Think the unthinkable, Mr Smith

Tony Blair has asked Chris Smith to look afresh at the welfare state. Nicholas Timmins sets out the options

Once again Labour has a new social security spokesman. Once again a Labour leader has told him "think the unthinkable". Once again, the search is on for the philosopher's stone - a modernised social security system.

The last time this happened it was John Smith and Labour's arms-length Borrie Commission on Social Justice. This time it is Chris Smith who is charged with the task by Tony Blair.

The word from senior Labour ranks is that Borrie was good on analysis, less good on prescription. Smith will look again at everything - from the string of proposals spawned by half a dozen inquiries including Borrie and Dahrendorf, Rowntree and Carnegie, to much more radical "Big Bang" solutions such as citizen's income or Frank Field's ideas for reinventing social insurance.

Smith, 44, a former Treasury and environment spokesman, is one of Labour's brightest and best. He arrives with the immense advantage and major handicap of little detailed knowledge of social security - an open mind, free of preconceptions. He was in the same position in his last post when he took on Labour's need for an information superhighway policy, a task Blair's office believes he performed well.

He comes with Tony Blair's soundbites on social security already in place - "a hand-up, not a hand-out", a big benefits bill is "a sign of failure, not of success" and responsibilities matter as much as rights. In addition, there is the boastful claim that Labour is the only party able radically to reform the welfare state because the electorate trusts Labour with it in a way that it does not trust the Tories. What is missing is a convincing set of principles and policies.

Smith arrives with the problems well understood. High and persistent unemployment has undermined the social security system. The number of lone parents has rocketed and most do not work. Many more women work, but are in part-time jobs that have little long-term provision for pensions and other benefits. Many more men are out of the workforce by their fifties, let alone early sixties. Existing means tests tend to trap people on benefit. And the population is ageing. Unless pension and long-term care are to be left for the next generation to provide, those now in work will have to pay twice: once to fund the current generation of pensioners and beneficiaries, and once to build up funds for their own retirement and long-term care.

If the problems are clear, the solutions are far less simple, as Peter Lilley would testify. If any of this were easy, it would have been done by now.

Smith is hampered by Labour's terror of announcing anything that could be seen to increase taxes. Labour's plans for benefits-into-work and improved training may help reduce unemployment in the long term, but will cost money in the short term.

And a wide range of issues needs to be addressed on fronts far broader than just social security. Reducing the numbers of young single parents, for example, will be as much about education, training, contraception and work opportunities as about benefits. And deciding how Labour should fund long-term care requires decisions about what the NHS should provide.

Smith is also likely to learn, as every social security minister before him has, that radical reform within the existing budget is impossible without creating large numbers of highly vociferous losers and that where Labour does have ideas for reshaping the system - taxing child benefit for example - the cash raised would be a flea-bite on the face of an pounds 80bn benefits bill. The scenarios on the right look at some of the ideas that Chris Smith will think about as he thinks the unthinkable. That task in itself is not easy: producing lasting and effective policies from it is even harder.

Mode: Big Bang

Description:

Most radical version comes from Frank Field in which benefits would come from funded schemes run or overseen by two new non-government corporations, providing welfare payments and pensions respectively. Employers and employees would contribute compulsorily and they, not the Government, would run the system. Government's role would be limited to paying in contributions for the lowest paid and those outside work, with a veto over contribution rates.

Claimed advantages:

The National Insurance Corporation would pay out unemployment and other benefits as of right, without a means test, while the Private Pensions Corporation would handle individual personal pension accounts. The corporations, rather than being monopoly monoliths, could provide the back-up to a wide range of providers - such as new-style friendly societies, the private sector, new mutuals or even funds run by unions. Should massively reduce reliance on means-tested benefits. Would boost saving and investment, discourage the black economy and, Field believes, encourage work and honesty. Would provide investment funds to pay out benefits in place of pay-as-you-go tax and national insurance contributions.

Disadvantages:

No costings available, and details still hazy. Field hopes to raise charitable cash to get the Government Actuary to cost his ideas. Not intended to save money. Might not require super-high levels of government taxation, but would require high levels of compulsory contribution to the funds by those in work - in effect, a tax by another name. In addition, the Government would be paying in for future benefits for the sick, disabled and unemployed, while still raising taxes to pay benefits to existing claimants.

Backers:

Field is the chief advocate and designer, but Tony Blair has taken an interest. Something on loosely similar lines operates in Singapore, while Australia has developed private sector-run super funds for pensions. That scheme has provided large amounts for industrial investment in the short term and funds to pay out pensions in the longer term. Field, with four members of the Commons social security committee, including Malcolm Wicks, Blair's latest appointment to his social security team, are currently on a trip to Singapore and Australia to examine them.

Odds:

Against, in the short term. Would be a 10- to 20-year programme to take full effect. Would require a degree of cross-party consensus to take effect. Enormous transitional problems.

