No time to play it by numbers: Labour and the Liberal Democrats must work together to redefine the welfare state, says Ben Pimlott

IN THE summer, London becomes a city of contrasts: of cheerful prosperous people with money to burn in its outdoor restaurants; but also of social detritus - drunks, bag ladies, hallucinators, unemployed young people - who sleep on the streets and hope to pick up crumbs. As in the Third World, the people in the first category ignore those in the second, weaving their way through the outstretched hands and pretending not to hear the curses. A stranger would find it hard to believe that there was once a time when Hogarthian figures did not huddle in doorways, and when beggars were just characters in nursery rhymes. If you suggested that the sight of human misery used to be considered degrading, and a matter for state action, you would probably get a blank, incredulous stare.

That is certainly what you would get from Peter Lilley, the Secretary of State for Social Security, who recently drew attention to the scandal - as he sees it - of excessive social security spending. Apparently this has risen by two-thirds in real terms since 1979, and something has got to be done about it. Anybody old-fashioned enough to think that the problem about benefits is how to reach more people has got things the wrong way about: according to Mr Lilley, the demographic timebomb of an ageing population and other factors, such as the increase in single-parent families, are creating a benefits bill that the state will soon be unable to meet.

Hence we should brace ourselves for a series of kites, with a tough- minded breeze behind them. In the supportive words of the Chancellor: 'Every developed country has to ensure its welfare systems are run in a way and at a level they can afford. That is what we are trying to do.'

But what can the nation afford? Put that way, the answer seems obviously to be very little. In national housekeeping terms, a country with a massive deficit has to deal with it first (goes the familiar argument) and worry about social welfare later. The Thatcher era seems to have made neo- liberals of practically everybody, and to have created a consensus against public spending per se. Hence even the opposition parties are experiencing a deep reluctance to challenge the Lilley position root and branch.

To be fair, Labour did propose raising pensions and child benefits at the last election - but got its fingers burnt when it talked about raising the necessary revenue. So now it is waiting to see how its own Commission on Social Justice, chaired by Sir Gordon Borrie, will report. Meanwhile, it is cautious about saying anything that will involve substantially more spending; and no Lloyd George or Aneurin Bevan has risen from the ranks of either the Liberal Democrats or Labour to tear Mr Lilley to moral shreds.

If Labour wishes to be more radical, it must either swallow the pill of increased taxation or it must think up some ingenious new way of dividing the cake. The Borrie commission seems to be edging in the second direction. Although its deliberations are far from complete, two of its interim reports (published today by the Institute for Public Policy Research) offer spirited proposals for a new philosophy of welfare that certainly deserve a hearing. The emphasis of the welfare state, according to the new approach, should be on enabling as much as on handouts: money should be directed at helping people (wherever possible) to help themselves.

If that sounds a bit like Mrs Thatcher, the reply would probably be that while the Tories talked about creating opportunities, the opposition has to mean it. For example, child benefit should be linked to child care, to enable women who want to return to the labour market to do so. Professor Julian Le Grand, of the London School of Economics, is even pressing Labour to adapt a suggestion first made by the Conservative MP David Willetts for a flexible retirement age, which would allow people to go on working without being penalised. This would both create a more flexible labour market, and cut the pensions bill at the same time. The most daring scheme of all - leapfrogging sober Toryism in acrobatic style - has been put forward by Frank Field and Matthew Owen in a Fabian pamphlet published last week, Private Pensions for All: Squaring the Circle.

Not only do they square the circle, they put knobs on. Mr Field is a Labour MP who cares passionately about the poor. Labour (so we were led to believe) has always been the party of the state. Yet the authors suggest that the whole pensions business should be privatised, with the state simply acting as a regulator (requiring both employers and employees to make contributions to a private scheme) and as a topping-up agency (for those unable to pay), guaranteeing a minimum pension. The Borrie commission is expected to look closely at this scheme, which in one sense out-Lilleys Peter Lilley.

The Field scheme has the attraction of being adventurous and tossing the old shibboleths to the winds. If Labour is to remain the party of the welfare state, it must redefine the concept or risk being linked in the public mind with a sentimental attachment to methods that are out of date, as happened over nationalised industries and council houses. Indeed, there is scope for a report (which Borrie may eventually provide) of Beveridge-like thoroughness that recommends myriad structural changes. Yet the bottom line remains: what can we afford? There is no finite answer. What we can afford depends on the kind of society we want. Here we meet the Catch-22 of post-welfare capitalism, what J K Galbraith brilliantly characterised as the 'culture of contentment', the indifference of a relatively prosperous majority to the needs of a marginalised and apathetic minority, and the democratic pressures on all political parties to share that indifference. As parties of the left desperately abandon the poor in pursuit of the contented majority, the gap between well-off self-providers and those for whom there is little provision gets wider.

In Britain, this gap now yawns to an alarming degree - and almost as alarming is the failure of the opposition parties to make much of it. The sharpest analysis has been provided by the Department of Social Security's own survey, published at the end of June, on households below the average income for the period 1979 to 1990-91. This shows not only a big drop in the share of total incomes going to the worst-off 10 per cent, but also a 14 per cent fall in real terms in disposable income after housing costs. Thus, in a period when average incomes rose by a real 35 per cent, the poorest tenth of the population got substantially poorer. The excuse, of course, has been that the nation could not afford to be more generous if it was to grow economically.

Economic problems are not new. Britain was in even more desperate financial straits in the Forties, when Sir William Beveridge's promise of 'cradle to the grave' security was triumphantly honoured. The difference is not that welfare costs have become more deleterious but that they have become less widely desired. Yet Labour and the Liberal Democrats would be foolish to think that the public's only concern is to keep costs down.

In the first place, many experts dismiss Mr Lilley's demographic time- bomb as propagandist hype. Second, it is absurd to characterise the nation's health, education and welfare services as a charity. It would be better to see them as a savings bank, or insurance company: recent research at the LSE shows that average earners get back over a lifetime at least 75 per cent of what they put in. This is not a bad rate of return, especially as a financially confident, socially secure work force is likely to be a more flexible and productive one. Perhaps the opposition parties need to train as insurance salesmen. They should certainly join forces on welfare and then seek to lead public opinion, instead of being scared of it. They should warn high earners now, to give everybody time to take it in, that those individuals who have gained pounds 5,000 or more in tax cuts since 1988 will be returned to where they were before. They should not save this sort of news until the election. They may also need to warn all taxpayers that they too will have to make their contribution, and explain why.

Finally, they will need to tie welfare policy to education, training, preventive medicine, housing and fiscal policy in a bold package, showing how one depends on another, and how all are linked to the development of a better and more fully employed economy. This used to be called indicative planning, and it is due for a revival.

Ben Pimlott is the author of 'Harold Wilson', (HarperCollins, pounds 20).

(Photograph omitted)