CONTRACT WITH BRITAIN?: Rolling back the state: the how, where and why

Some of the most radical welfare scenarios painted in the Treasury's document contain serious practical difficulties. Privatisation of the basic state pension and unemployment benefit have been examined by Peter Lilley, the Secretary of State for Social Security, but so far they have been ruled out.

Privatising the basic pension would, in Mr Lilley's words, create "a black hole" in the economy. "You have pounds 25bn coming in from contributions and pounds 25bn going out to pay existing pensions," he said. "If you let people put their contributions in private schemes you have to find pounds 25bn from somewhere to pay for the existing scheme."

The privatisation of much of Serps (state earnings-related pension scheme) was possible because the scheme was a long way short of maturity when the Government started to cut back its value and encourage people to leave it. It would be possible to phase out the basic pension by declaring that it would not be available for people under a certain age. That, however, would take decades to work through and those affected would be paying twice, once for their private provision and once for existing commitments.

Mr Lilley has been against privatising unemployment insurance. "Things are only suitable for private insurance if there is no negative correlation between the risk you are insuring against and people's incomes," he has said. "If poor people have higher risks and have to pay higher premiums, it can't be done. You lose the cross-subsidy effect where you most need it."

Even if private unemployment insurance were made compulsory and insurers were told that they had to take all risks, there would be serious difficulty preventing them marketing policies in such a way that they took on those people at the least risk of losing a job.

Similar difficulties of selectivity would face attempts to privatise incapacity benefits which cover long-term sickness - although much short- term sick pay has already been privatised by shifting the costs to employers.

Andrew Dilnot, director of the Institute of Fiscal Studies, argues that the basic pension is already being privatised through the policy of raising it only in line with prices, not earnings. Because of its falling value, relative to the living standards of those in work, 70 per cent of those in work now take out private provision for their old age.

Something similar, though less dramatic, is happening with sickness benefit. And even benefits for the unemployed are being privatised as claimants must now cover up to the first nine months of mortgage interest payments themselves.

Other parts of the radical scenario include mirror images of the programme of the United States Senate Majority Leader, Newt Gingrich, who wants to reduce entitlement for lone parents, set time limits on benefits, and decentralise welfare benefits to local authorities. The Treasury document notes, however, that the US plan "has not progressed as they hoped and in the more liberal culture [of the UK] would probably meet even greater resistance".

It also canvasses the possibility of pushing down responsibility for delivering health and social security for the disabled to local authority level.

None of that is yet Government policy. But Conservative Central Office is known to be examining localisation of benefits as a policy for possible inclusion in the manifesto.

Also expected to form part of the Tory manifesto are vouchers for post- 16 education. The document is clear, according to the leaks, that "consideration is currently being given to reducing state support for post-16 education on the grounds that rising demand is 'unaffordable' and private returns to individuals and their employers exceed social returns".

It says funding could be changed so individuals receive "vouchers, grants, loans and employer contributions".