Iain Duncan Smith – 2012 Speech on Reforming Welfare

The below speech was made by the Work and Pensions Secretary, Iain Duncan Smith, at the Cambridge Public Policy lecture on 25th October 2012. The speech was titled “Reforming Welfare, Transforming Lives”.

Thanks to Simon Heffer, Miranda Gomperts and others for arranging tonight’s event.

It is a pleasure to be here this evening.

With a new Masters degree in public policy starting at the University next year, I hope that vigorous policy thinking in Cambridge will filter through to Westminster…

… strengthening the links I know my Department already has with the Centre for Science and Policy…

… and bringing a network of knowledge, evidence and expertise to bear on what we are delivering in Government.

In my area of responsibility – welfare policy – the challenge we face is not an abstract one.

Nor is it simply a question of institutions and systems.

My mission has always been about people – improving the life chances of the most disadvantaged and providing effective support to those in need.

That was the reason I founded the Centre for Social Justice back in 2004, an organisation set up to better understand the drivers of poverty and to find effective solutions.

And it remains my purpose in office – where tens of millions of people rely on the Department for Work and Pensions every day.

We are currently delivering an extensive reform of the benefits system, and I do want to spend some time reflecting on this programme.

But if we are to make a real difference to people’s lives, what we need to deliver is cultural change – both in society and even in Government itself.

Beveridge

To explain what I mean let me start by taking you back to the early 1940s, when Beveridge was laying out his vision for the modern welfare state.

Beveridge was driven by a desire to slay the ‘five giants’ that he identified in society at the time: want, disease, ignorance, squalor and idleness.

But he was also clear about the risks that were attached to this laudable cause.

He warned that:

“The danger of providing benefits, which are both adequate in amount and indefinite in duration, is that men as creatures who adapt themselves to circumstances, may settle down to them.”

And he was clear that the system should not be allowed to “stifle incentive, opportunity, or responsibility”.

In other words he was focussed on the kind of culture that the welfare system could underpin.

Would it be one that fostered a society where people took responsibility for themselves and their families, and treated welfare as a temporary safety net in times of need…

…or one that conditioned people to grow dependent on state support, and treat it as a long-term crutch?

His fear was that if the balance was wrong it would lead to the creation of a semi-permanent underclass.

70 years after the publication of Beveridge’s seminal report, I wonder what he would make of the system now?

Welfare inheritance

Some 4.6 million people –12% of the working age population – on out of work benefits.

1 in every 5 households with no one working, and 2 million children living in workless families – a higher proportion than almost any country in Europe.

This culture of entrenched worklessness and dependency was not just a product of the recession.

There were over 4 million people on out of work benefits throughout the years of growth.

Under the previous Government whilst employment rose by 2.4 million, more than half of that was accounted for by foreign nationals.

Let me be clear, this is not even a point about borders.

It was an issue of supply and demand.

The facts serve to illustrate an issue with our workforce at home – and the enormity of the first cultural challenge we faced.

Large numbers sitting on out of work benefits unchallenged, many unwilling or unable to take advantage of the job opportunities being created.

Whilst companies were unable to get British people to fill these jobs, workers from overseas stepped in.

Overburdened system

Part of the problem was that while our economy was subject to a fundamental overhaul – freeing up the markets and moving power away from the state…

… after Beveridge, governments of all hues seemed to forget about the need for social reform.

They assumed that the renewed economy alone would do the trick of creating a more prosperous and more cohesive nation and so our welfare system was subject to an incredibly reactive process of change.

A new challenge would emerge and governments would respond by tweaking things…

… creating add-ons to employment support – at one stage, the New Deal for young people, the New Deal for those 50+, even the New Deal for musicians…

…and introducing new supplements, even new benefits into the welfare system.

Small wonder we were left with a hugely overburdened system, comprised of over 30 benefits.

For disabled people alone a complicated muddle of 7 additional payments, 3 different premiums, 4 components in the main out of work benefits and tax credits… each with separate rules, rates and purposes… some means-tested, others linked, many overlapping.

On top of this over 25 passported benefits in England, and around 20 in Wales and Scotland.

For example:

Non-repayment of children’s welfare loans. Healthy Start vouchers and vitamins . Exemption from paying the cost of board and lodging on residential trips. Energy Assistance Package Stages 3 and 4. WaterSure.

Ah yes, WaterSure. I had to ask around to find out what this was, and it turns out it is to cap the bills of certain utilities customers who have a water meter.

You might think this is an isolated benefit – but no, there is also one for reduced telephone tariffs called BT Basic.

