The thinkable

So many crises of the welfare state have been declared over the past 20 years that many of us have become immune to the rhetoric. When a newspaper headline recently declared the end of the welfare state; when an old campaigner like Frank Field describes the welfare state as "broken-backed;" or when Robert Skidelsky, in January's Prospect, argues that welfare costs are "out of control" and must be detached from public funding-it is tempting to recall that we have been here before, many times.

But it would be wrong to dismiss the current brouhaha as just another round in the battle between laissez-faire and social democracy. Whatever the reality of welfare spending-and, as we shall see, the situation is not as dire as has been claimed-there has been a pronounced shift in attitudes towards welfare, across the political spectrum. Out of these new attitudes a genuine crisis could arise, unless policy-makers use their imaginations.

the welfare state used to be one of the hallmarks of a civilised nation. For many people it was the crowning achievement of the postwar consensus: a noble edifice constructed through the efforts of altruistic people to help the disadvantaged and to promote social justice. The politicians who shaped it and the civil servants who administered it were motivated by the spirit of public service. The professionals who worked within it-doctors, nurses, teachers, social workers-were required by their professional ethic to do the best for those they were trying to serve. Welfare services-education, health care, social care-were provided free, or largely so; the resources for this, together with those for financing income support, and social assistance, were willingly provided by taxpayers for the benefit of all citizens, but especially the disadvantaged. By producing a healthy and well educated workforce, the welfare state was also an economic asset.



Now the picture is very different. From being a saintly, even heroic enterprise, the welfare state has become the villain of the piece. For many thinkers on both right and left, it has become an incubus, sapping the spirit of the nation, draining the life-blood of the economy and corrupting the citizenry. The attacks have come from every corner. Social historians now believe that the origins of the modern welfare state do not lie in an altruistic sacrifice by the better-off, or even in the collective interests of the working class. Rather, it is the product of pressure from the middle classes, anxious to secure state insurance following their experiences in the inter-war years.

Many observers believe the well of middle class self-interest has now run dry. Better-off taxpayers have reached the limits of their taxable capacity. Politicians who propose tax cuts win elections. The middle classes now believe that, instead of participating in collective school education, health care and pensions, they can do better by making private arrangements. In this they have been encouraged by 17 years of Conservative government which has whittled back welfare services, both in these areas and others in which the middle class benefited (such as higher education, and mortgage interest tax relief). The welfare state has lost an important defender.

At the same time, the influential "public choice" school of economists and political scientists has challenged the belief that politicians and bureaucrats working within the welfare state operate in the public interest. Instead they are said to be primarily self-interested. Politicians are concerned to maximise votes; bureaucrats seek power through increasing the size and adjusting the shape of their budgets; professionals are concerned, not with the welfare of their clients, but with their own income, status and working conditions.

Even more insidiously, the welfare state is supposed to have corrupted the very people it was trying to help. It has turned welfare recipients into shirkers avoiding paid work, wilfully having children on state largesse and jumping queues for public housing. Welfare is not a response to the problems of inequality and poverty: it has created them. Thus Skidelsky claims that the welfare state "produces social pathologies summed up in the notion of the 'underclass.'" For Frank Field, it is having "a monstrous effect on human motivation and honesty."

Finally, far from being an asset to the economy, these same thinkers believe that the welfare state is a burden whose weight needs to be lifted off the productive sector as soon as possible. Skidelsky argues that "the welfare state... keeps growth low and unemployment high. Moreover, it weakens the supply side of the economy by giving people less incentive to work and to save." Others claim that welfare costs on employers make companies uncompetitive in the international market. Moreover, the situation is getting worse- the ageing of the population and medical progress create an almost irresistible pressure for ever higher welfare spending.

in many ways this new picture is as much of a caricature as the old. In most countries of Europe the dreadful experiences of depression and war that disfigured the earlier part of the 20th century bred a genuine spirit of solidarity among all classes, a spirit that undoubtedly contributed to the setting up of the postwar welfare state. Even now the welfare state is more of a savings bank than a redistributive device. Recent research at the London School of Economics demonstrated that fully two thirds of welfare expenditures involved distributing income from one period in an individual's life to another period in the life of the same individual; only one third redistributed income from one individual to another.

