Why Tories ought to care: David Willetts argues for a non-socialist vision of the welfare state that complements free market economics

THE intellectual and political cutting edge of modern Conservatism comes from its commitment to the free market. That dominated Britain's political agenda in the Eighties because it was so obviously what the economy needed. Liberalising the labour market, privatising public services, cutting back on regulations are the basis for transforming Britain's economy. Now we are at least half way through a process of catching up with the other big European economies behind which we had fallen so far in the Sixties and Seventies. That free market agenda remains as relevant as ever. But it is not the whole story.

The other strand in Conservatism is commitment to institutions and values which lie outside the market but help to sustain it and give life to so much of its meaning. Some of those institutions - from the monarchy to the family - now seem to be under threat. Political arguments about the underclass, educational standards or law and order do not make sense if they are split into narrow Whitehall compartments. They all rest on a deeper worry about incivility and the threat to our core values.

That means we need a Conservative agenda that speaks as confidently about values as we have learnt to speak about the free market. The challenge is to formulate a set of values that are substantial without being narrow and exclusive. They are given practical political meaning by driving a Conservative agenda for the welfare state. One might call it 'civic Conservatism' - applied to those parts of society which cannot simply be left to the free operation of the market.

We need to start from first principles. Why should Conservatives believe in a welfare state? Is it really a socialist institution with which we have to compromise out of political prudence? If Conservatives lack confidence about their approach, they are more likely to feel obliged to win the electorate over with big spending and timidity before the pressure groups. It is, for example, an iron law of post-war British politics that spending on the NHS rises as a percentage of GDP under the Tories and falls under Labour governments: this is because the NHS is thought to belong to the Labour party so it can get away with stringency which, under a Tory government, would be seen as a fundamental attack on the NHS.

There are two distinctively Conservative arguments for a welfare state. First, modern free market economies need a welfare state. The concepts of 'unemployment' and 'retirement' emerged in the late 19th century. They are features of modern capitalism, which needs to be able to hire, fire and retire - financial provision for the unemployed and the elderly make that possible. Similarly, capitalism needs healthy, well-educated employees - what the economists call investment in human capital.

But these arguments will not do on their own. They fail to capture what we think we are doing when we pay our taxes to finance spending on the NHS ( pounds 35bn last year) or education ( pounds 32bn) or social security ( pounds 79bn). Conservatives are not just the party of the free market, but also the party that understands the shared culture and values which tie us together as a community. The welfare state is a sort of mutual insurance scheme to which we contribute and from which we are entitled to draw. These Tory principles have nothing to do with socialist redistribution. We can now move on to a distinctive Conservative agenda for reform of the welfare state.

The first practical proposition is to give local institutions as much control as possible over their own destinies. Seeing a Victorian school or technical institute standing out from a mass of terraced houses, rather like a medieval church in a country village, reminds us that those institutions are crucial for local communities. They matter to Conservatives because they are part of that rich network of mediating structures that stand between the individual and the state. The welfare state has been built on the ruins of vigorous local institutions - friendly societies, voluntary hospitals, grammar schools. Fabian centralised control has drained the life-blood from them. Initiatives such as self-governing hospitals, grant-maintained schools and neighbourhood watches are giving autonomy back to local people: they need to go much further.

Second, there is the objective of securing some of the best features of markets - choice and competition - within publicly financed services by distinguishing between purchasing and providing. This is the so-called internal market. But some purchasers of services are now issuing contracts which look like the legal documentation for a major international bond issue. Purchasers - be they local authorities dealing with a contract cleaner, social services dealing with a private nursing home or a district health authority dealing with a hospital - should be specifying the objectives to be met, not how the job should be done. The 'contract culture' must not become bureaucracy by other means. To describe in great detail exactly how the job has been done in the past and then call it a purchasing contract is to fossilise patterns of provision, not to liberate them.

