test was thought to be, as Aneurin Bevan, Attlee’s Minister for Health, said: “A principle that eats like an acid into the homes of the poor.” It is not difficult to imagine what Bevan would have made of the tax credit, which introduced means testing on a scale never seen before.
The coalition is no different. Though its senior personnel see themselves as embodying a concept of fairness based on contribution, there is no sign of this in their actual policy. In 2012, the coalition limited contributory entitlements to the employment and support allowance to 12 months. The long-awaited universal credit will, if the glitches in the computer department are ever fixed, make only a minor improvement to work incentives. Indeed, it is rather odd to draw a rhetorical distinction between strivers and shirkers and then roll everybody up into the same universal system. There is no premium in the universal credit, as there could be, for those with long contribution records. Excluding pensions, contributions are worth just 4 per cent of the overall benefits bill and the austerity programme is introducing more means testing (child benefit, for example), not reducing it.
The welfare state is still comprised of both contributory and non-contributory benefits. The basic and additional state pensions, jobseeker’s allowance and employment and support allowance, maternity allowance, bereavement and incapacity benefits are all wholly or partially based on payments made by the citizen. Benefits that are not linked to national insurance contributions include child benefit, the greater part of jobseeker’s allowance and employment and support allowance, the working tax credit, child tax credit, disability living allowance, the carer’s allowance, war widow’s or widower’s pension and the pension credit.
The two types of benefit embody competing ideas of the purpose of welfare. The governing idea of the means tested welfare state is need. Payments meet necessity and smooth out the unequal flow of income in a market economy. The sovereign notion of the welfare state based on contribution is that citizen rights are earned and paid as a badge of belonging. Modern social democrats tend to stress the importance of the pattern of income distribution. Liberals and conservatives, by contrast, stress that it matters how people come by their money and that too great a reliance on handouts fosters a culture of dependency. The argument about welfare is the constant oscillation between these two poles.
Yet, although welfare may be a conversation between these two notions, one side has been winning decisively. When Margaret Thatcher was elected, 65 per cent of welfare expenditure was on contributory benefits. Now, just 42 per cent of what is paid out is linked to what has been paid in. In real terms at 2011-12 prices, the bill for income-related benefits has risen 620 per cent since 1979. The cost of other, non-contributory benefits has risen 230 per cent. Expenditure on contributory benefits has risen only 100 per cent over the same time frame. Even that understates the shift as the increase in contribution is almost entirely due to the state pension. Everywhere else in the welfare state, the shift towards means testing is almost complete.
That this is a result of conscious policy choice can be shown by the fact that other nations have chosen differently. The main reason that the debate on immigration in Britain is so fractious is that benefits are largely paid as a response to need, rather than as a reward for contribution. In countries where the opposite is the case, there is no need to worry about immigrants taking benefits to which the public feel they are not entitled. Nobody who has not built up a fund of entitlement will be permitted to draw on public funds. Hence one choice we have made about welfare—to respond to need and redistribute income to the indigent—is rubbing up against another choice we want to make—which is to limit welfare payments to those who have built up a record of contribution.
This is leading the political parties back to the idea of contribution. Taking contribution seriously is not, for all that, wholly impossible. Graeme Cooke at the Institute for Public Policy Research has suggested that Labour might introduce a loan system for job seekers which would permit borrowing at zero interest for those with good contribution records. A paper from the Trades Union Congress has suggested that maternity pay might be graded according to prior contribution. Duncan O’Leary of Demos proposes that mortgage interest ought not to be paid as part of unemployment assistance and suggests that the proceeds might be disbursed to create a two-tier jobseeker’s allowance.
Any politician seeking to reform the welfare state will find that contribution is the problem as much as it is the solution. By some distance the largest item in the bill is the cost of pensions which people feel, perfectly reasonably, that they have earned.
This is not the only barrier to the return of the contributory principle—it will not even be the most important objection. In time, the money can always be found if the spirit is willing. In truth, however, the spirit is not willing. Be wary of politicians who blithely claim that they are in favour of contribution. The truth is that they do like contribution, they just like other ideas more.
The Conservative party has found contribution every bit as troublesome an idea in government as Labour did. In an era defined by spending constraint, the expensive move towards a more contributory welfare state is bumping up against the anger that recipients feel when benefits are withdrawn. The most acute problem is with benefits for the elderly. Many of them, like the winter fuel allowance and free bus passes, are not, in the strict sense, contributory. But they feel to their recipients as if they are a reward for long service. Until the public finances are repaired the Conservative party is stuck. It can preach about contribution all it likes but it will not be able to act.
However, the clash between a professed interest in a more contributory system and rival ideology is especially acute on the left. In 2010, on one doorstep after another, Labour campaigners were told that the public did not share its conception of welfare. The flirtation with contribution is a result of this. Yet it is salutary to remember what happened the last time a Labour politician tried to embody contribution in policy. In 1997 Tony Blair appointed Frank Field (see his article, £) as his Minister for Welfare Reform with a brief to bring the principle of contribution back into welfare. That must have been the presumption as, ever since his critique of Keith Joseph’s family income supplement as the head of the Child Poverty Action Group in 1971, Field had been a vehement critic of the means test. His argument was moral—the means test eroded personal responsibility and acted to deter behaviour such as savings and work.
The only solution to the widespread welfare dependency that Field believed was corroding the vigorous virtues of the decent working class was a rise in universal welfare and a corresponding fall in the means test. When welfare is linked to citizenship there is an incentive to work. When payments are withdrawn rapidly as soon as work is found—which is an intrinsic feature of the means test—there is little financial reason to prefer work over idleness.
All of this moral prescription might have been expected to find favour with the Presbyterian Chancellor of the Exchequer, Gordon Brown. It may have done were it not for two facts about the contributory principle, both of which offended Brown and are enduring reasons why, no matter what anyone is tempted to say, contributory welfare will remain a minority pursuit in Britain.
The first is that the changes Field envisaged are expensive. When Brown realised the fiscal implications he ran scared. There is no way around this. A reduction in means testing involves an initial boost to the welfare bill. This is a disabling contradiction. The public wants a welfare state in which the principle of desert is enshrined but it wants it to be cheaper, not more expensive. This is a circle and there is no known way of turning it into a square.
The second problem with the contributory principle for the political left is even harder to dislodge, because it is a question of ideological identity. The more that welfare is tied to contribution the less it works as a vehicle of redistribution. The tension between equality and contribution is inescapable. In the end, this is a choice that the left has to make. It is just the insoluble conundrum with which it was presented in the 2010 election. The public does not share its idea of welfare.
A great deal is riding on whether Labour abandons the primacy of its belief in egalitarian redistribution through the state. If it wants a welfare state that Beveridge would have recognised it will have to give up a lot, namely the idea that has animated its political passion—the dominance of equality. When it comes to it, the cost will be invoked as the reason for not acting but it will be the ideological conviction that is, secretly, doing the work.
