Hail the welfare revolution

Both parties now agree that full public provision for all our needs must end

This week the shape of the welfare state changed. Not yet in reality. But in a big way in terms of the ideas that are likely to mould and drive it over the coming decades. On both sides of the political divide, new partnerships, both between the citizen and the state, and between the public and private sectors, are in the making.

Stephen Dorrell's scheme to allow middle England to protect some of its assets from the means tests for long-term care is a new departure - nothing quite like it has been seen before in the 50 years since the Beveridge report. And Chris Smith's twin statements on the role of the welfare state - revolutionary for Labour - have implications that could go way beyond the large but narrow field of the pounds 90bn social security budget.

"We have," Mr Smith said, "a responsibility as a community to support those amongst us who fall on hard times." But, he instantly added, we also have "a responsibility as individuals to make provision in our own lives for those times when we can't earn and support ourselves by doing so."

He coupled that with a statement that the state must act "as the guarantor of all provision, the regulator of all provision" but the administrator only of "some" of that provision. "The welfare state is after all a framework which the Government sets in order to enable citizens to achieve security; it is not a particular mechanism per se for delivering that security." Implicit in that is more private provision - both by individuals in terms of insurance and savings, and by the private sector in terms of delivering services.

Take Mr Dorrell's scheme first. Individuals who take out private cover will be able to protect a larger part of their assets, including their home, from the increasingly invasive means tests for long-term care. By allowing individuals to protect more of what they have earned, the scheme should reward thrift, responsibility and self-provision. Mr Dorrell has established a new type of partnership in the welfare state.

What has driven Mr Dorrell's new approach and has started to underpin Labour's thinking, is the ageing population, which is proving evermore costly because of their requirements for health and social care. Meanwhile, there is the problem of how to finance better and longer education for the general population. All of these problems are arising at a time when people are increasingly reluctant to pay higher taxes.

Given, however, that such services still have to be paid, for, whether privately or publicly funded, a certain logic then cuts in. Those areas of social provision which can sensibly be privately funded - paid for out of savings and investments for the future rather than out of taxes - should be so funded. And the items best funded are those where the scale of need is broadly predictable, where the impact is time-limited, and where individuals can be shown to benefit directly from their own expenditure.

Thus pensions are a prime candidate for private funding for those who can afford to contribute. So, equally, are parts of education - witness the seemingly inevitable move to some form of graduate tax once Sir Ron Dearing's university review, supported by all the parties, reports next summer. So too with Mr Dorrell's plans for social and nursing home care for the elderly. Acute health care of the sort the NHS provides is not suitable for such an approach, however, because needs are neither predictable nor time-limited and because it is highly debatable whether higher private spending at the expense of public spending would actually produce better health care.

The first step that Labour will take in the direction mapped out by Mr Smith is likely to be an announcement soon that it wants to replace the remainder of Serps, the State Earnings Related Pension Scheme, with a new funded system - in partnership with the private sector. Big decisions on how to do that remain - whether to run the new schemes in parallel with Serps or to use them to wind Serps up, and whether, as Frank Field would like but Gordon Brown is likely to resist, the taxpayer will put in contributions for those who cannot afford them. Labour, too, for all its over-the-top on-the-day reaction to Mr Dorrell's package, has ideas for partial equity release schemes to help fund long term care.

Beyond that, it is gazing through a glass darkly. But we can expect a friendlier attitude to the role of private finance in the NHS. If Labour reaches government it is also likely that it will show greater acceptance of private delivery of publicly funded health and social care. Further down the road, there will be more private contribution to education, perhaps initially funded by the state but later repaid by those who benefit through a graduate tax.

The great divide in this recast public/private mix may come over compulsion. This week's announcement aside, the Government's approach has generally been to cut back public provision - on SERPS, mortgage interest payments, income support and unemployment benefits, to name but a few - but to provide only incentives, no compulsion, for individuals to cover themselves. The risk is that they will then fall back on tax-funded means-tested provision.

If Labour wants to avoid that, while ensuring, in Mr Smith's phrase, that the state remains "the guarantor of all provision", then certainly in pensions and possibly in other areas, Labour may have to compel contributions to whatever new partnership schemes it launches.

The Conservatives will paint that as just another tax. But without it, the recast relationship between the citizen and the state may lead only to a more divided society and yet greater reliance on means tests which in the end will cost the taxpayer dear.