Nor have the middle classes deserted public health and education; private health insurance is limited in coverage and its growth has been less than spectacular, while the proportion of school-age children educated privately remains around 7 per cent and has hardly increased at all in 30 years.

As for the underclass, if it exists at all-which many social scientists doubt-surely it is more plausible to blame not the welfare state, but the growth in market-driven unemployment and inequality. Despite the plethora of anecdotes about able-bodied men shirking available work, or teenage girls having children in order to jump the queue for public housing, hard evidence is sparse.

Nor is it clear that the welfare state is a growing burden on the economy. Although there has been growth in some areas of social spending, such as social security and health, this has been offset by falls in areas such as education and housing. Consequently the share of GNP absorbed by welfare spending has remained roughly constant (at around 25 or 26 per cent) since 1976. Moreover, it is still less than in most other, more successful, EU economies: only Portugal has a lower share.

The future is not so dire either. This is particularly true of the ageing population issue: for Britain at least, much of the increase has already occurred. The numbers of elderly people will rise in the 20 years between 1991 and 2011 by less than half the increase that has already taken place since 1971. The numbers rise more sharply after 2011 (particularly for those over 75) but, even by 2041, four fifths of the population will still be aged under 65. The estimated age dependency ratio (the number aged over 65 for every 100 persons aged 15-64) shows no great change until 2020, remaining at around 25. By 2040 it will have increased to 33.1, but even then it will be well below that faced by other advanced countries, including France (38.2), Japan (37.8) and pre-unification Germany (48.2).

The implications of an ageing population for future spending in the UK are not dramatic. One estimate of its impact on costs concludes that, if the same amount continues to be spent on each elderly person as now, welfare spending per head would increase in absolute terms by less than 17 per cent by 2041-a figure considerably less than the increase in average incomes over that period.

Moreover, the assumption that the same amount per person will be spent on elderly people may be unjustified. This is especially true of health care, where it is a matter of controversy whether elderly people at a given age are becoming more or less healthy. But an increased awareness of the different cost effectiveness of treatment for patients of different ages, coupled with pressures to allow elderly people to "die with dignity" may lead to a shift of spending towards younger age groups.

Further, an important cutback in state welfare as advocated by Skidelsky in his Prospect article does not necessarily reduce the overall burden of welfare. The demand for welfare services such as health and education will continue; it must be met somehow from the economy's limited resources. In privatised systems these costs are often met by business-and the burden can be considerable. The cost of providing their employees with private health care plans in the US, for instance, led the chief executives of several big American corporations to lend their support to some of the pre-Clinton proposals for national, government-funded, health insurance-proposals that (unlike Clinton's reforms) they saw as reducing their wage costs.

The message to those who regard the demise of the welfare state as imminent is: don't panic. It is perfectly possible to soldier on with broadly the present welfare arrangements without too much pain; and some of the more dramatic alternatives, such as substantial privatisation, are much more likely to make things worse than better.

However, the fact that things are not as bad as the Cassandras would have us believe does not mean that all is well. Aspects of this new picture of the welfare state are realistic enough to make even its most convinced supporter uncomfortable. The middle classes do seem to be getting more dissatisfied with the uniform, often basic standards of services the welfare state provides. Many politicians, welfare bureaucrats and professionals are often self-serving. Much of the apparatus of the welfare state-especially the ever growing use of means tests-does demean its clients, often converting them into evaders and avoiders of various kinds. What should be a noble enterprise, too, often becomes a sordid one of hunting down the supposedly undeserving. Most European countries do have a significant grey economy; participants work there at least in part to avoid the tax and social security nets.

so the search is on for amendments and alternatives. One, relating specifically to the service side of the welfare state, is the introduction of internal or quasi markets into the provision of health, education and social care. The advocates of these policies accept that many professionals and managers are self-interested, but argue that introduction of the forces of competition will, as Adam Smith suggested, har-ness that self-interest to the public good. Thus locally managed schools will, in their own interests, compete for state financed pupils; hospital trusts and private social care providers will compete for contracts from state purchasers. To be successful in the competition, the argument runs, all these providers will have to pay more attention to the needs and wants of their users.

