'Intervention needed' to reduce welfare bill without causing more poverty
Toby Lloyd from Shelter explores the need for government intervention to reduce the welfare bill and tackle poverty in today's exclusive article, compiled as part of the 75th anniversary of the Beveridge Report.
Public – and hence political - support for welfare is on a long term downward trajectory. This challenges anti-poverty campaigners to ask themselves hard questions about their approaches to campaigning. It also raises questions about how much poverty we are prepared to tolerate as a society, and whether welfare benefits are the best means of tackling it.
This debate is neither new, nor surprising. Reducing and responding to poverty is one of the most complex problems modern societies face. While poverty evolves within changing economic and political currents, it also exists in a symbiotic relationship with the very systems set up to reduce it. Taxes, employment law, trade policy, benefits, and other aspects of the welfare state are all used to target poverty. And, as a result, all of them shape the contemporary form that poverty takes, to the extent that many people identify the policies designed to mitigate poverty as drivers of poverty themselves.
Again, this is not new: arguments about disincentives to work, benefit traps, the impact on wage levels, labour mobility and above all, the sheer cost of poverty alleviation have raged since at least Elizabethan times. These debates, like the poor themselves, may always have been part of society, but it’s not been a smooth ride. Periodically, the debate heats up and the system goes through spasms of crisis and change.
The Welfare Reform Act of 2012 clearly marks the beginning of one of these periods of change. Depending on your view point, you may identify the current changes as a vital reform to a system grown bloated and dysfunctional, an ideological assault on the welfare state itself, or an unpleasant but necessary part of a wider ‘economic rebalancing’. These views are not mutually exclusive – and all three are well represented in society and in politics today, because tackling poverty has always been a trilemma. By this I mean that it is impossible to simultaneously avoid widespread destitution; an ever-rising welfare bill; and major state intervention into key markets. It should be possible to avoid one or even two of these at once – but not all three.
At any given point in history society is effectively making a choice to embrace, or at least tolerate, one of these three options. It may not be explicit, but by prioritising the avoidance of one or two of these outcomes, we are implicitly agreeing to put up with the third as the lesser of three evils.
The first big change in modern society’s response to the trilemma was the enclosure movement. Before enclosures, the largely feudal economy was, crudely, a non-market system in which inheritance, political allegiance and military power determined who owned what. The poor were expected to feed themselves, and were not allowed to relocate – but the system also granted them access to land to grow and gather food, to collect firewood and graze livestock. Feudal society was effectively choosing the third option, by preventing a free market in land and labour from operating.
Enclosure, which turned common land into private property, was a critical part of the turn towards a market economy – which triggered economic growth, but also intense poverty as millions found themselves deprived of subsistence. Throughout the 16th and 17th centuries, hunger and social unrest were widespread: society was unwittingly choosing the first option. The eventual creation of the Speenhamland system of ‘outdoor relief’ in the late 18th century marked another turn – and this time one in which the state took the lead. Local municipalities raised levies to feed the poor and mitigate the worst of rural poverty. This represented the second option: the acceptance of the need for welfare (however inadequate and patchy), as the price of allowing free markets in property and capital to exist without intolerable poverty.
But as the costs of alleviating poverty grew, so did moral objections about the impact on the poor’s motivation to work and employers’ incentives to pay decent wages. Under the New Poor Law of 1834 Speenhamland was abolished and the workhouse was born. For the rest of the 19th century, while trade and global finance drove spectacular growth, millions endured abject poverty of the type made famous by Dickens. In choosing to tolerate such destitution, Victorian society had reverted to the first option, avoiding both intervention in property and capital markets and financial transfers to the poor.
The next major shift came after First World War, as the implicit choice became one of market intervention first, and welfare second. The birth of council housing, landlord and tenant regulation, and the creation of the national planning system are all evidence of the willingness to intervene in markets to prevent poverty – while old age pensions and unemployment relief were created to relieve it. Welfare spending rose dramatically compared to the Victorian era, but then remained fairly stable. By the mid 1950s it still didn't take much more of a percentage of GDP than in the early 1920s. This represented a new balance in the trilemma response: rather than plump for one option alone, the mid twentieth century settlement involved a bit of the second and a lot of the third options. This balance started to reverse as the economy was steadily liberalised in the 1950s – and the benefit bill started rising steadily too. By the 1980s the political preference was determinedly for low intervention and high benefits. Characterising Thatcherism as a willingness to accept large welfare payments may seem odd to anyone who remembers the anti-welfare rhetoric of the time. But there is no denying that the upward trend in the total welfare bill continued over the last decades of the twentieth century. Some of this was cyclical, as recessions drove up unemployment costs. Some was demographic, as an aging population drew more in pensions (see above).
But in at least in one area there was a very explicit policy choice: housing. The private rented sector was deregulated, council housing sold off and property ownership advantaged in the tax system – while the state stopped building homes. In other words, market intervention was dropped and the focus shifted to using welfare to help people house themselves in the market. Ministers argued that any increase in poverty occasioned by a move towards freer markets would be offset by spending more on housing benefit, which would be there ‘to take the strain’ .
Since then, and under successive governments, public investment in affordable housing has collapsed and housing benefit has indeed taken the strain, as the bill has risen to top £25bn a year. Inevitably, this has put the spotlight back on the benefit bill, and prompted repeated assaults on the real and perceived failings of the welfare system.
But no matter how hot the current debate gets, the basic trilemma remains. If we are not prepared to spend as much as we do on benefits, we have to accept EITHER much more poverty OR greater intervention in markets. In housing terms, if we don’t want to see families destitute on our streets or pay more and more housing benefit to landlords to house them, then we have to do something else.
Few would argue publicly for a return to Victorian levels of urban poverty – although the Adam Smith Institute has made the case for more slums. Even putting morality and social justice aside, the consequences for public health and social order do not bear thinking about. Politicians also have a fully enfranchised electorate and a vocal media to contend with nowadays, which would make widespread and visible abject poverty harder to sustain politically.
So, the broader debate is really about what that something else should be – how we can intervene in markets in smart ways to both reduce poverty and welfare bills. In my view, the best target for greater intervention now is the dysfunctional land market, which lies at the heart of our failing housing system.
Land is the essential natural resource needed to build a home. But unlike other raw materials, it also has numerous other functions. Most importantly, land is where the majority of all wealth in Britain is stored (as most of the value of a home is in where it is) and how it is passed down the generations through property inheritance. Land value is also the collateral on which our entire financial system is based, via mortgage finance.
Smarter public intervention in the land and property markets to get more land developed; while constraining price growth it could start to tackle these problems at source. And, it could get more, better and cheaper homes built.
It wouldn’t be cost free: every time society reaches for a new response to the trilemma there are losers, and some land owners would make less than they might currently expect to. But if we are not prepared to pay the political price of that intervention, we will have to accept either an ever-rising welfare bill, or a return to widespread, abject poverty.
Toby LLoyd is head of housing development at Shelter.
This piece was written for the Webb Memorial Trust and the All-Party Parliamentary Group on Poverty as part of the 75th anniversary of the Beveridge Report and is part of a series of articles we will be running in the coming weeks.