Why IDS's plan is right and why it won't happen

Iain Duncan Smith’s ideas for a new benefits regime are coherent and progressive but he can’t avoid the fundamental ‘trilemma’ of welfare reform.

In essence, the Duncan Smith plan – which was published on Tuesday – argues for a massively simplified system in which job seekers and the low paid receive universal flat rate benefits. Unlike existing benefits, recipients will keep a large proportion of their payment if they get work or improve their earnings. Thus people have stronger incentives to work, and there is an end to the manifest injustice that it is among the poorest in our society that we see the highest marginal tax rates (the combination of loss of benefit and tax-paying).

I support this approach. Indeed in a perfect world I would go further and advocate a universal citizen income paid to everyone. Yes, this means we give benefits to the rich but the way to address this is through the tax system. But what can’t be disguised is that this system – and even IDS’ more modest version - costs a great deal more.

IDS’ answer is to recognise the cost – which he puts at £2.7 billion a year but to argue that by providing stronger work incentives he will get an extra 600,000 people back to work. By then factoring in the money saved on the health service and law and order as a consequence of having fewer people unemployed, he shows that within a few years the scheme is saving money.

The problems with this are threefold. First, we don’t currently have this kind of money to pay out upfront. Second, his cost and benefit estimates are almost certainly too generous to his scheme. Third, it is in reality very hard to show that upstream measures like benefit reform have downstream effects like increasing employment and reducing ill-health and criminality; there are just too many intervening variables. I say ‘very hard’ because it is not impossible. A few years ago Quebec instituted an ambitious and integrated enhancement of parental leave and child care provision. The figures do seem to show pretty conclusively that this has led to a significant increase in the employment rate of mothers.

In the short and medium term (which is all that the Treasury cares about when it comes to revenue expenditure) IDS has to face up to the welfare trilemma. Which is simply that out of three main objectives for the welfare system - to incentivise work (or saving), to help the poorest most, and to constrain public expenditure - you can achieve any two but never all three.

IDS’ plan is not dissimilar to the framework developed by Frank Field before his short lived time as minister for welfare reform in 1997-8. Field too was viscerally opposed to the means test and its impact on incentives. When officials worked on Field’s plan they too found that the upfront costs were huge. Feeling that he was being blocked by officials and lacking support from his Secretary of State, Harriet Harman, Field was soon briefing against the department and soon after that he left government to resume his role as contrarian back bencher (it was, by the way, this history which lay behind great amusement when Field recently declared that Harriet would be a good replacement for Gordon Brown).

IDS’ radicalism is to be applauded. In the long term I believe a plan like his would work. But in the time frame that Government’s tend to use there is no escape from the welfare trilemma.