Welfare reform needed to prevent long-term dependency

According to official figures, almost two million people are now unemployed in the UK. That number is rising rapidly as the economy shrinks.

This means extra expenditure on welfare benefits, putting further financial pressure on a government already deeply in debt.

More worrying still, hundreds of thousands of families will now be at risk of falling into long-term welfare dependency, with negative implications in terms of crime, family breakdown and ill-health.

Many of those made redundant, particularly the low-paid, will face strong disincentives to re-entering employment once they start receiving benefits. For every pound they earn above a certain level, they may lose 65p in housing benefit and 20p in council tax benefit. They must also pay significant income tax and national insurance – even at minimum wage rates.

There is therefore a real danger that the economic slowdown will lead to a structural rise in the number of long-term benefit claimants. Before the slump there were already around five million working-age individuals on various out-of-work benefits.

The depths of recession may seem like the worst possible time to reform radically Britain’s welfare system. Yet it is in periods of mass redundancy that change is most desperately needed to avoid growth in dependency. It is therefore essential that the government adjusts tax and benefit rates to improve the financial incentives for unemployed people to return to work. 

All the talk is about demand management. We must remember that how long unemployment continues rising for will depend, largely, on whether there is supply-side reform. Deregulation, lower and simpler taxes, benefit reform and a reconsideration of the level of the minimum wage must all be on the opposition and government’s agenda.

3 November 2008, IEA Blog

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