Portillo's review could mark end of welfare state: Ministers consider privatisation plans for benefits and insurance

THE COMPLETE dismantling of the welfare state is being considered by ministers as part of the long-term review of public spending by Michael Portillo, Chief Secretary to the Treasury.

Handing over the administration of all benefits to private contractors, insurance companies and charities, and financing them through a combination of compulsory insurance and from the existing National Insurance contributions, would in the long term relieve the Government of financial responsibilities that are currently open-ended.

Privatising the management and funding of social security benefits would be a radical alternative to the two other ways - cutting benefits or increasing taxes - of reducing the growing Public Sector Borrowing Requirement, which will be pounds 50bn this year. Both methods are politically unpalatable and any major changes will be virtually impossible to push through in the short term because of the Government's small majority.

A series of revolutionary policy changes is being studied by the Adam Smith Institute, the right-wing think tank, which has been influential in introducing policies such as paying incentives to get workers to opt out of the State Earnings Related Pension Scheme.

The proposals are being examined closely by Mr Portillo, and other ministers and officials involved in the Portillo review. Peter Lilley, the Secretary of State for Social Security, is particularly keen to rethink the whole system.

Off-loading the social security system could only be a long- term solution to cutting public expenditure, as the Government would have to underwrite all costs in the short term.

But Dr Eamonn Butler, director and co-founder of the institute, believes there is a 'a very realistic' prospect that some of the moves towards privatisation could be introduced before the next election.

He told the Independent: 'Putting the management of DSS benefits out to tender could be tried out in a pilot area next year. Insurable benefits are feasible in the lifetime of this parliament. Insurance companies have spare capacity, private companies would develop and many charities are keen to expand.'

One of the biggest structural changes being considered is the introduction of compulsory unemployment insurance for everybody leaving education. Insurance companies would have to agree to take on all risks, and probably accept a single premium rate.

Several of the large insurance companies have already been sounded out and are willing to take on even the highest risks, providing they receive adequate government guarantees and incentives.

Another proposal is a formula to encourage people to opt out of the state pension scheme completely and take out a private pension instead.

Since today's workers pay for today's pensioners, only a certain number of workers could be allowed to opt out immediately, while others could be phased out gradually over the next 40 years. The institute is publishing its proposals on pensions later this month.

A formula for changing the child benefit system to one of paying towards child care for working mothers is being developed. And making employers responsible for statutory sick pay and industrial injuries insurance is also under review.

Today the Social Security Advisory Committee is being briefed by senior officials and economists about the options for cuts in the social security budget, estimated to reach pounds 80bn this year, a third of government spending.