Third, welfare provision cannot ignore questions of behaviour. It is entitled to set conditions for membership of the mutual insurance scheme. The welfare state needs to reinforce the core values of the community. It is not just a matter of handing over money or services, no questions asked.

All this has to be within the constraint of what can be afforded. That means resisting pressures from vested interests who are always willing to say how terrible things are in order to extract more money from the government. This puts the grainy realism of Conservatives in conflict with the eternally unsatisfied modern social conscience.

The obsession with ever higher public spending stands in the way of serious consideration of the welfare state. It avoids having to face the big questions of the best way to deliver services or to target help on the people who need it. Ernest Rutherford is supposed to have observed at one point when his impecunious team were trying to split the atom that 'we have no more money, now we must think'. That motto could guide many a manager in the public sector.

A substantial agenda for civic Conservatism is now clear. It stands for the strengthening of local institutions and our core values, harnessing market forces within the limits of what can be afforded. Then some of the Government's disparate initiatives, for example the Citizen's Charter, deregulation, private finance for public services, begin to come together as a coherent way of rebuilding local institutions and shifting power back towards the people who use them.

Too much of the debate on social security has been an exploration of blind alleys, which may appeal to the technocrat but are completely out of tune with Tory values. There is a set of ideas - a negative income tax, tax-benefit integration, one big means- tested benefit, using the tax system to assess people's benefit entitlement - which appeal to the newspaper leader writer desperate for some supposedly radical way forward, but which are in practice deeply flawed.

First, paying in (through taxes) is very different from paying out (through benefits). We have, quite rightly, different attitudes to taxing and spending, revealed in the different criteria that guide the tax and the social security systems. For example, we pay out social security to families, but we tax individuals independently: it would not be thought reasonable to pay income support to the non- working wife of a Surrey stockbroker; equally it would be thought wrong to tax her income as if it belonged to her husband.

We tax people on their income over a year, while benefit is based on need over a period of weeks or even days. We take account of capital in allocating means-tested benefits, but the PAYE system takes no account of people's assets. Attempts to bring together the tax and benefit system always founder on these practical difficulties, which reflect fundamental differences between a tax system and a social security system.

Moreover, all these technocratic schemes take the benefits system even further away from any concern with people's behaviour. They rest on the fallacy that the only thing you need to know when assessing someone's entitlement to benefit is their income. But many people would be happy to see a war widow receiving more than an unemployed person not actively seeking work and are happy to see someone who is disabled receiving more than a New Age Traveller.

The social security system has to rest on a series of judgements about behaviour. The right way to reform it is not to take it further away from such judgements; if anything, we need to move in the opposite direction. The conditions for getting benefits have become too loose. You can sign on for unemployment benefit once a fortnight when it should be once a day. Single parents with older children could be classified as unemployed and therefore expected actively to seek work.

Then there is the exaggerated faith in means-testing. I remember putting to Margaret Thatcher a proposal to means-test child benefit nearly 10 years ago and one of the reasons she turned it down was the administrative costs and complexity. The challenge is to target benefits better, without getting into complicated means tests, by defining categories of claimants carefully. Targeting and means testing are wrongly treated as synonymous.

The main universal benefits, pensions and child benefit, are intended to cover phases of life when people's incomes are particularly low. But both could be better targeted without means-testing if child benefit were focused on the under-fives and the state pension on the over-eighties. Poor families are one-earner families and those tend to be families with young children. Poor pensioners tend to be very old pensioners, often widows.

While it would not be possible to phase out entitlements to child benefit for five- to 16-year-olds or the pension for the under-

eighties, it should be an objective of policy gradually to create a two-tier structure with any extra expenditure going to the extremes of the life cycle. Increasing pensions for the over-eighties might be one way for the Government to meet the pressure to help people with higher fuel bills who are not on means- tested benefits.

This adds up to an agenda for civic Conservatism. We need to transform the debate on social policy as we have transformed it on economic policy.

The author is Conservative MP for Havant.

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