How to open the benefit trap

The welfare state has grown both inefficient and expensive. Labour has begun to offer tentative proposals for its reform. But radical changes are needed

The first fruits of Labour's review of social security, which were revealed last week by Chris Smith, stretch to the limits the possibilities of action within the present system of taxation and social security. There are two compelling reasons why radical reform isn't merely an option but a necessity for Labour.

First, the hard truth the country has to face is that more, not less, needs to be spent on welfare. Yet under existing rules taxpayers are understandably reluctant to pay more. And second, the social security budget is growing at a rate - twice that at which the economy has been growing - which, unchecked, will financially derail the next Labour government.

A moment's reflection tells why more needs to be spent on welfare. Working lives have shortened and decades now are spent in retirement. An adequate retirement income depends on saving more now.

Paradoxically the message of spending more on welfare comes at a time when the welfare budget is already growing like topsy. Each year the budget overruns by pounds 3bn only to overrun again by a similar amount in the following year. The social security budget is not only by far and away the largest of all government budgets, but is increasing faster than any of the others. To embellish former mandarin Sir Geoffrey Holland's observation, other departments are left to scavenge the scraps that fall from the table upon which welfare feasts. The uncontrollability of this budget increasingly makes prioritising government business difficult. It wasn't for nothing that Aneurin Bevan remarked that priorities were the language of socialism.

How can a future Labour government break free of the curfew DSS expenditure would impose on most of its major initiatives? By addressing that question Labour begins the big debate of the Millennium. It involves recasting the relationship between the state and the individual, of switching the balance away from centralism towards other forms of collective association, as well as re-drawing the border between the public and private domain.

At the centre of today's welfare lurks a cancer that has been nurtured by the Tories. While expenditure on insurance provision since 1979 has risen by under 30 per cent, means test costs have soared by 300 per cent. Means tests trample upon those basic instincts that help to sustain civilised progress. Means-tested help depends on low income and small savings. Such benefits therefore penalise work, savings and honesty.

In their craving for extending means-tested assistance, the Tories have launched the most significant attack ever by government on both the individual's and the nation's natural drive for self-improvement. And they have implemented their approach with a ruthlessness that the leaders of the old discredited Soviet regime would have admired.

Disengaging from this welfare nightmare demands wholesale reforms. Tory failure has closed the option for limited incremental change. The hour demands the most radical reconstruction.

Labour's overriding commitment must be to begin a progressive disengagement from means-tested assistance. This cannot be achieved overnight. It will take perhaps 20 years to complete. But the first steps of that long journey need to begin with the advent of a Blair government.

Four major initiatives are required. The poor law is alive and well in Britain. Claimants for income support only gain help if they withdraw from the labour market. This final vestige of the poor law must be abolished. All claimants of working age should be invited to think what they want to do with the rest of their lives. They should be able to use their income support payments to help achieve the next stage in their career.

Next, a new system of insurance benefits must be introduced. A new insurance corporation should be established and owned by the members themselves, and work begun on introducing two new benefits. The Job Seekers Allowance needs replacing with insurance cover for unemployment. This new benefit would run for six months, as does the Job Seekers Allowance. The big difference is that people would re-qualify for benefit after 13 weeks rather than two years. As every week out of the labour market increases unemployability, this would give risk-takers an incentive to return to jobs with what might be a short shelf life.

Also, the partner's job would be safeguarded, as households would not be pushed on to means tests where it pays most wives not to work. New jobs would become more fairly shared between those households with no workers and those with many. Similarly a new care pension is an urgent reform. Here again is an opening for the new, collectively owned but non- state insurance corporation.

Third, pension provision must be made adequate and universal. A new pension corporation would be responsible for running the existing retirement pension, which will cover all workers. The four million workers on low earnings who currently pay nothing towards a state retirement pension would be brought within the scheme and a pension in their own right. Next, second pension coverage must also become universal for workers earning above a modest level. Those workers not in a company or a private pension scheme would be required to begin saving towards a second, funded pension.

This reform extends the existing system of compulsion so that it covers everyone and thereby does what is possible to ensure adequate retirement incomes for today's workers.

Last, the issue of fraud must also occupy the centre stage. The largest of all government budgets is under sustained attack by serious criminal fraud. Even someone with Peter Lilley's determination has yet to mount an adequate counter-fraud strategy. Here is another opening waiting to be seized. Only Labour appears ready to be tough on fraud and tough on the causes of fraud.