The dangers of a spoon-fed diet

Radical change to our benefits system is vital to unclog the wasteful cycle of perks and poverty

Whenever I read about the Department of Social Security, I am reminded of the grotesquely fat diner played by Terry Jones in Monty Python's The Meaning of Life. And whenever I hear Peter Lilley trying to explain why his bloated department keeps consuming ever more platefuls of taxpayers' money - only to throw it all up again into a bucket marked "benefits" - I think of the poor, spew-spattered waiter whose unenviable job it was to serve the monster.

The figures speak for themselves. Thirty per cent of all households now have one or more members receiving one or more income-related benefits such as income support, housing benefit and family credit. And that is only a part of the pounds 87bn DSS budget, which has grown in real terms by a staggering 78 per cent since 1979, from one fifth to one third of total public expenditure.

The question is: why has a party supposedly committed to "rolling back the state" failed so comprehensively, despite having been in power for a decade and a half?

The conventional left-of-centre wisdom is, of course, that Tory policies, by increasing unemployment, are to blame. The conventional Tory response is that the system is plagued by scroungers and fraudsters. If the DSS targets benefits more accurately at those who really need them, its budget will finally be brought under control - hence the huge swing towards means- tested benefits, over which Mr Lilley has presided.

Of course, the more Mr Lilley means-tests, the more fraudulent claims his department processes (to the tune of pounds 1.4bn a year). But the Secretary of State has an answer to that, too - clamp down on the fraudsters, by using bar codes and smart cards. Even "New Labour" seems to accept the logic of this - witness Frank Dobson's enthusiasm for "fraudwatch", a telephone hotline for people who wish to inform on their fraudulent neighbours.

Yet the reality is that the welfare malaise has causes far more profound than unemployment or fraud. In part, of course, it is an inevitable consequence of rising life expectancy. Take, for example, the growing number of elderly people in nursing homes. The fact that they receive no assistance until they are down to their last pounds 8,000 is the object of much Tory opprobrium. But raising the threshold will merely push up an already soaring bill.

The ageing of the population is only part of the problem, however. The real key is the fundamental internal contradiction of our modern, post- liberal democracy, which demands simultaneously more spending but less taxation. I say "post-liberal" because there was nothing wrong with the original conception of the welfare state devised by Liberals like Beveridge. The post-1945 system represented a laudable attempt to reduce the inequalities that had existed before the war - or to preserve the equality created by the war - by constructing a basic safety net of old age pensions, health care and education, financed at least partly out of a national system of insurance contributions and progressive taxation.

The problem is that the nature of democratic politics militates against keeping welfare at that basic level. The pressure on politicians seeking election to offer new forms of "hand-out" is too great. As the perks, privileges and anomalies multiply, the safety net begins to mutate. From being a net, it becomes a rather comfortable mattress on to which more and more people are tempted to flop. And finally, when the number of floppers exceeds a certain proportion of the tax-paying population, it mutates again - into a sticky quagmire of disincentives from which none can escape.

In political economy, this proportion is the equivalent of critical mass: it is the point at which the number of benefit recipients grows so large that it becomes politically impossible to reduce spending. And if individuals as diverse as Viscount Cranbourne and children of Linford Christie are in receipt of some kind of state subsidy (albeit from English Nature in the Viscount's case), we are surely close to that point. Lord Acton famously said that power corrupts, and absolute power corrupts absolutely. But where power is shared democratically, it corrupts democratically, with innumerable scams for rich and poor alike.

The simplistic right-wing answer to the problem is, of course, to appeal to the interests of taxpayers by offering them, John Redwood-style, tax cuts. The theory behind this is that tax cuts will either boost economic activity and so increase overall revenue, or they will force voters to accept cuts in public spending.

In practice, however, a third possibility is more likely - tax cuts merely increase public borrowing, leading to higher levels of public debt and therefore higher interest payments, which have to be funded out of taxation. The only way this problem was avoided in the Eighties was by concealing public sector deficits behind privatisation receipts. But now all that remains, as deficit follows deficit (pounds 3.3bn for June alone), is the traditional escape route of all fiscally lax governments - devaluation of the currency and, sooner or later, higher inflation. This quietly reduces the real burden of debt and the real value of benefits ... whereupon the cry once again goes up for increased benefits.

To some Keynesian cynics, this process may seem infinitely sustainable. It is not; a system such as this is doomed to economic stagnation. Indeed, there is no better explanation of Britain's poor post-war economic performance than the steady sapping of economic morality produced by the welfare system.

In short, we find ourselves in an immense, though still latent, political crisis. Are there any solutions? Happily, there are two, both of which have been considered by the Commons Select Committee on Social Security. The first - the solution favoured by Frank Field - is for a return to the original notion of contributions-funded universal benefits.

That would be a step back to the "New Liberalism" of the 1900s. The trendier alternative is a system of "basic income", whereby all benefits would simply be replaced by a simple tax credit, administered by the Inland Revenue. This is the solution advocated persuasively by Alan Duncan and Dominic Hobson in Saturn's Children, their recent book.

In their objectives, the two ideas have much in common. Both solutions would clear away the appalling quagmire of perks and poverty traps that has accrued over the years, restoring a basic "safety net". Both would emancipate millions from that dependency culture which stifles individual initiative and personal responsibility. And both would ultimately repay the inevitable costs of transition tenfold, through increased economic growth.

The question is: which of our two party leaders will have the nerve to take up the Duncan/Field ideas? The intriguing thing is that Mr Blair shows rather more sign than Mr Major of doing so. Yet somehow it is hard to imagine root and branch reform of the welfare state by a Labour leader. Too many of the 30 per cent of households on benefit are, after all, composed of Labour voters.

Then again, Mr Blair may have no alternative - unless, that is, he wants to be the maitre d'hotel when the great glutton finally explodes.

Andrew Marr is on holiday.