Social security – Cost savings first, reform later

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The UK’s social security figures are terrifying. If the related tax credits of c£22 billion per year are also taken into account, the overall cost of the social security budget is close to £190 billion – that’s over £3,000 per person per year. Against that background, the Coalition Government has targeted this budget aggressively in its quest for public expenditure savings.

However, recent media comment has focussed on cost savings, maladministration of benefits, fraud and long-term reform of the whole system: these aims are very different. In seeking to achieve all of them, the Government risks losing focus. Its short-term priority should be to deliver the necessary savings – of at least £5 billion annually.

Aside from its CPI-based uprating adjustment, the Government should adopt a ‘shrinkage’ policy – a combination of a modest reduction in benefit payments and the denying of eligibility to the least deserving claimants – to achieve a substantial reduction in the pay-out costs. For example, a 5% benefit cut and a 5% eligibility reduction could deliver annual savings of up to 10% from the social security programme. Of course, tax and threshold issues distort the calculations, but the principle endures.

In both the short and medium terms, vigorous efforts should be made to reduce maladministration, which – given the immense complexity of the system – is almost inevitable. Furthermore, catching social security fraudsters, whose activities are almost certainly under-estimated, should be accorded priority.

In the long term, full integration of the social security system into the taxation system - thereby giving rise to a negative income tax – is the Holy Grail. It should reduce the poverty trap and deliver major savings. However, it will be a project of byzantine complexity and should only be attempted with the greatest care – it is not a panacea for short-term savings.

A logical strategy?