Britain’s welfare state is broken-backed: the number of claims is soaring and with them the welfare bill. Well over 22 million citizens already depend on means-tested assistance. Means tests paralyse self-help, discourage selfimprovement and tax honesty. Means tests attack the basis of independent citizenship and community cohesion and at the same time incentivise bad behaviour. It was not meant to turn out like this. The Labour government led by Clement Attlee, elected in 1945, aimed for very different results when it implemented the welfare programme set out in Sir William Beveridge’s report Social Insurance and Allied Services, published on 1 December 1942.
Ultimately Beveridge’s scheme failed but not for the reason normally trotted out – that he did not envisage the changed position of women in society. His scheme could easily have been adapted to accommodate changing gender roles if there had been the political will and the imagination in Britain in the postwar period.
If we are to understand why Attlee’s and Beveridge’s vision of a “New Jerusalem” failed to materialise, we need to look at the main assumptions that underpinned the 1942 report, and at the failure of the great man, who served briefly as a Liberal MP before losing his seat in the 1945 Labour landslide, to make a clear distinction between the principles of national and private insurance.
Beveridge’s welfare state stood on three pillars: the creation of a national health service, full employment and the payment of child benefit. Beveridge insisted that the numbers in his welfare budget would not add up unless the National Health Service proactively prevented short-term injuries from becoming long-term disabilities. Citizens had a duty to get themselves well as quickly as possible and so cease to be a cost to the public purse. To help them achieve this objective, the NHS was not to become an ill-health service.
Beveridge was similarly discerning about the question of full employment. The welfare budget could not be balanced if unemployment continued with the role it had played in the lives of too many working-class families during the years between the two world wars. Wartime had shown full employment to be an achievable reality, not merely an aspiration.
His third assumption concerned the payment of adequate family allowances (now known as child benefit). Family allowance had to be large enough to ensure that work paid.
On these three basic assumptions, Beveridge built his welfare state. He and Attlee saw the welfare state as teaching values of citizenship and thus as a staging post to perhaps the most audacious reform programme of all. Attlee’s goal was nothing short of the creation of a new type of citizen who would breathe life into the institutions of the “New Jerusalem” that he and his colleagues set about establishing after the Labour victory of 1945. As it turned out, the failure to develop a new citizen who prized, through welfare, the values of work, savings and honesty is responsible for more than just the “failure” of Beveridge’s reforms.
Beveridge’s vision was for an insurance-based welfare state in which entitlement would be earned largely by the function the citizen undertook, either through work or by assuming caring responsibilities. When Winston Chur - chill finally turned his attention to domestic politics after the Second World War he conjured up the phrase by which Beveridge’s proposals would be described: he envisaged a compulsory national insurance that would afford coverage “from the cradle to the grave”.
By 1948, Britain had insurance-based welfare that offered coverage against all the events that could interrupt a person’s earnings and thereby push them into “want” (one of the five “giants” that Beveridge thought should be attacked on the road to reconstruction; the others were disease, ignorance, squalor and idleness). Benefits included maternity grants, unemployment and sickness benefits, old-age pensions and a death grant.
The central principle of the Beveridge report was a unified contributory insurance scheme that ensured that all qualifying citizens, when prevented from working, would have a subsistence income for themselves and their families as of right, without any form of means testing. He was clear that his definition of subsistence was a political decision. He recognised, however, that in every year from 1948 onwards benefits would become less adequate, as they were fixed in value while the cost of living rose.
It was against this background that social scientists “rediscovered” poverty in the late 1950s and came to define it in relative terms, a development with which Beveridge would have been uncomfortable. Poverty was now defined by the level of the means-tested safety net. This new definition, however, had the ironic effect that each time parliament raised the minimum level of income, it changed the poverty line, too. By acting generously, parliament increased the numbers of the poor.
Against means testing
The challenge for the Labour Party today is to use the 70th anniversary of the Beveridge report to rethink the means-tested social security strategy that dominated the last Labour government. That strategy has imprisoned the party in an approach which threatens to destroy the Attlee vision of the welfare state.
The coalition government’s system of universal credit, which will be introduced gradually from April 2013, will replace the existing system of working-age benefits and tax credits with a single payment for both people looking for work and those on low incomes. It entrenches means testing more firmly in our welfare system. Yet Labour’s line is to support this reform. It does so without any clear thought as to where the strategy will lead us or what our goals should be.