All these benefits introduced with the best of intentions – yet each with different eligibility criteria and each giving rise to confusion, fraud and error.

It is a system of byzantine complexity.

Worse still, it is a system set around the minority.

An exemption here, an addition there, all designed around the needs of the most dysfunctional and disadvantaged few.

Instead of supporting people in difficulty, the system all too often compounds that difficulty – doing nothing for those already facing the greatest problems, and dragging the rest down with it.

Obsession with spending

What do we find as a result?

Under the last Government, spending on benefits and tax credits increased by over 60%, rising even before the recession – when growth was booming, jobs were being created, and welfare bills should have been falling.

More money spent on welfare than ever before – by 2010, costing every household in Britain an extra £3,000 a year in tax.

Small wonder that the Government racked up the largest deficit since the Second World War.

We were unable to pay our way, with an economy built on debt and consumption.

This then is the second cultural challenge I want to touch on tonight – a problem which lies, to a large extent, in the culture of government spending which has developed.

This is a culture marked by an obsession with inputs – with pouring money into social programmes – so that governments are seen to be doing something.

Of course big spending is attractive because it brings big headlines.

Chasing media attention and placating lobby groups in the short term.

But my concern is that no one asks about the outcome – in other words what impact the spending will have on people’s lives.

Take the fact that 120,000 of the most disadvantaged families cost the Government some £9 billion per year in special interventions, from an array of agencies.

The police, the ambulance service, the Council, youth offending teams…

… all of them administering selective help, most often without discussion with other groups, trying to manage their own bit of the problem rather than addressing what was holding the family back.

We were paying out some £75,000 per family, yet without doing anything to transform their dysfunctional lives.

So we saw social breakdown on the rise at the same time.

And income inequality stretched to its highest level since records began.

That is what I mean when I speak about inputs versus outcomes – we have become comfortable with the idea of measuring the money we put in, but without really caring to ask what that money achieves in terms of life change at the other end.

Pensions

In many ways the problem I’ve touched on here is also relevant to our pension system.

Irresponsible government spending is symptomatic of a wider problem – of a society reliant on debt, rather than saving and investment.

Currently, some 11 million people the UK aren’t saving enough for their retirement.

Why?

Because under the pensions means test, hard-working people who try to save can find themselves retiring on the same income as their neighbour – someone who hasn’t saved at all but is eligible to claim for Pension Credit.

What kind of message does that send out?

It tells people on low incomes that it’s not worth saving – it’s not even worth working. Just sit back and wait for the government to pay out when you retire.

Over the years we seem to have become addicted to debt instead.

Even before the recession we accumulated one of the highest rates of personal debt in the whole of Western Europe, around £1.5 trillion – the size of the whole UK economy.

We embraced a culture of ‘live now, pay later’ and looked to future generations to pick up the bill.

Reform

How far from Beveridge’s original vision.

And clearly a system ripe for reform.

But how do you reform when there is no money?

Gone are the days when governments could buy their way out of a problem.

This Government is rightly committed to the vital task of cutting the deficit – and no department is exempt when it comes to getting the public finances in order.

We have already taken action to reduce welfare bills by £18 billion by the end of this Parliament, and with continuing economic uncertainty we will have to find further savings.

But from day one we have resisted an approach which focuses solely on the amount of money to be saved.

The solution, I believe, lies in structural change – leading to a complete shift in the welfare culture in this country.

We are bringing spending back under control.

But instead of simply top-slicing the budget, we are focused on tackling the demand for welfare…

… changing the incentives in the system so that it acts as a springboard rather than a trap, rewarding those who move into work…

… and redesigning the system in a way that restores fiscal stability whilst restoring lives at the same time.

Journey to independence

This Government will always stand by its promise to protect the most vulnerable and provide support for those whose sickness or disability puts them in difficulty.

Nevertheless, my belief is that where they are able, those in the welfare system should be on a journey. It should be taking people somewhere, helping them move from dependence to independence.

So if you are able to work the system should make work worthwhile and should both support and encourage you.

What it should not do is tug you in the wrong direction, to a place where you receive so much in benefits that a return to work is unaffordable.

If you are sick but able to work in time the system should support you, stay with you as your condition changes or improves, and make sure you can take the opportunities to work when you are able.

What it should not do is consign you to a life on benefits, never check on your condition, assuming that you are better off languishing there indefinitely – as has been the case for the 1 million people on incapacity benefits for a decade or more, many unseen for the whole duration.

To achieve this journey requires an internal and external cultural change – whereby the welfare system supports people in need, but not to remain in need.

Early action

Midway through this Parliament, we have already taken action to remove stumbling blocks on people’s way to independence.