It is still not clear whether these quasi markets are working. On the one hand, there are signs of both greater efficiency and responsiveness among many schools and hospitals. There are also encouraging signs of innovation and entrepreneurship. On the other hand, there are worries that providers are engaging in "cream-skimming"; that is, selecting the cheapest and easiest clients to provide for instead of the neediest. There is also the danger that treating people as though they are self-serving makes them so; that the good money of public-spiritedness is driven out by the bad of self-interest. Overall, the state of the quasi market balance sheet is unclear.

On the other side of the welfare state-social security and cash benefits-we are still in the realm of ideas rather than policy. However, some of the ideas are interesting ones. One, drawing on the Singapore experience and echoed in the work of Field and Skidelsky, is what we might call "compulsory privatisation." Under this kind of scheme, everyone is compelled to contribute to their own individual savings account held in a national fund. This account may be drawn on to pay for welfare needs, including health care, long term care and pensions. It can also be used to tide people over periods of unemployment; it could even finance house purchase or personal investment in education or training. If there is a surplus in the individual fund it may be passed to one's heirs.

Such schemes have their attractions. They avoid means-testing benefits (although the contributions to the pool increase with income): hence they reduce the disincentive to work and save of those tests. They positively promote savings; and could lead to an increase in the savings rate of the economy as a whole. People who worked harder would accumulate larger accounts and hence be rewarded for their efforts, rather than penalised as under means-tested regimes.

However, these schemes also have significant problems. Governments which have tried them have found it difficult to resist plundering the revenues they raise, usually through compelling the fund concerned to invest in low-yield government securities. As a result, as David Willetts noted in his review of Frank Field's proposals in last April's Prospect, the capacity of the fund to meet its commitments may be significantly impaired. Furthermore, as with income tax or social security contributions, these schemes drive a large wedge between gross wages and actual take-home pay (in Singapore it has amounted to up to 40 per cent). Thus they can still create incentives for avoidance by those who think themselves unlikely to need welfare benefits-as well as creating pressures to drive up gross wages and imposing more costs on employers struggling to compete.

another approach supplements "fiscal" welfare, that is, welfare based on the tax and social security system, with "legal" welfare, that is, welfare based on regulation or legal interventions of one kind or another. An example of legal welfare is the minimum wage, long advocated on the left, but now gaining support from a much wider group of labour market analysts. Another, aimed at reducing unemployment, is a legal limit on the working week, an approach being studied in the Netherlands and France.

In Britain, Australia and elsewhere, the financial difficulties of single parents are being addressed by statutory bodies such as the Child Support Agency; and in Britain measures have been proposed to make divorce more difficult, especially for couples with children. There is also a growing interest in Anglo-Saxon countries in the obligation alimentaire: the principle, common in continental Europe, that adults have a financial obligation to support their elderly parents. Singapore is now considering a similar scheme, with the obligation being legally enforced.

What all these measures have in common is that they do not wait until income is "delivered" by the market to families or households and then, like the current welfare state, redistribute it through fiscal measures such as taxes and social security benefits. Instead, they use legal measures to intervene directly in the process by which people get an income. So minimum wages and limits on working hours affect the amounts that employees obtain from their work; the Child Support Agency, restrictions on divorce and the obligation alimentaire compel people to support their dependents directly. Such measures deliver welfare through legislation or regulation, not through the tax and benefit system.

Legal welfare schemes have their merits. Perhaps the biggest one is that they avoid taxpayer resistance. They also reinforce certain moral principles; employers should not exploit their workers either through paying them too little (minimum wage) or working them too hard (maximum working week); errant fathers should support their families (Child Support Agency) and families each other (obligation alimentaire). As such they can provide a kind of moral leadership; if the values become firmly embedded in the culture, it may mean that in due course the legal compulsion can be removed.

But they also have their problems. Taxpayer resistance might be replaced by other, equally effective kinds of resistance: witness the campaign by middle class fathers against the Child Support Agency. There may be damaging consequences for the economy of minimum wages and maximum working weeks (although these remain controversial). And the underlying moral agenda may not always be to everyone's taste: should the state really enforce family obligations as in the obligation alimentaire?

but the most promising alternative to the old welfare state involves neither compulsory privatisation nor legal welfare, but what might be termed partnership schemes. Here the state acts not as a benevolent giver of charity or as a punitive inquisitor dividing the deserving from the undeserving, but as a partner helping people in need to help themselves. Such proposals can appeal across the political spectrum. The present government has proposed a kind of partnership scheme in one area of welfare (long term care); but ideas of this kind also seem consistent with the philosophy of New Labour as expounded in some of Tony Blair's and Chris Smith's recent speeches.

