Lilley gets axe ready for welfare state: - Smaller benefits for fewer people - More encouragement to 'opt out'

PETER LILLEY, the Secretary of State for Social Security, last night disclosed radical plans for cutting social security spending and restructuring the benefits system as a modern replacement for Beveridge's welfare state.

His two main policy proposals, which he called 'cautious propositions', are cutting and targeting benefits to fewer people and encouraging more to 'opt out' of the state system and take out private insurance for such benefits as pensions.

The first will be interpreted by the Opposition as an assault on the poor, and the second as an attempt to dismantle the welfare state. However, given the pressure for root-and-branch cuts in the pounds 50bn Public Sector Borrowing Requirement, Kenneth Clarke, the Chancellor, will want Mr Lilley's kites to fly.

In a lecture to the City University business school, Mr Lilley revealed for the first time details of his agenda for a long- term review to tackle the ever-increasing social security budget - pounds 80bn this year, 'and equivalent to the turnover of British Telecom, Unilever and BP combined. It means that to finance social security, every working person now pays, on average, over pounds 13 every working day.'

It was his first detailed speech on benefits cuts since the leak of a Whitehall document earlier this month revealed plans to tax invalidity benefit, and reduce the amount paid and the number of people eligible to claim it.

Mr Lilley announced he would soon publish official figures for the projected growth in social security spending and an analysis to stimulate public debate. Even if unemployment fell to 2.25 million by 2000, spending would increase by pounds 14bn a year unless drastic changes were made.

He said: 'There is no escaping the need for structural reforms of the social security system. Any effective structural reform must involve either better targeting or more self-provision, or both.'

Mr Lilley added that means testing acted as a disincentive to claimants and universal benefits as a disincentive to taxpapers. However, he concluded: 'Disincentives are inherent in statutory benefits.' Indicating personal opposition to means testing, he said other ways of targeting benefits to those who needed it most included categorisation by age. For example, he said: 'When equalising the state pension one option would be to equalise at 65.'

Benefits could also be targeted by defining need, for instance on invalidity benefit, he said, adding: 'We are examining the possibility of a more precisely defined medical test of inability to work.'

Other targeting could be introduced through tighter enforcement of rules, and imposing conditions on benefits such as those implied by the Restart programme.

On opting out of the state benefit system and making private provision for future security, he said: 'No-one has the right to opt out of contributing to help those who cannot provide for their own needs, but there is no reason in principle why people should not (in addition to contributing to others) opt to make provision for themselves privately rather than through the state system.'

Extending the policy under which people were encouraged to opt out of the State Earnings Related Pension Scheme, using their contribution to make private provision, would be 'excellent for the economy,' he said.

'The more provision for needs and risks is monopolised by the state, the less incentive to work and save to provide for them . . . consequently, the greater extent to which people can make private provision for their own security (even if only at the margin to supplement a minimum state benefit) their incentives to work and invest are enhanced.'

In an apparent dig at the approach of the Eighties, Mr Lilley concluded: 'My last proposition is that reform of something as vast as the social security system is best carried out sector by sector than by the 'big bang' approach. Comprehensive 'big bang' reforms invariably result in imposing elegant intellectual and bureaucratic structures on the inconvenient

diversity of the real world.

'I am much more attracted by the approach we adopted to tax reforms in the 1980s - Lord Lawson's more lasting achievement.'

That more gentle approach could mark the key compromise between the two sides of the Tory political divide - the essentially Thatcherite views of Mr Lilley and Michael Portillo, Chief Secretary to the Treasury, on one hand, and the more pragmatic John Major and his Chancellor on the other.

Donald Dewar, Labour's spokesman, said if the Government planned to encourage the better-off to contract out, the welfare system would be reduced to a fall- back safety-net for the less well-off.

'Labour agrees there is a need for an in- depth review of the present system,' he said. 'The danger is that with the DSS under present control, change may be dictated by Treasury crisis management.'