Let me give you just a few examples.

First the changes we are making to cap Housing Benefit.

Under the system we inherited, in certain cases where families were living in areas with incredibly high rents, it was actually possible for them to claim over £100,000 a year for help with housing costs.

Think about what this means for someone who is considering taking a job.

There’s a good chance they won’t, because they will fear losing their home as their Housing Benefit is tapered away.

Unable to pay their rent from a salary, they cannot take that positive step.

That is why we have limited the amount of Housing Benefit that a household can receive…

… a change which means families face the same choices about where they live and what they can afford, regardless of whether they are on benefits or in work.

Take our reforms to incapacity benefits.

We are reassessing everyone, at a rate of 11,000 claimants per week.

This is about staying with those who cannot work at the moment – regularly checking whether their condition has changed, worsened or improved.

And again, for those who can, it is about moving back towards work, and an independent life beyond the state.

Work Programme

In many cases this process requires us to address the factors that cause people to be in difficulty in the first place.

When you are dealing with people who are a long way from the workplace, who lack skills or the work habit… who are homeless or recently released from prison… you need a system that addresses these barriers in order to get them work-ready.

That is what we are doing with the Work Programme.

We have tasked the best organisations in the voluntary and private sectors to get people into employment, and then to help keep them there for up to 2 years.

The Work Programme is already helping some 700,000 people – and is due to support 3.3 million over the lifetime of the contract.

Results

Without a doubt, there are no quick fixes to get people back to work – particularly in difficult economic times.

But whilst the overall economic outlook is still unsure, the labour market is holding up better than many might have expected.

Nationally, we have seen 4 consecutive quarters of positive job growth – up 212,000 this quarter alone – and 3 consecutive quarters of falling unemployment.

There are now more people overall – and more women – in work than ever before…

… and the latest migration data shows that over the past 2 years a majority of the increase has come from UK nationals.

What’s more, we are seeing some positive signs that our reforms are having an effect.

There are now 170,000 fewer people claiming the main out of work benefits than when this Government entered office – driven by falling numbers on incapacity and lone parent benefits.

This is important. It means even though we’ve had four years of difficult economic times, we no longer let people just drift away from the labour market.

Let’s contrast this with what has happened in America.

There the unemployment rate has been similar – last month it fell to 7.8%, just below the UK figure of 7.9%.

But since the recession, the inactivity rate in America has risen by 2 percentage points, that’s 2% of the working age population giving up on work.

In the UK, despite the recession, and despite more young people staying on longer to study, the inactivity rate is close to the lowest in a generation.

The biggest demotivating factor

Despite these promising signs, there is still more to do.

For if we are to build a new journey, we have to recognise a simple fact.

Not everyone is starting from the same place.

There is no point assuming – for example – that everyone understands the intrinsic benefits of work, the feelings of self-worth, or the opportunity to build self-esteem.

For someone from a family or peer group where no one has ever held work, the pressure to conform is enormous, underscored by the notion that taking a job is a mug’s game.

Thus, across generations and throughout communities, worklessness has become ingrained into everyday life.

Take somewhere like the London Borough of Hackney, which has a high number of people claiming Jobseeker’s Allowance – almost 10 thousand people in just one district.

Yet in September alone, Jobcentre Plus took some 8,000 new vacancies in Hackney and the neighbouring boroughs.

Overall, there were over 40 thousand new vacancies across London, and across the UK there are almost half a million unfilled vacancies at any one time – many in low skilled jobs.

So as well as providing people with support to get back to work, it is vital to tackle the biggest demotivating factor that many people face…

… the fact that the complexity of the system and the way it is set up creates the clear perception that work simply does not pay.

Under the current mess of benefits and tax credits, people on low wages face losing up to 96 pence in every pound they earn as they increase their hours in work.

In other words for every extra pound they earn, 4 pence goes in their pocket and the rest goes back to government in tax and benefit withdrawals.

It is this factor which can stop someone’s journey back to work in its tracks.

Universal Credit

Changing this is what Universal Credit is all about.

From 2013, it will replace the main out of work benefits and tax credits with single, simple payment withdrawn at a clear and consistent rate.

By removing the cliff edges in the current system which mean it’s worthwhile working either 16 hours, 24 hours, 30 hours or not at all…

… Universal Credit will make work pay – at each and every hour.

80% of financial gains will go to those in the bottom 40% of the income distribution, lifting some 900,000 adults and children out of poverty.

Rebalancing the system

Importantly, our guiding principle in designing the new system is that it should be set around the majority.

Over 75% of people in work are paid monthly in arrears.