To illustrate the basic idea, take the topical issue of funding long term care for elderly people who are physically or mentally disabled. It is clear that, in order to provide an adequate level of finance for such care, private resources will be essential-both in financial terms and in terms of time and effort provided by carers. The trick is in some way to mobilise these (or to continue to mobilise them) in a fashion which both provides enough combined resources (public and private) for an adequate level of care for those who need it, while not seeming punitive to those paying.

The problem with the current means-tested system in Britain is that it meets neither criterion. The level of provision of community care is universally regarded as inadequate. At the same time the means test, which requires that personal assets fall below a certain level in order to qualify for state support, seems to penalise those who have had the foresight to save for their old age, or for their children's inheritance; it is thus viewed as punitive and exploitative. Moreover, like other means tests, it encourages people to behave badly: to engage in means test avoidance, adjusting their means in such a way as to minimise the amount extracted by the state.

The government has recently proposed what it calls a partnership scheme to deal with this. If individuals are prepared to take out private insurance against the need for such care, then they will be allowed to include the value of the insurance as the part of their assets exempt from the means test. So, for instance, if an individual took out insurance worth ?40,000, he or she would be able to add the ?40,000 to the ?10,000 currently exempt from the means test, making ?50,000 exempt in all.

But there are a number of difficulties with this. One is that the means test remains less stringent, it is true, but still there. More important, reliance on private insurance is suspect. Premia for these kinds of schemes tend to be very high, especially where couples are involved. Moreover, people are reluctant to pay them for what, rightly or wrongly, they see either as a low risk, or one that involves costs which others may bear-their family or the state. This is illustrated by the US experience of such schemes, where take-up has been much lower than expected. A scheme in Connecticut set up in 1992 was supposed to attract 50,000 takers in its first five years; so far fewer than 2,500 have signed up.

An alternative which does not suffer from these problems is what might be termed a "matching" scheme. This would involve a minimum level of public funding coupled with a system of matching grants for expenditure over that minimum. Under this system, each person assessed as in need of care would be entitled to a minimum level of care met from public funds. This minimum, although adequate, would be basic. For payment of care above the minimum, the government would undertake to match pound for pound the resources which individuals or their relatives can mobilise for their own care. To keep spending under control, there would be an overall limit on the total amount of grant which could be received by any individual.

Matching schemes of this kind give individuals an incentive to mobilise their own resources only when the necessity arises and are therefore more likely to be taken up than insurance. They are likely to be less progressive than the means-tested schemes they replace; but, precisely for that reason, they provide an incentive for the middle classes to stay in the welfare system, thus contributing to its defence. Moreover, they have the merit of avoiding any form of compulsory means tests, encouraging people to contribute resources voluntarily instead.

A similar idea could be applied to pensions. The state could continue to provide a minimum pension, as now, but also agree to match pound for pound (or at some other rate) any extra provision an individual makes. As with community care, there would be a limit on the total offered to any one person.

The idea applied to pensions is less regressive than community care; there is also a crude form of partnership scheme already operating in the form of the various tax reliefs for occupational and private pensions. But, as is well known, tax relief is both regressive and a blunt instrument: it favours higher rate tax payers and does not benefit those who do not pay tax. Moreover, its cost is difficult to control.

The total cost of these tax reliefs to the UK treasury is now running at about half the total cost of the state pension. If this money were used for a matching grant system, it would be more progressive. It would not favour higher rate taxpayers and would go to everyone, not just to those who pay tax; it would create a much more sensitive policy instrument and would reduce the incentives for tax avoidance. Finally, it would not consume resources-it would be simply a redirection of existing resources. So partnership schemes offer a way of reforming the welfare state which does not involve its abolition in whole, or even in part; which can reduce its malign effects while reinforcing its beneficial ones.

But whatever the merits of these reform proposals, or those of the others we have discussed, we must remember that in the welfare world, as in other worlds, there are neither saints nor villains. There are simply imperfect people trying to work with imperfect systems. We need to accept the imperfections of the former while using our imagination to devise ways of reducing those of the latter.