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Last Updated: Thursday, 11 August 2005, 20:40 GMT 21:40 UK
The future of welfare reform
By Steve Schifferes
BBC News economics reporter

The Beveridge Report from 1942
The welfare state was based on the 1942 Beveridge report

Since the British welfare state emerged in 1945, the debate on how to reform it has never ceased. But how will it develop in future?

Tony Blair is not the first post-war Prime Minister with an interest in welfare reform.

Debate about the inadequacies of the model began shortly after the Labour government implemented the Beveridge report on national insurance and created the NHS on 1 July 1948.

Labour introduced what Professor David Gordon of Bristol University called "truncated universalism" - with a level of contributory benefits too low to take people out of poverty.

In the first 25 years after the welfare state was introduced, the debate concerned how to increase its scope and abolish means-tested benefits.

Then, after the economic crisis in the 1970s, the concern was how to trim it back.

Now, the future of the welfare state itself is the subject of fierce debate.

There is no connection in the long-term between high government spending and economic growth.
Professor Peter Lindert, University of California, Davis

The right believes excessive spending on the welfare state has weakened economic growth and reduced incentives.

The left argues the traditional welfare state has paid too little attention to important groups like women and ethnic minorities, and to concerns of social justice in the household, workplace, and community.

Policies for welfare reform have gained strength in the UK, but also in continental Europe and the US.

Some argue the strength of economic growth in the US, and its weakness in the eurozone, stems from the generosity of the European welfare state.

Welfare and economic growth

Other economists dispute whether welfare state spending has any correlation with economic growth.

Professor Peter Lindert of the University of California argues there is no connection in the long-term between high government spending and economic growth.

And he argues that most welfare states have been designed in practice to avoid the labour disincentive effects that worry the critics - which partly explains why they are still functioning.

Margaret Thatcher at the Brighton Tory conference in 1980
Margaret Thatcher took on the unions and the welfare state

In any event, welfare states have proved difficult to dismantle politically whatever the economic arguments.

Mrs Thatcher could only roll back the state to a limited extent on welfare reform.

Now, President George W Bush is finding it difficult to reform the social security system, the heart of the US welfare state, which provides old age pensions.

The overall size of the welfare state outlived the Conservatives, but its nature changed, with greater emphasis on means testing and the involvement of the private sector (such as pension provision).

Labour's welfare reform

Tony Blair came to power in 1997 determined to make a clean break with Labour's past record as the party of "tax and spend".

Gordon Brown and Tony Blair
The two architects of welfare reform seemed to have different agendas

A key part of his New Labour agenda was welfare reform.

He wanted benefits recipients to pull their weight, with his "rights and responsibilities" approach.

Certain benefit recipients - such as single parents, the disabled, and older workers - were to be encouraged into work and retrain rather than remain on the dole.

A strong economy creating plenty of jobs helped Labour here, although the labour force participation rate among single parents and the disabled is still below European averages.

COMPARING WELFARE STATES
How Britain's welfare state measures up to our rivals

Another part of the New Labour agenda was to tackle "social exclusion", groups of the poor who lacked not just income but access to social institutions.

These included the homeless, young single mothers, and older workers.

A special cabinet unit was set up to develop initiatives in these areas.

And finally, Gordon Brown decided to introduce "redistribution by stealth" by sharply increasing benefits to poor families in work paid through a system of tax credits.

He hoped to radically reduce the amount of child and pensioner poverty - and end the UK's poor record relative to Europe.

There has been some progress in this area, although poverty rates have not fallen as fast as the government hoped.

Contradictions of reform

However, Labour's plans have had their own problems and echo many previous debates.

Frank Field
Labour minister Frank Field wanted more universal provision

The first minister of welfare reform, Frank Field, clashed with the chancellor over the extension of means tested benefits.

He wanted a return to Beveridge-style universalism - giving everyone a right to a generous citizen's pension based on their contribution to society.

Gordon Brown said this approach was too expensive.

However, his own means-tested tax benefits are proving difficult to implement, with many either not taking them up or getting incorrect amounts.

More broadly, Labour's emphasis on people's responsibility to seek work harks back to the principles of the liberal welfare state that were only partially obscured by the Beveridge report.

The means-tested (or tax credit) benefit system - which the chancellor judges is all Britain can afford - is the latest attempt to reconcile a desire for the state to ensure that everyone has a "national minimum" income with the lack of resources to pay for a universal benefit.

Pensions

The biggest challenge facing the UK welfare system is how to pay for retirement.

The proportion of older people in the population is climbing as people live longer and have fewer children.

With occupational pension schemes being abandoned by companies, it is likely more state help, as well as more private savings, will be needed.

So far the government has avoided making tough decisions - such as introducing a compulsory savings scheme, or substantially increasing state pensions - needed to deal with the crisis.

It says it wants to seek a political consensus before proceeding with radical reform - but time may be running out.




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