Mode: Big Bang

Description:

In its purest form, tax and benefits would be merged. Every man, woman and child would be paid a tax-free basic income by the state, financed by a tax on all, or almost all, other income. Payments would vary by age - the elderly would get more than adults, who would get more than children. Most existing benefits, national insurance payments and all tax reliefs would be abolished. And once paid the basic income, individuals would, in the main, be on their own, able to take work if they wanted it.

Claimed advantages:

Would hugely simplify the tax and benefit system, slashing administrative costs. The existing plethora of means tests would disappear, along with the poverty and unemployment traps and, in theory, much of the black economy. Individuals could afford to take work at very low wages, producing a very flexible labour market. The need to look after yourself would dramatically encourage saving for self-provision above the basic income. Versions of the idea were explored in detail in government by Labour in the Sixties and the Conservatives in the Seventies.

Disadvantages:

Not one single idea, but a whole Heinz 57 varieties of different schemes, variously labelled citizen's income, basic income, negative income tax, tax credits. If the basic income provided enough to survive on, critics argue it would require enormously high rates of tax on those who work - 70 per cent or more; therefore many might choose not to work. Despite its seductive simplicity, other benefits would still be required, for example for housing and for the disabled. Backers argue it could be introduced in stages and for particular groups - an approach that loses the attractions and savings of simplicity. The existing child benefit is a citizen's income for children. And Labour's idea of a minimum pension guarantee would be a form of citizen's income for pensioners.

Backers:

Many eminent academics and some politicians from across the political spectrum. Supporters of at least some version of the idea range from Alan Duncan, the right-wing Tory MP who believes in an almost non-existent state, to Meghnad Desai, the Labour peer who is an LSE economics professor. Others include Samuel Brittan of the Financial Times, the Oxford political economist Tony Atkinson, the Liberal Democrat peers Baroness Seear and Lord Dahrendorf, and Professor David Marquand, former SDP luminary now back with Labour.

Odds:

Heavily against a full citizen's income because of the massive organisational and cultural change required. But partial schemes may emerge. The Irish government currently has a working group examining the idea and there is some EU work on it.

Mode: Evolutionary

Description:

The approach that has informed a string of reports including Labour's Borrie Commission, the Liberal Democrats' Dahrendorf report and the independent Joseph Rowntree inquiry. All go much wider than social security.

Claimed advantages:

Often an attempt to mix and match from the best of the Thatcher years while rebuilding the social solidarity that Thatcher and Major are claimed to have undermined or destroyed. Diverse and varied recommendations, but a broad acceptance of private-sector involvement in pensions and the attractions of funded, rather than pay-as-you-go, schemes. Some common ground with Frank Field's ideas. Widespread calls for paying benefits to help people into work rather than keep them out of it. Some common ground there with the Government, but deep divisions over whether that would need a minimum wage. Heavy emphasis on education and training. Some recommendations would make benefits more selective - eg Borrie proposal to tax child benefit. Big differences between them on degree of compulsion - eg to take second pension, pay into "learning accounts" or undertake work and/or training in return for benefit.

Disadvantages:

All produce proposals, often not fully costed, that would increase taxes and contributions - certainly in short term. Many remain bright ideas that require the resources of being in government to work out and cost. Despite much common ground, still wide differences on individual policy.

Backers:

Influential figures in Labour and Liberal Democrat ranks and among "the great and good" who have sat on the various inquiries want a more inclusive society and, at the least, an end to widening inequality.

Odds:

The lines down which Labour is most likely to go if it gets the chance. Pragmatic, evolutionary, far from uncontroversial, but more likely to be achievable than the big bangs.

Mode: Evolutionary

Description:

Lilley's strategy. A sector-by-sector review of social security encouraging more private provision where possible.

Claimed advantages:

Has produced significant longer-term savings. Lilley's measures have already cut pounds 14bn a year off the social security bill for the middle of the next century. By 2000, the savings are smaller but still pounds 4bn - before further cuts of pounds 1bn or more due in the Budget. Private provision has been substituted for public in pensions, mortgage interest for the unemployed and, through employers, for sick pay. The UK now has more cash - pounds 500bn - invested in private and occupational pension funds than the rest of Europe put together. Better targeting has toughened entitlement to unemployment and incapacity benefits. Some measures have been taken to pay more people benefits in work, rather than pay them to stay out of work. Vigorous attack on fraud.

Disadvantages:

Has contributed to a huge widening in inequality and a dramatic increase in numbers on means-tested benefits - despite rhetoric of "ending dependency culture". Almost one in three now lives in a household where means-tested benefits are claimed - a rise of 50 per cent since 1979. Critics argue that means tests penalise thrift and encourage dishonesty and the black economy. Those in low-paid work can lose 90p of each extra pound earned as benefits go and taxes are levied - such tax rates were long ago abolished for the better-off. Private pensions taken by the low-paid may pay out so little that they will still need means-tested benefits. Shifting more benefits from taxpayer to employer will risk reducing jobs. Changes have tended to produce less security in a more uncertain world.

Backers:

The Government

Odds:

100 per cent - it is happening now