Don't panic: we can afford it: Reports of the death of the welfare state have been greatly exaggerated, says Nicholas Timmins

JUST after the general election 18 months ago, Britain's politicians suffered a collective loss of nerve over the welfare state.

The Labour Party saw the electorate comprehensively reject its proposals for what now seems a deeply modest tax rise of pounds 3.5bn, to pay for higher pensions and child benefit, and promptly started suggesting that the age of universal benefits might be over.

The Tories, for their part, discovered that the pounds 28bn deficit predicted by Norman Lamont just before the election would rise this year to pounds 50bn. The party of low taxes (actually low income tax) had to turn suddenly into the party of higher taxes. The Tory right, moreover, has augmented its calls to cut the public sector borrowing requirement with the message that Britain can no longer afford the welfare state and should do its best to get out of the business.

Into this rather depressing picture comes today a handy document from the Joseph Rowntree Foundation and the London School of Economics whose message is summed up by its author, John Hills, in two words: 'Don't panic'.

Examining welfare state spending from 1974, and projecting into the next century, Mr Hills's study concludes that spending is neither 'spiralling out of control', nor is it being inexorably 'rolled back'.

The 'demographic time bomb' of a heavily ageing population has been exaggerated, he argues. The proportion of the population aged over 64 will rise - but only from 16 to 24 per cent. And the United Kingdom, having started the ageing process somewhat earlier than other countries, is in fact better off when looking to the future than many of its competitors. On current calculations, in the next century we will have more people of working age to support our elderly than will our competitors.

Britain's early entry to the ageing process also means that the pressures on the National Health Service in the Eighties were unprecedented. As a result, the total extra demand on the health service from ageing will be less over the next 25 years than it has been over the past decade. In education, after a slight rise over the next eight years in the numbers under 16, a steady decline in school age children is expected over the following 40 years.

The pressures on welfare spending therefore hardly look unmanageable - particularly given that the UK, despite its self-image as a society that offers a cradle-to-grave welfare state, in fact allocates a lower share of its gross domestic product to social spending than all but four of the 21 countries in the Organisation for Economic Co-operation and Development.

Indeed, Mr Hills calculates that the UK could afford to maintain its health and education services, allow for ageing and for the State Earnings Related Pension Scheme coming to maturity, and link pensions and benefits to income instead of prices - and the net effect over the next 50 years would be to add about 5 per cent of GDP to public spending. That is an awful lot of money - around pounds 35bn at current prices. But the report points out it is actually no more than the increase in welfare spending over the past three years, chiefly due to the recession. Its impact could be felt very slowly. And at the end of it, social spending as a share of national income would be no more than it is now in many European countries.

To achieve that would, of course, entail tax increases, unless other public spending was cut or the economy did better than expected. But it does mean that, as Mr Hills argues, 'the implications of maintaining services at their current level, or even of improving provision, are not as outrageous or impossible as some commentators have sought to suggest'.

The result is that Britain has a set of choices about the future of the welfare state; it is not inevitable that it has to be rolled back.

The choices range, Mr Hills says, from 'taking it on the chin' and accepting that spending will slowly rise, to acknowledging the argument of the right that the political limits of taxation have been reached and reductions in the scope of services will have to be made.

Even then, the issues are far more complex than just whether to privatise or not. For example, future pensions costs could be reduced by raising the age of retirement - first by equalising men and women's pension age at 65 and then by slowly raising it to reflect greater longevity.

In education, while pressures on school budgets will ease in the long term, pressures on higher and further education are mounting as Britain moves to match its competitors in the proportion of 16- to 19-year-olds staying in education or training. Since 1987 the proportion of 18- to 19-year-olds entering higher education has risen by more than 40 per cent, producing a sharp fall in spending per student. That offers the choice of higher public spending or finding better ways than the present student loan system to raise extra money from those who benefit from higher education. That could mean a graduate tax or a different type of loans system which is linked to earnings.

Equally, there may be options for those who want to preserve spending, of finding different and more acceptable ways of raising the taxes - hypothecation, for example: earmarking taxes for the NHS or education. This is deeply uncertain territory, but it may be one way of bridging the gap between opinion surveys, which show that people want more spent on such services, and the fact that at elections people vote for the promise of lower taxes.

But while yesterday's report argues strongly that all need not be doom and gloom for the welfare state, what cannot be concluded from it is that all is well and nothing needs to change. Its costs may be bearable, given the political will, but a whole series of issues need to be faced, not least of which is that some current policies look simply unsustainable. It is on these that the political parties may find themselves fighting in the future.

Chief among these policies is the linking of pensions and benefits to prices rather than to average earnings - a measure that has contributed to the huge widening in income inequalities since the early Eighties. Continue with that, and far from the welfare state costing a greater share of national income next century, it would cost less. But a society in which the standard of living of those at the bottom becomes increasingly detached from the remainder may be neither acceptable nor sustainable. Had pensions been linked only to prices since 1948, the basic pension today would be pounds 23 a week - a sum no one would argue provides a reasonable minimum for old age.

It can hardly be counted a success either that one in six of the population now lives on means-tested benefits. Measures such as forcing up council house and housing association rents by switching housing subsidies from buildings to people are in fact forcing many more people to claim benefits, not reducing the numbers claiming. More, not fewer, people are being drawn either into the unemployment and poverty traps or into positions where they see so little extra cash from earning more that there is little incentive for them to do so.

What right-wing Conservatives condemn as a 'culture of dependency' can to others look like being trapped on benefits. Policies to allow people to get themselves out of such a trap - and thus help not only themselves but the economy generally - are desperately needed.

Yesterday's report does not provide answers to such issues. But it does look into a wide range of the options available and points out that the welfare state is not just about relieving poverty but about meeting a whole range of other needs, including health and education, and redistributing income over the life cycle - needs that will have to be met anyway, whether publicly or privately financed.

The Rowntree report should give politicians fresh heart. For it shows that the sort of welfare state we have in future can be a matter not just of bowing to inevitable forces, but of making real choices and exercising political will.

'The Future of Welfare: a guide to the debate', available from Joseph Rowntree Foundation, 40 Water End, York YO3 6LP, pounds 8.50.

(Photographs omitted)