The real crisis today is of welfarism not capitalism
February 24, 2012
Forget the breathless pronouncements from Davos. Forget the domestic political posturing of Party Leaders desperately trying to convince voters there is much of substance to choose between their economic outlooks. Forget even the furore over the pay, bonus and rank handed out to RBS chief executives past and present.
Free enterprise and the market remain the only games in town. As the financial crash of 2008 plays itself out (and it has barely begun to do so) the systemic, existential crisis will not be of capitalism. Out of sheer financial necessity the real calamity to which the minds of the political class will soon be forced to turn is the unaffordability of our ever-growing welfare state.
For all the talk of unprecedented austerity and savage public sector cuts the government is still borrowing £1 in every £5 we collectively spend. This current generation of Britons continues to consume recklessly beyond its means. Those of our children and grandchildren who decide not to leave these shores will in due course foot the bill for our profligacy. Three years and counting of near-zero interest rates has helped prolong the era of cheap money, higher borrowing and larger debts in the hope that “something will turn up”.
In fairness someone, in the form of Work & Pensions Secretary, Iain Duncan-Smith, has turned up. All his instincts are sound. His Universal Credit plan will begin the long path of weaning Britons off their sense of welfare entitlement. He dares to tread where so many of his predecessors have failed in tackling the welfare trap for those in the workplace, who otherwise stand to be better off claiming benefits. But none of this radical restructuring comes cheap. Indeed the annual Work and Pensions departmental budget is likely to crash through the £200 billion mark for the first time in 2012-13 (remember this £600 million daily welfare bill does not include the cost of healthcare).
One is reminded of probably the most notorious telegram ever from Monte Carlo – “Cracked the system. Please send more money”.
Prospective reformers’ biggest headache is that this addiction to the welfare state extends well beyond the workshy and benefits scroungers of tabloid lore.
Headlines may focus on the morality of setting a strict overall annual benefits cap at £26,000, the level of average national earnings. However there will soon be renewed debate on the rumbling furore over Treasury proposals to deprive Child Benefit from households with a higher-rate taxpayer.
Paradoxically the government may discover that it is only by depriving middle-class voters in the upper quantile of earnings of their current welfare entitlements that sufficient momentum can be raised to reform radically the entire system.
Created as a reward for the collective national effort in winning the Second World War, the original purpose of our welfare state has been subverted as the UK has become ever richer. Nowadays even well-off Britons regard as an absolute entitlement nursery vouchers for children; living allowance for any disabled relatives; health visitors and carers for the sick, not to mention the benefit gratis of the services of a vast array of local government employees. Meanwhile even the very richest are entitled as a matter of course to free bus travel, substantial rail discounts, winter fuel allowance and free TV licences merely by reaching a certain age.
When it comes to being compromised by the welfare state we are, to coin a phrase, all in this together.
One classic example of an apparently worthy, yet muddled and ruinously costly expansion of the empire of the welfare state came in the early Blair years with Sure Start, an initiative designed to aid pre-school children in deprived areas. My own inner city constituency contains mixed neighbourhoods – as a result ‘South Westminster’ was designated as a Sure Start pilot area. Disused office space was converted into a state-of-the-art nursery; a children’s healthcare centre was set up; two sparkling new adventure playgrounds were created on open space. What was unanticipated, however, was that the overwhelming clientele for these services were middle-class Pimlico mums and their offspring’s nannies. Years later they became a highly articulate lobby group, as large scale recipients of (by now) essential welfare provision campaigning against the withdrawal of Sure Start funding.
Naturally rather than making a blatantly self-interested appeal the prosperous will always seek to justify hanging on to their accustomed benefits on the grounds that such services are an integral part of living in a civilised society.
The recent Dilnot Report on the cost of long-term care for the elderly exposed the confusion lying at the heart of too much policy thinking in this area. Any lifetime ceiling on the financial burden to be borne by the individual (rather than the State) will within a decade be regarded as inadequate such is the rapid pace of life expectancy. The harsh truth is that before long the only way you can be sure to hang on to your anticipated inheritance is to take full responsibility for an ageing relative, in deteriorating physical and mental health. Whatever price-tag the government today wishes to place on these average lifelong costs – £35,000 and £60,000 are the figures doing the rounds – will simply be unaffordable within a very short period.
Long before the financial crisis, welfare reform was no mere academic debate. The expansion of the European welfare model has for years served to make our continent less and less economically competitive. Yet the solution is one we cannot face – to start with a blank sheet and ask ourselves what we need instead of salami slicing against what we want.
As power shifts eastwards, the Asian economic powerhouses will not be immune from their own demographic problems. Unlike the UK, however, they have an enormous advantage – that blank sheet, the luxury to think afresh and construct a welfare state fit for the twenty-first century without the need to battle against a morass of vested interest. Meanwhile, we cling to an unreformed set of entitlements that has grown like topsy from the late 1940s, when life expectancy on retirement was under three years. It serves to convince me ever more that for so long as we keep clinging, the gulf with our Eastern counterparts will only deepen.