Back in the 1950s, the Conservative MPs Iain Macleod and Enoch Powell were clear about their objective. In a pamphlet entitled The Social Services: Needs and Means (1951), they argued that, at some stage, the important question to ask about welfare provision would cease to be, “Should a means test sometimes be applied to a social service?” Instead, it would be asked whether any service should be provided without first having a test of means.
If we are fast approaching that tipping point today, where should a Labour reform programme go? First, we need to be clear that insurance cover should be based on collective ethics, not governed by private market insurance rules. Second, we must make a distinction between when to save and when to insure. Third, we will need a number of different schemes to offer a comprehensive coverage. Fourth, we must adhere to Beveridge’s three critical assumptions, which are worthy aims in their own right.
It will be a long haul back to full employment but that must be the goal. We must build on the one outstanding success of the last Labour government’s welfare reforms – the Future Jobs Fund – so that, in time, those who choose to remain idle are offered work and no benefit, while those desperate to work have their wishes met.
The NHS has to be reformed to fulfil Beveridge’s ambitions, which will require a new means of financing, as the switch to preventative health comes with a large price tag. And the cost of childcare must be met in a way that pays claimants to work.
We need national schemes to ensure that, whatever the level of benefit they may be receiving, claimants can again begin to build on their own provision without being penalised or having to disguise what they are doing. These schemes must promote work, saving, caring and honesty.
Any new scheme must make the important distinction between when savings and when insurance will provide the best cover against loss of income. Almost all of us will retire, and we need to have saved so that we have an additional claim on future national income. Savings for individuals can be risky, but all of us have an interest in not financing means-tested welfare. The risk in gaining a minimum adequate state pension should be shared. The risks of an additional pension above the state minimum should be shouldered by the individual.
A new national savings scheme, with the current state pension provision, could guarantee a minimum pension linked to earnings, if some of the costs are met by a degree of redistribution. As the vast majority of us cannot buy an index-linked minimum pension in the private market, it is in our interests to pay a little extra so that the poor are included, and we are not presented with their means-tested pension bill.
Which of our needs are suitable for insurance rather than savings? Long-term care is an area where only one in five of us will need to make a claim. Likewise, only a minority of us will become unemployed; again, insuring against unemployment makes sense.
How will increased National Insurance (NI) contributions go down with the voters? Even though all the political parties use NI as a means of increasing tax revenue on income, surely most voters still believe in the contributory principle and think they cover most of the cost of the NHS – the one aspect of welfare that is loved by so many. So why don’t we turn this affection to our advantage when financing wider welfare reform?
Let’s openly finance the NHS from a new insurance fund with a proper contribution from general taxation to cover those who do not or cannot pay National Insurance. The switch must be matched by cuts in that part of direct taxation that covers current NHS expenditure.
Once the switch is made, we will see that our ceaseless demands for a better NHS come at a price that would have to be met from the new NHS insurance fund.
But few of us would willingly contribute more if we believed that politicians would get their hands on the funds. The governance of these new schemes is crucial to the success of reform. Each fund’s independence must be guaranteed. We have a model of how this might work in the Bank of England’s interest-rate-setting Monetary Policy Committee, which is independent of the central government.
The trustees of the new insurance funds would be directly accountable to the membership and not to the government. Here is the basis for a new tax contract where increased contributions may be forthcoming, and where - by we make the insurance funds powers in their own right.
What chance does Labour have of making a decisive break by reasserting the principle of insurance-based welfare? There is much in our political culture that supports such a change. There has always been a deep longing on the centre left for a virtuous polity, and support for the view that citizenship is more substantial if it is tied to certain public functions, such as work, caring and the nurturing of children. Likewise, our political culture has stressed contractual rights, which are thought to take precedence over poverty relief.
The reforms proposed here would return welfare to being earned rather than awarded after proving need. Re-emphasising this part of our tradition frees politicians from the present futile debate, in which they defend a definition of poverty that most of us do not recognise.
The idea of solidarity has wide appeal, and that appeal becomes even more relevant as we try to counter global market forces over which we have little or no control. There could not be a better time for Labour to set out a new, nonstate, collective approach to welfare reform.
Frank Field is the MP for Birkenhead (Labour). He is the author most recently of “Saints and Heroes: Inspiring Politics” (SPCK, £12.99)