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Home Opinion Valuing contribution
Welfare • Public Attitudes • Reciprocity

Valuing contribution

Duncan O'Leary - 23 July 2014

Progressive politics needs to base its appeal on valuing contribution more, not less. A long-term move away from means-testing, increasing wages, employee ownership, and reforming taxes to shift the burden from work and enterprise to unearned wealth can provide a clear story about work, wealth creation and reciprocity

Britain’s welfare system is a case study in the premise of the ‘5-75-20 society’ –  that ‘a stable governing majority cannot be fashioned on the basis of appealing simply to the bottom 20%, even with the voters of an altruistic middle class added in’.

Public support has been draining away from welfare for more than two decades. The percentage of the population agreeing with the statement, ‘the government should spend more money on welfare benefits for the poor, even if it leads to higher taxes,’ peaked in 1989 and has been on a downward trajectory ever since. More people disagreed than agreed with the statement for the first time in 2007. A growing proportion of the population has come to believe that the welfare system encourages the wrong behaviour and benefits the wrong people.

The fundamental story behind this is not media bias or political rhetoric, it is the way the system itself has changed.  The system established by Beveridge was, in his words, ‘first and foremost, a plan of insurance – of giving in return for contributions benefits up to subsistence level, as of right without a means test, so that individuals may build freely upon it.’ It was a majoritarian system, based around pooling risk, rewarding contribution and protecting people from loss of income.

Today’s system looks very different to this. The central purpose of the system has shifted from risk pooling to redistribution. This is represented by the rise in means testing and the diminution of the contributory principle.  In 1980, means testing accounted for around a third of benefit spending on non-pensioners, whereas it now accounts for around two thirds. Contributory benefits accounted for about a third of spending; they now represent less than one tenth. As a result, the link between what people put into the system and what we can each draw out of it has been greatly diminished.

Given these changes it should not be surprising that welfare has become a ‘them’ and ‘us’ issue – many among the 75% have come to believe they have no real stake in the system. The experience of the recession often served to reinforce rather than correct this impression. People were often shocked to learn that social ‘insurance’ entitled them to just £72.70 per week in Job Seekers allowance – around 15% of average earnings – and that years of contribution would count for little. After six months, those with savings or a partner in work would lose this entitlement, leaving many further aggrieved that they were being punished for doing the right things.

Research into public attitudes reveals that support for welfare systems draws on two broad types of sentiment – first, the idea that people are vulnerable, through no fault of their own (altruism)  and, second, the idea that they have entitlements by way of right, earned through prior contributions (reciprocity). Britain’s welfare system has become too dependent on altruism, it needs rebalancing with the reciprocity that the contributory principle was designed to provide.

The difficult part is how to fund this. Labour intends to pay for the policy by raising the hurdle for contributory welfare, so that fewer people qualify and money is therefore freed up for a higher contributory rate. The problem with this is that it will also mean more people going through the means test immediately – and some people therefore receiving nothing at all, despite having good work records.

An alternative would be for the state to do fewer things, such as paying people’s mortgage interest during periods of unemployment. Over the life of a parliament, Jobseekers Allowance (JSA) could be increased by around £20 per week by reducing spending on Support for Mortgage Interest (SMI) – a benefit for unemployed homeowners. Instead people would be expected to insure themselves against the risk incurred by the decision to take out a mortgage.

Money could also be saved by extending auto-enrolment from pensions policy to other areas, such as income protection. This would see more people protected against loss of income – without losing the freedom to opt out – but would have an additional fiscal benefit.  When insurers have ‘skin in the game’ (the cost of replacing people’s wages) they have a strong incentive to help people return to work quickly. This helps, in turn, reduce the bill for sickness benefits in the long-run. 

As Nick Pearce has argued, the long-term aim should be to move away from means-tested residualisation of welfare, not further towards it. Reviving the contributory principle is an important part of that. However, there remains the challenge of tackling the problem that means testing was designed to address – living standards for those who work but are not wealthy.  Here, too, progressive politics needs to base its appeal on valuing contribution more, not less.

The drive to increase wages is one important aspect of this – valuing the work that people do. But there are big forces pushing in the other direction. Global competition and new technology are weakening the bargaining position of labour relative to capital, putting downward pressure on wages for many.

The answer to this is not just to boost the bargaining power of employees within firms but, ultimately, to get to a position where employees own part of the companies they work for.  Put simply, if employees’ salaries are likely to stay low, they need a share in the profits of firms too. Achieving this is far from simple, but in the long-term it’s hard to see what the alternative strategies are that might really make a difference.

The idea of valuing contribution should drive reforms to tax policy too. The answer is not to continually refight battles over a 50p tax rate, which may not raise much money in any case. Instead it should be to tax differently, with a greater focus on unearned wealth from land and property.  Shifting the burden of taxation in this direction, and away from work and enterprise, would set the right incentives for people to create jobs and stick with them. There are different ways of doing this, from a land tax, to a mansion tax, or a simple revaluation of council tax, but the goal should be to tax work less and unearned wealth more. People should be rewarded for creating wealth, not just accumulating it.

None of these suggestions come without risk, or their own political downsides. Successive governments have drifted towards more means testing, both to save money and to lean against inequality. All sides profess to support employee share ownership in theory, but governments rarely make much progress in practice. Council tax is still based on how property was valued in 1993, because revaluation would create many losers, even if off-set by other taxes.

But a genuinely majoritarian offer, capable of winning over a healthy proportion of the ‘75%’, needs a clear story about work, wealth creation and reciprocity. A more whole-hearted focus on valuing the contribution that people make to national prosperity would provide just that.

Duncan O’Leary is research director of Demos

This articles forms part of a series of responses to the Policy Network essay The Politics of the 5-75-20 Society

This is a contribution to Policy Network's work on Social Policy and Changing Welfare States.

Tags: Welfare , politics , reciprocity , Beveridge , Contributory principle , public spending , 5-75-20 , Duncan O'Leary , Demos , Policy Network , tax , spending , benefits , public attitudes , skin in the game

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