Britain’s post-war cradle-to-grave welfare state is facing a fundamental, slow-burn crisis. One that’s so deadly the system is unlikely to see its 100th birthday in 20 years’ time.
The entire institution rests on shaky, unsustainable foundations because it was done in a hurry, with a pay-as-you-go-scheme where current taxpayers fund today’s benefits, pensions and health services. It seemed affordable to begin with, at a time when the population was young and most people only lived a few years beyond retirement, and the politics worked because voters saw the benefits of higher taxes straight away, rather than waiting for years while savings built up before anything happened.
But this ‘jam today rather than tomorrow’ approach didn’t reckon on everybody living much, much longer in future. Rising life expectancy is wonderful but has to be paid for, and the demographic timebomb of our aging society means a smaller-and-smaller working age population has to pay for more-and-more retirees.
It isn’t just pensioners either. More working-age citizens aren’t paying the taxes which keep the system solvent because they’re off work with long term illnesses. And the working-age benefits which are supposed to fix the problem have turned into well-intentioned but very expensive failures, where taxpayers pay hundreds of billions every year but poverty has barely changed for decades.
Worse still, the sticky tape and sticking plasters which Governments of every political hue have used to keep this increasingly-rickety old system going are starting to run out. One of the most important has been steady cuts in post-war defence spending to fund an ever-bigger welfare state, but international security threats are rising again so that cupboard is bare.
Then there’s every politician’s favourite rabbit-out-of-a-hat: economic growth. But it’s been anaemic ever since the 2008 banking crash and, even if sensible economic policies (no sign of them at the moment) pushed it back up to its long-term average, the demographic timebomb of our aging society will still push costs up much faster than any developed country can grow.
There’s a ray of hope in the shape of benefits reform, which could reduce the numbers of working-age claimants so more of them start living proudly independent lives rather than relying on the state. But even if a future Government could make it work (which the current regime has already tried and failed to do) it wouldn’t solve the underlying demographic problem of more pensioners and fewer workers. So it could ease the problems but wouldn’t solve them on its own.
Or immigration could help, in theory at least. Importing lots of young, productive, working-age foreigners could, in principle, rebalance our aging population and economy quickly. But even though academic economists might like the idea, it’s a political non-starter. The rise of populist parties in Britain and across western Europe shows voters are deeply unhappy with the social and political strains it creates.
Last but not least there’s higher taxes and borrowing. But they are both at post-war highs so the Government’s credit card is maxxed out already and, in any case, they only bandage the financial symptoms of an increasingly unaffordable system rather than fixing its underlying causes.
How do we redesign the welfare state so it becomes financially affordable and sustainable for the long term, and still leaves space for things like higher defence spending too?
In the short term we need urgent working-age welfare reform to get more people ready and able to work. That means creating stronger work incentives by scrapping benefits cliff edges and replacing them with a more predictable, rational system so it always pays to work. Plus better support for working parents by reforming today’s inflexible, expensive childcare system and replacing it with a simple, cheap tax allowance as well. Then changing the official definition of poverty to reflect people’s real standard of living rather than the equality of their incomes, so the core intention of our benefits system switches from a political mission of redistributing wealth to a practical one of equipping citizens to need less help from the state. And last but not least we must reintroduce regular face to face interviews for every benefit claimant, so everyone gets what they’re entitled to but no-one gets more than they should.
These changes will create short-term financial savings as well as getting more people back into work, which will buy time for equally essential, long-term and fundamental reforms too. We should start by publishing an independently-audited, annual Government balance sheet, to reveal the huge and hidden taxpayer IOUs that are embedded in our welfare state for everyone to see. Then the Chancellor should expand his fiscal rules to include progressive cuts in those newly-uncovered IOUs, to prevent his successors making even-bigger unsustainable promises in future. Next we should expand the already- successful National Insurance Savings Trust (NEST) to create a better state pension where future generations aren’t dependent on political promises of whether to keep or remove the state pension triple lock when they retire. And we should finish the job with a UK Sovereign Wealth Fund that, in the long run, would grow big enough to fund all the other retirement-age benefits that pensioners receive on top of the state pension, and ultimately make National Insurance obsolete too.
In The Sun Also Rises one of Hemingway’s characters famously says he went bankrupt ‘in two ways. Gradually and then suddenly’ . Our 80 year old pay-as-you-go welfare state is in the ‘gradually’ stage of the process at the moment but, unless we fix those underlying problems soon, it won’t reach its 100th birthday.
This article originally appeared in Centre Write, the online journal of Bright Blue where John is an Associate Fellow.
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