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Saturday, July 17, 2010

U.K. eyes welfare reform


The cost of providing welfare benefits in Britain has risen by 45 percent in a decade and could rise from £87 billion annually to £192 billion by 2015. These costs are a major element in the national budget.

If the new government is to cut Britain's huge budget deficit, as it has declared that it will, significant changes and cuts will have to be made in the British welfare system.

Chancellor of the Exchequer (finance minister) George Osborne declared in a recent budget speech that increasing numbers of people in the United Kingdom were living on benefits. He wanted to increase incentives to work and would cut benefits such as child tax credits to middle-income families. Housing benefits, which had greatly increased in recent years, would be limited to a maximum of £400 per week for those with large families.

The government has announced that a welfare reform bill will be introduced in the autumn. The aim will be to simplify the benefits system, to make it fairer and to make it clear to claimants that they would be better off in work rather than on benefits. The requirement for medical assessments before disability allowances can be claimed will also be tightened up. A simpler benefits system should reduce the scope for fraud.

British welfare arrangements have a long history. In the Middle Ages, before the dissolution of the monasteries, it was the responsibility of the church, which received money from parishioners under the tithe system to look after the poor.

In the 19th century, laws placed the duty of looking after the indigent on local parishes. This led to the establishment of the infamous workhouse system described in Charles Dickens' "Oliver Twist."

It was only a century ago that the state in Britain assumed some responsibility for providing a safety net. The first limited arrangements proved totally inadequate in the 1920s and '30s during the Great Depression. It became clear that a new and comprehensive system was required. So during the war between 1939 and 1945, Sir William Beveridge was commissioned to produce recommendations.

The postwar Labour government, which lasted from 1945-1951, accepted the Beveridge recommendations as a basis for reform and introduced a system that was designed to provide at least minimal cover for all "from the cradle to the grave." A major element was the National Health Service, but a wide range of financial benefits were made available for the poor and the unemployed.

The Labour Party was proud of its achievements despite the inevitable weaknesses that developed or were inherent in the system. But Britain was not the first to introduce a safety net. German welfare measures had been introduced in the 19th century under Chancellor Otto von Bismarck. Scandinavian countries were also ahead of Britain in providing welfare benefits.

Other European countries developed their own systems, although many were less comprehensive than those in Britain. President Franklyn D. Roosevelt had started the process in the United States. Japan's Liberal Democratic Party introduced various welfare measures in line with the recovery of the economy.

It is generally accepted that there must be an adequate safety net in advanced economies to ensure that no one starves or is homeless, but all the different systems that have been developed have their defects and their costs. No country has found the perfect answer that ensures that no one will fall through the net while at the same time maintaining adequate incentives to work and minimizing the burden on the taxpayer.

The more comprehensive the system, the greater the danger that the work-shy will milk the system for their own benefit. The more complex the system becomes in order to maintain fairness the greater the temptation to fraudsters. Any simplification of the system will, however, inevitably lead to winners and losers. The government's attempts at reform and the cuts proposed will be opposed not only on the left wing of the Labour Party, but also by charities and other organizations seeking to end child poverty and homelessness.

One problem that affects Britain in particular is the nature of the housing market. A much higher proportion of people in Britain either own their houses outright or are buying them on a mortgage. This reduces the mobility of labor. There may be jobs in the southeast of England, but those in the northeast, even if they have the necessary skills, are unable or unwilling to move because houses in the southeast are more expensive and fewer are available. Jobs have to be created where the labor is available.

The nature of the welfare net in Europe and employment laws in the European Union have helped to keep unemployment lower than it might have been in the recession, but they may also have reduced the speed of necessary changes in the private sector. The holes in the Japanese safety net have probably slowed down the deregulation that the Japanese economy requires if it is to remain competitive.

The work ethic is supposed to be greater among people of Protestant countries and in Northeast Asia. This is debatable, but the value and need for incentives to work are clear. If there are no jobs no amount of incentives will get claimants back to work.

In Britain, stories about scroungers, fraudsters and lay-a-beds form the stuff of gossip in pubs, but there is little hard evidence that the situation there is worse than that in other European countries. Britain has largely thrown off the image of a country crippled by strikes. These seem more prevalent in some of its European neighbors.

Our budget deficit is serious and it does need to be brought down soon. We will not default on our debts but we do have to tighten our belts. The necessary cuts in welfare spending and simplification of the rules, however, need to be made in such a way that hardship is minimized while incentives are enhanced. They should also be designed so that the cuts do not add to the recession.

Hugh Cortazzi, a former British career diplomat, served as ambassador to Japan from 1980 to 1984.


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