Over 78% of working age benefit claimants use the internet now.

And over 71% of those receiving housing benefit in the private sector already take responsibility for paying their own rent.

That is why as a default, Universal Credit will be paid monthly, online, and directly to claimants themselves.

We are rebalancing the system so that it caters to the needs and expectations of the mainstream, and making it a seamless transition into work – meaning Universal Credit will be simpler both to use and to administer.

But more than that, because we are no longer going by the lowest common denominator, Universal Credit will enable us to identify the most vulnerable people much more quickly than now.

For the minority who cannot budget, cannot pay their debts, or are struggling to manage…

… instead of maintaining them on benefits or waiting for them to crash out of work…

…. we should be doing more to address the root cause of this hardship – whether it be financial illiteracy, addiction, mental illness, or another problem.

Using interventions targeted and coordinated to restore stability to those who have been left behind, Universal Credit offers an opportunity to help these individuals rejoin the rest of society.

A new contract

Underpinning this improved support is conditionality.

By this I mean the set of obligations that claimants must meet in return for benefit – too often confused, poorly communicated and inconsistently applied in the current regime.

Under Universal Credit we are changing this, requiring everyone to sign up to a claimant commitment as a condition of entitlement to benefit.

Just as those in work have obligations to their employer, much like a contract, this commitment will clearly set out claimants’ responsibilities to the taxpayer.

Those who can work but are unemployed will be expected to engage with us, treating their search for work as a full-time job.

If someone fails to do so without good reason, the commitment will also spell out the robust set of sanctions they face – losing their benefit for 3 months for the first offence, 6 months for the second and 3 years for the third.

This marks the renewal of personal responsibility within the welfare system, just as for those in work.

Clarity that will lead the claimant to commitment or to conditionality.

By ending the something for nothing entrapment we can make a meaningful, sustainable change to people’s lives…

…and one that is likely to be more affordable in the long term, as we put individuals on the path to independence and reduce the churn in the system.

Pensions

As in welfare, so too in my other area of responsibility. We are plotting a journey in our pensions system as well.

Here we are looking to set people on the road to a decent and sustainable retirement.

The solution here is to get people saving – and to get them started early.

That is why we have introduced auto enrolment, helping up to 9 million people into a workplace pension scheme – making saving the norm.

But that still leaves us with the problem of the means test, which acts as a disincentive to saving.

So the second thing we are doing is pushing ahead with plans to radically simplify the State Pension system – creating a ‘single tier’ pension set above the level of the means test, so that if you contribute, you will see the rewards.

Universal Credit and the single tier pension are two sides of the same coin – ensuring that it pays, first to work and then it pays to save.

Positive action which will change lives.

Going further

In all this, we take our lead from Beveridge.

His guiding belief, that a “revolutionary moment in the world’s history is a time for revolutions, not for patching” is as true now as it was in the 1940s.

All too often, Government’s response to social breakdown has been a classic case of “patching” – a case of handing money out… containing problems and limiting the damage… but supporting – even reinforcing – dysfunctional behaviour.

This has to change, and is beginning to.

Yet if we are committed to a radical overhaul, there is scope to scrutinise the existing system further still, driving out perverse incentives.

First, you have to ask which bits of the system are most important in changing lives.

And you have to look at which parts of the system promote positive behaviours, and which are actually promoting destructive ones.

Should families expect never ending amounts of money for every child… when working households must make tough choices about what they can afford?

Is it right that young people should be able to move directly from school to a life on housing benefit, without finding a job first… when so many of their peers live at home, working hard to save up for a flat?

As Beveridge said: “The insured persons should not feel that income [from the state] can come from a bottomless purse.”

Especially so, when the economy isn’t growing as we had hoped, the public finances remain under pressure and the social outcomes have been so poor.

So these kind of questions need to be asked as we develop this theme.

Government spending

Yet there is one final piece to the puzzle.

I have covered a cultural change in society at large, and cultural change in the welfare system.

But we must also achieve a shift in the culture of government spending.

We have to reject the old tendency to lavish money on programmes in the hope that they will succeed.

The history of such programmes is of great hope followed by embarrassing failure… with taxpayers carrying the risk when they failed.

Instead of focussing solely on money going in, we must open up a whole new dimension – one focussed solely on the impact that spending has.

Every pound for life change.

That means changing not just how much we spend, but how we spend it.

Work Programme

So let me return to the example of the Government’s Work Programme, where we have been pioneering the use of payment by results.

We do that by putting the cost of helping people back to work onto the 18 Prime Providers who compete to deliver the Work Programme in different parts of the country.

