Sean O'Grady: Joblessness, the crucial factor in the welfare equation Osborne has ignored

Some 800,000 more Britons are out of work because of the recession, not because being on the dole is so cushy

(Lewis Whyld/PA)

Even George Osborne's harshest critics could not accuse this Chancellor of lacking zeal. In proclaiming his "New Welfare State" his ambitions vaulted way past those of his predecessor but one. Even Gordon Brown at his most hubristic might have baulked at claiming that he could design a welfare system that would, simultaneously, mean it "always pays to work"; save the taxpayer billions; and abolish child poverty by 2020.

Yet the Government's plans, at least as much a product of Iain Duncan Smith's holy mission among the poorest in society as the Treasury's search for cuts, are less radical and more problematic than Mr Osborne's rhetoric suggests.

Take the centrepiece pledge to ensure that no one on benefits will be worse off in a job than in idleness. The bulk of this promise was in fact contained in the emergency Budget in June, when Mr Osborne announced a series of caps on housing benefit. This, especially in more expensive areas, is the bulk of the reason why some people seem better off on benefits.

But a more fundamental objection to Mr Osborne's boast is that the tax credits developed by Ed Balls and Mr Brown went a long way towards achieving that goal after 1997. The new tax credits did remove the disincentives associated with going to work, when the sharp withdrawal of multiple benefits left many worse off when they took a low-paid job. The combination of tax credits, better nursery care, the minimum wage and job creation pretty much abolished such traps.

However, to be fair – and this would be an historic achievement if it is delivered – the Coalition's reforms should sharpen up those incentives considerably. According to the Institute for Fiscal Studies, some unlucky individuals still only get to keep 4p in every extra £1 they earn now. The best guess is that the new arrangements will allow people to keep 30p in every extra £1 earned even in the worst cases. But delivering that will be tougher than it sounds.

For there is a very murky assumption at the heart of the Government's thinking that needs to be dragged into daylight. For even if the social security system were to be perfectly designed, there is still a big question about whether the jobs are actually there for people to get on their bikes and chase – and therefore the savings the Government expects.

After all, some 800,000 more Britons are out of work than two years ago because of the recession – not because a large slice of the nation suddenly decided that being on the dole was so cushy it wasn't worth getting out from under the duvet in the morning. The actual number on benefits as a "lifestyle choice" is probably as tiny as ever, and comprises the usual, probably ineradicable hard core of the lazy, who exist in all nations and at all stages of the economic cycle.

The child benefit reform is also less than meets the eye. Only those who live a household where one partner earns in excess of £43,875 will lose their benefits, some 1.2 million cases, from the richest tenth of society. It is obviously unfair that a family next door, with say two earners on £43,000 and combined income of £86,000, get to keep their cash, and the move does undermine the principle of universality.

The Government has offered little detail about how its reforms will – eventually - work in practice. That awaits a White Paper later this year. The new universal benefit may be split into elements for housing, children, and council tax, so replicating some of the distortions of the old regime. It will probably be less generous for future generations, but those moving off the old benefits are guaranteed to be no worse off, blunting its impact. And the transition is due to take place over a decade at least, with little happening before 2015. For now, it will cost the Treasury less than £1bn, out of a £135bn welfare budget.

The coalition agreement also suggests that room for manoeuvre on other areas is limited: "We will protect key benefits for older people such as the winter fuel allowance, free TV licences, free bus travel, and free eye tests and prescriptions".

And as for the child poverty pledge adopted by the Government, despite all their efforts, Labour missed its target of halving the 1998 level by this year by 700,000. So about 2.4 million children will need to be made better off by coalition policies. Sensible though it may be, scrapping child benefit for the offspring of the upper middle classes won't spring a single poor child from the prison of poverty.

The welfare state - and what the coalition are doing to it

Pensions

The Thatcher government removed the link to earnings in 1980, and the Coalition has now reinstated it, part of a"triple lock" that includes inflation and a 2.5 per cent minimum rise. So far, pensioners generally have done much better than their children and grandchildren from these reforms: £132.60 if single; £202.40 for couples (inc pension credit).

Incapacity and disability

Incapacity benefit is being replaced by Employment and Support Allowance, of just £65.45 a week. It has more stringent tests on suitability to work. Disability benefits have been protected, though the housing benefit cap may force some to move to cheaper areas.

Housing benefit

Caps on entitlements mean poorer tenants will be "cleansed" from more prosperous areas. Has an unfortunate whiff of gerrymandering. Ministers say those in work have to live where they can afford to, so why not those who don't work? Now capped at £400 a week.

Job Seekers Allowance

Out-of-work benefits have ballooned. The new Work Programme tightens up the Flexible New Deal and the conditions for receiving benefits for those not making enough effort to find work. If aged 16 to 24 you receive £50.95 a week; if 25 or over the rate is £64.30 a week.

Child benefit

Historically, a recognition of the contribution of parents to national prosperity. Once a tax allowance for fathers (usually), pressure grew for it to be paid directly to the mother. At £20 a week for the first child; £13 for others. Blair abolished the single parent rate.

Other: eg TV licences, bus passes, maternity

Tory anger at Labour's "scaremongering" during the election about plans to abolish free bus passes and TV licenses for pensioners led to a TV pledge by David Cameron, so these items are probably safe. Little has so far been proposed on many others, including maternity grants and pay, the motability scheme or industrial injuries.

Winter fuel allowance

On the same basis that child benefit was chopped for the more prosperous, logic suggests that younger or better-off pensioners don't need the winter fuel allowance. The Coalition only promises that it will "be protected" though not its eligibility or levels. Currently £250 per household (£400 for those 80 or over).