Benefits could be scrapped altogether as Coalition turns to tax breaks to end welfare trap
By Daniel Martin
30th July 2010
Benefits to encourage unemployed back to work
Middle class to lose out as entitlements are withdrawn
Labour: reforms designed to conceal budget cuts
Ministers are considering scrapping benefits altogether for those who work under radical proposals unveiled today.
They are looking at giving people tax breaks - through income tax discounts - rather than paying them a bewildering array of benefits and tax credits.
The radical plan is one of five options contained in a blueprint for benefits reform, unveiled by work and pensions secretary Iain Duncan Smith today.
And, in a surprise move, the proposals gained the support of his Labour predecessor David Blunkett - who said Mr Duncan Smith deserved support 'from across the political divide'.
Launching a consultation document in east London, the work and pension secretary warned the benefits system was on the verge of collapse - saying major changes were needed to ensure work pays.
At present, he said, too many people living in 'ghettoes of worklessness' turn down jobs because losing their benefits actually leaves them worse off in a job than out of one.
Mr Duncan Smith said he was also considering localising the benefits system, so that people in more affluent areas receive more than those elsewhere, to take account of the higher cost of living.
He said: 'We want to talk to people from different areas to see whether or not they think they would prefer to see that.'
Speaking to the Today programme on BBC Radio 4, he said: 'The first thing that happened when I walked through the doors of the Department for Work and Pensions was my officials said to us: "For goodness' sake, let's get on and reform this because we spend so much money holding together this complex system which is really, really on the verge of breaking down. Every day we worry that we simply will have a system breakdown and we will lose people as a result".'
The work and pensions secretary said there were far too many benefits, each of which works in a different way - often making it impossible for people to know whether they would be better or worse off taking a job.
He wants to see all benefits unified into one, and Gordon Brown's tax credits phased out eventually.
And instead of people losing benefits all in one go as soon as they hit a certain income - a real disincentive to work; he said the amount paid in benefits should taper off gradually as the income rises, so that a worker never loses out.
The most radical option is to merge the benefits and tax credits entirely into the tax system, through a 'negative income tax' model.
Under this scenario, pushed by the TaxPayers' Alliance, someone who needs help with housing costs, for example, would see their income tax cut rather than receiving housing benefit.
Benefits would be retained only for those who cannot work or who need extra support.
Lord Freud, minister for welfare reform, said: 'One of the options we are looking at is to integrate not just the benefits and tax credits system - but also the tax system into one coherent negative income tax.
'It would in practice mean an element of simplificaton. It's important to emphasise that these architectural changes can be made based on people's existing entitlements to benefits and tax credits.'
Lord Freud said that every year, some £9billion was spent on administration of the excessively complicated benefits system. He hoped reforms would be this bill reduced by between £2 and £3billion.
Matthew Sinclair, research director at the TaxPayers’ Alliance, said: 'It is great news that Iain Duncan Smith has not backed down from radical reforms, of the kind recently recommended by the TaxPayers' Alliance, to benefits that are costing taxpayers a fortune but failing the poorest.'
Shadow work and pensions secretary Yvette Cooper has vociferously attacked the proposals. But last night David Blunkett, who did the job in 2005, told the Daily Mail that he supported the ideas.
He said: 'I very much welcome the debate that Iain Duncan Smith is keen to have on the future of the welfare state - and, above all, on a simpler, more straightforward system of providing financial support to those in and out of work.'
Mr Blunkett said he had tried to bring in similar reforms, but was blocked by the Treasury
'A single benefits system, which we discussed inside the DWP in 2005 – could ensure that we return to a programme which is all about helping people out of dependency and into self-determination.
'If that is the long-term objective, then Iain Duncan Smith should have support from across the political divide. But if it is merely a gimmick in order to indicate radical thinking without any real reforming zeal behind it; and if the dead head of the Treasury is once again to win; then disillusionment will set in. That would be the worst of all worlds.'
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