CAIN: Democratic Dialogue: Social Exclusion, Social Inclusion (Report No. 2)

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Social Exclusion, Social Inclusion


SECTION 3
BENEFITS, TAXES AND JOBS - HOW MUCH ROOM FOR MANOEUVRE IS THERE FOR REGIONAL REFORMS?

Welfare: piloting change

Paul Gorecki
Cormac Keating

The objective of the benefits system, according to the Department of Social Security, is "to provide a fair and efficient system of help for beneficiaries and other customers" - the unemployed and less well-off families, including families of people in work. The department's strategic priorities are to: focus benefits on those most in need; maximise incentives to work; and ensure the system adapts to differing needs, rather than making people adapt to an overly complex system.

While many would share these objectives, there is widespread concern that the system falls short of meeting them. In particular, it creates various disincentives to work:

  • The unemployment trap: For the unemployed, net income in work can sometimes be little more, or even less, than the income out of work. This is measured by the 'replacement rate' - the ratio of income out of work to income in work.

  • The poverty trap: For those in low-paid work, particularly those with a family, increased hours may leave them only a little better off because of increased taxes and lost income-related benefits. This is measured by the 'withdrawal rate': the proportion of any increase in income which is lost in income tax, National Insurance contributions and/or reduced benefit payments.

  • Entry/exit from the benefits system: Many of the jobs likely to be taken by those on benefit are low-paid and temporary, so it is important that individuals who leave the system should be able to requalify quickly. There appear to be delays and uncertainties, however, which further discourage people from taking work.

  • Means-tested benefits: Based on family income, these discourage partners of the low-waged or unemployed from staying in or taking up employment.

These difficulties not only create disincentives to work; they can also cause substantial hardship and suffering, frequently for the most vulnerable in society.

The British government has moved to reform the benefits system, so as to enhance work incentives. Changes introduced in 1988 substantially reduced the incidence of replacement rates above 100 per cent, while some attempt has been made to reduce the period for requalification for benefit. On the other hand, the move towards more means-tested benefits has arguably increased the importance of some work disincentives.

Table 1: recipients of certain benefits, NI and UK (1992-93)

.
NI
UK
Income Support
As % of population over 18
204,940
17.9
5,675,000
12.7
Unemployment Benefit
As % of population over 18
16,695
1.5
701,000
1.6
Family Credit
As % of all families
15,398
3.8
447,000
2.8
Child Benefit
As % of all families
221,556
54.2
6,897,000
43.1
One-parent Benefit
As % of All Families
28,862
7.1
873,000
5.5
Housing Benefit
As % of all households
160,400
30.2
4,327,000
19.3
Total benefit expenditure (£m)
1,748
57,784
Total expenditure per head (£)
1,085.71
996.31
Sources: various government publications


Table 2: sources of household Income by quartiles of gross weekly income,
NI and UK (1993)

.
Northern Ireland
As % of av gross weekly h'hold income
Lowest
25%
2nd
25%
3rd
25%
Highest
25%
All
H'holds
All
H'holds
.
%
%
%
%
%
%
Wages and salaries
1
23
66
80
64
65
Self-employment
1
9
7
8
7
8
Investments
2
4
3
4
3
5
Annuities/pension (exc SS)
3
9
5
3
4
6
Social security benefit
89
53
18
6
20
14
Other
3
2
1
1
1
2
Av gross wkly income (£)
76.21
162.31
315.18
657.21
302.71
353.03
Source: Policy, Planning and Research Unit


Recent reports by the Commission on Social Justice,[1] the Joseph Rowntree Foundation[2] and the Social Security Advisory Committee make the case for further reforms to ease the transition from welfare to work. For example:

  • claimants should be allowed to earn more without benefits being withdrawn;
  • 'passported' benefits, such as free school meals, exemption from health charges and so on, should continue for some time after employment is gained;
  • there should be a more gradual withdrawal of benefits once a job is taken up;
  • disregards for second earners would help alleviate the traps facing partners (typically women) of the low-waged and unemployed; and
  • more flexible and comprehensive childcare allowances, encompassing informal childcare arrangements, would help parents (especially single parents) take up employment.