They raise the money to deliver the programme alongside their subcontractors…

… we then pay them when they deliver the results – with the biggest payouts of up to £14,000 for supporting the hardest to help into work, and sustaining them there.

Because we are paying for results we will only pay for what works, reducing the risk on the taxpayer…

… and making sure each pound is having a transformative impact on someone’s life.

Early intervention

A payment by results system works best when the timescales for success are short and the metrics relatively straightforward.

But across Government, we are prioritising early intervention – getting to the root of social problems before they arise, rather than waiting to pick up the pieces.

Whether in welfare, health, education or family policy, we are focusing our attention and spending on improving life chances.

Take an example in my own Department, where we are acting on Dame Carol Black and David Frost’s Sickness Absence Review…

… preventing workers from dropping out of the labour market altogether when they become sick, rather than trying to catch them in the benefits system once they’ve fallen.

In doing so, we will reap the benefits further down the line – alleviating the social problems which so are often more difficult to tackle once they become entrenched.

But because these are dynamic interventions, the impact is trickier to measure and more difficult to forecast.

So beyond payment by results, this makes it vital to establish a measurable quality to programmes that deliver over a longer period…

… whilst unlocking new streams of funding.

Social investment

In particular, we are making good progress in opening up the social investment market.

I see this as a huge and exciting opportunity to get much more private money working in pursuit of the social good.

Historically it has been assumed that people could either be ‘good citizens’ and put their money into charitable works, but without expecting anything in return…

…or they could be ‘profit maximisers’, who invest their money in commercial ventures and have to forget about the social consequences.

Social investment is a way of uniting the two – it is about saying to investors:

‘You can use your money to have a positive impact on society, and you can make a return.’

We are leading the field in putting this idea into practice.

Of the 7 Social Impact Bonds established in the UK, 6 of them are being delivered by the Department for Work and Pensions…

… with government money working in partnership with businesses and charities.

This is the model being piloted in Peterborough, where investors are funding charities to run rehabilitation programmes with prisoners.

If reoffending falls by 7.5%, the investors receive a return paid for out of the reduced costs of social breakdown.

Just last week the Prime Minister announced his intention to roll out an outcome-based approach across the probation and rehabilitation services, making payment by results the norm.

But to replicate the success of social bonds elsewhere, we need programmes that have a real chance of seeing a return.

They need to be proven to be effective.

That’s why we’re testing a variety of cutting edge programmes through our £30 million Innovation Fund, so practitioners can develop a proof of concept – in turn making it easier to access alternative funding streams.

And it’s why we are establishing the Early Intervention Foundation which will accredit programmes of work and provide a rigorous assessment of their likely social returns.

Huge potential

There is still more to do to grow the market – with researchers and academics playing a crucial role in developing evidence-based policy.

But if we can get it right, I believe social investment has huge potential.

First, it has the potential to greatly increase the amount of funding available for social programmes by bringing in private investment money on top of that provided by Government or pure philanthropy alone.

Second, it brings a whole new level of discipline and rigour to how government delivers social programmes. Because the money follows the outcome, it therefore requires that spending has a demonstrable purpose – we must invest in proven programmes that change lives, rather than chasing a few media headlines.

But third – and perhaps most importantly – social investment could be a powerful tool for building a more cohesive society.

The gap between the top and bottom of society is in many cases larger than it has ever been.

We have a group of skilled professionals and wealth creators at the top of society who have little or no connection to those at the bottom.

Yet in so many cases what divides the two is little more than a different start in life.

I believe social investment gives us an opportunity to lock not just the wealth but also the skills of those at the top of society back into our most disadvantaged areas.

Imagine you create a social bond in a particular deprived neighbourhood. Investors buy into it and as with any investment, will want to see it flourish – taking an interest in that community where they would otherwise be totally detached.

At the same time, these wealth creators can have a dramatic effect on the communities themselves – showing those at the bottom that they have an opportunity to turn their own lives around and move up the social ladder.

Conclusion

Our failure to make each pound count has cost us again and again over the years.

Not only in terms of a financial cost – higher taxes, inflated welfare bills and lower productivity, as people sit on benefits long-term.

But also the social cost of a fundamentally divided Britain – one in which a section of society has been left behind.

We must no longer allow ourselves to accept that some people are written off.

Our reforms are about improving the life chances of the most disadvantaged – not changing people but restoring them.

Breaking the spirals of deprivation, and giving them the opportunity to take control of their own lives.

The prize for doing so could be immense.

It pays to work…

…. it pays to save…

… and spending is about outcomes not inputs.

Amounting to sound public finances and a modern economy, matched by a fairer and more unified society.