These and associated reforms to the benefits system are not, of course, a panacea for unemployment. To be effective, there must be work to match the skills of those who are unemployed.[3]

Northern Ireland is much more reliant on the benefits system than the UK as a whole: close to one in five families are on income support and one in three on housing benefit; the figures for the UK are one in ten and one in five (Table 1). Social security benefits account for 20 per cent of average gross weekly household income in the region, compared to 14 per cent for the UK overall (Table 2). For the poorest quarter of Northern Ireland households, this benefits dependency rises to 89 per cent.

Such reliance on benefits - particularly means-tested benefits - goes hand in hand with features of the regional economy which exacerbate the disincentives inherent in the current benefits system.

Long-term unemployment in Northern Ireland is twice the UK rate. As duration of unemployment increases, the probability of finding a job decreases and the chances of escaping from the unemployment trap also decline. The worker becomes discouraged, skills depreciate and work habits may deteriorate, while employers are more willing to hire recent entrants to the workforce and those already employed.

Over time, the pay an unemployed person might expect to receive will decline, while work in the black economy becomes attractive. Meanwhile, s/he moves from unemployment benefit to means-tested benefits. The effective replacement rate rises, as the withdrawal of benefits consequent upon employment may be compounded by a loss of black economy earnings.

The incidence of poverty and unemployment traps is also likely to be greater in Northern Ireland, because of lower regional earnings at the bottom end of the wage distribution. In 1993, gross weekly earnings for the lowest paid 10 per cent of men in Northern Ireland were 84 per cent of their counterparts' in Britain (Table 3). If it is assumed some within this cohort were single with no dependants, then the replacement rate in Northern Ireland was 60 per cent, compared to 53 per cent in Britain.

Table 3: gross weekly earnings. various groups, by sex, NI and GB (1993)

NI GB
Gross average weekly earnings - lowest decile (£)
Male147.1 174.7
Female118.0 134.0
% males earning less than: £160pw 13.96.9
£130pw5.4 2.3
£110pw2.1 0.9
% females earning less than: £160pw 31.220.9
£130pw15.9 8.5
£110pw6.8 3.2
Source: Department of Economic Development


In the recent past, before UK-wide policies have been introduced, there have been local pilot or trial schemes to test their effectiveness. For the first time, this is being considered with respect to benefits, but the selection of locations is restricted to Britain.

There are, however, good reasons for piloting reforms to the system in Northern Ireland. (This is not in order to depress benefit levels regionally, as some have argued; benefits UK-wide are already at subsistence level and have been depressed relative to rising earnings through price indexation.)

Firstly, the benefits system, combined with regional economic conditions - such as higher long-term unemployment, lower earnings and larger families - results in greater work disincentives than in the UK as a whole; thus, the effects of any pilot would be more visible.

Secondly, to the extent that such reforms assisted in addressing long term-unemployment, they would help, in combination with other policies, to remove Catholic/Protestant unemployment differentials and thus be consistent with the government's Policy Appraisal and Fair Treatment (PAFT) guidelines.

Thirdly, the prospect of peace and a durable political settlement holds out also the prospect of job generation. But to the extent that this employment is concentrated in industries such as tourism-where many jobs are low-paid and temporary-the work disincentives created by the benefits system are likely to be particularly prevalent. So reform, albeit on a pilot basis, would assist in realising the fruits of peace.

Fourthly, the location of Northern Ireland ensures a relatively closed labour market. And, finally, recent developments in statistical and benefit information systems in the region mean a pilot could be carefully monitored.

Thus, there is a strong case for a pilot scheme(s), containing some of the reforms outlined above - designed to ease the transition from benefits to work-in Northern Ireland. While this would not solve the deep-seated problems of the region's labour market, it would be likely - if successful - to generate a valuable policy improvement.

Footnotes
1See note 6 in the introduction
2Rowntree Foundation Inquiry into Income and Wealth (2 vols), available from BEBC Distribution, P0 Box 1496, Parkstone, Poole, Dorset BH12 3LL (£15 together)
3See the chapter by Maura Sheehan and Mike Tomlinson in this report.

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