Tory welfare plan comes Downunder

Politician Iain Duncan Smith is in New Zealand to deliver a lecture about his proposed social welfare reforms for Britain. Photo / Paul Estcourt

Iain Duncan Smith is a politician with a grand ambition - to repair what he famously labelled "Breakdown Britain".

His Centre for Social Justice thinktank, which he formed after losing the Conservative Party leadership in 2003, analysed "five key paths to poverty - family breakdown, serious personal debt, drug and alcohol addiction, failed education, worklessness".

Duncan Smith saw these problems in Britain first-hand.

"When I visited Glasgow I saw the poverty, the crime, the drug abuse among a swathe of forgotten people," he told Glasgow community worker Bob Holman. "I felt I had to do something. I realised residents had given up on national politics and were seeking their own solutions. I came away a changed man."

His conclusions, in a 2007 report, Breakthrough Britain, emphasised supporting marriage, parenting education and improving preschool education to help fix the other problems, including worklessness.

Four years later, as the British Prime Minister's Work and Pensions Secretary, he is here to tell New Zealanders what he is doing about it in a lecture for the Maxim Institute.

His reforms are a trial run for what a local welfare working group chaired by economist Paula Rebstock has recommended here. Rebstock had a rather narrower assignment - to "reduce long-term benefit dependency". She took what she called "an actuarial approach", recommending "investing" in unemployed people early so they could contribute to the economy. Yet this different approach led her to almost exactly the same proposals as her British counterpart.

Our two countries, of course, share many cultural similarities. Along with the United States and Canada, we have the developed world's highest rates of teen pregnancy, sole parenthood and cannabis use.

According to Breakthrough Britain, we also have some of the world's worst "poverty traps". A married parent moving from part-time to full-time work loses 90.3p for every extra pound earned in Britain, through taxes and clawbacks of various benefits and allowances. The same person here loses 84c for every extra dollar earned, against an OECD average of 55c.

Duncan Smith believes this poverty trap drives the breakdown of the family.

"A lot of people declare themselves as living apart so the mother can claim a higher level of support. That is illegal," he says. "But then they end up actually splitting."

Even worse, the system is so complex that people are put off even trying to work "because they have no idea what they will have in the pocket at the end of the day".

The centrepiece of his Welfare Reform Bill, now passing through the British Parliament, is collapsing the whole complex of benefits and allowances into a single "universal credit".

This will phase out at a steady and understandable rate of 65p for every extra £1 earned after tax.

The British pay no income tax on their first £144 ($271) a week. Above that, taxes start at 20 per cent so they will lose 20p out of every extra £1 in tax, plus 65 per cent of the remaining 80p (52p) off their universal credit, a total loss of 72p - still better than the previous 90.3p.

Duncan Smith believes this simple reform will entice about 650,000 of Britain's five million working-aged beneficiaries into working enough extra hours to lift them out of poverty. He believes it will actually create more jobs by giving employers flexibility to hire people for whatever number of hours they need. Each new hour will be equally valuable to the employee, unlike the present system where some extra hours are just not worth doing.

Britain's former Labour Government already replaced the doctor's "sick note" with a "fit note" specifying what a person can do. It also required sole parents to look for work when their youngest child turned 7.

Duncan Smith will make sole parents seek work when their children go to school, at age 5.

"You need to be able to demonstrate to your child where the money comes from," he says.

He is also reforming the system of helping jobless people to find and keep work. Job centres will keep working with the 90 per cent of newly unemployed who find a job within a year, but those who are still unemployed after that or have other barriers to work, will be handed over to companies and voluntary agencies that will be paid by results.

Rebstock's proposals are virtually identical, but with less emphasis on relaxing poverty traps to entice people back to work and a lot more "sticks" to tighten up the system, such as making sole parents look for work after 14 weeks if they have another baby on the benefit.

The centrepiece is the same - a standard benefit for all with top-ups.

The cost of the accommodation supplement would also be reined in by fixing a standard benefit top-up for each region based on average regional housing costs. As in Britain, this would force families in high-cost housing to look for cheaper homes.

But rather than encouraging part-time work like Duncan Smith, Rebstock would claw back the standard benefit at a rate that encourages people into full-time work.

She recommends adopting the British "fit note" for the sick and disabled, and takes an even tougher line than Duncan Smith on sole parents - they would have to look for part-time work when their youngest child turns 3 and full-time work when the child turns 6.

She would replace Work and Income with a new Crown agency, Employment and Support NZ, tasked with minimising the long-term future cost of the welfare system, partly by contracting out to private sector and community agencies.

But Lincoln University economist Paul Dalziel, in a recent critique, says Rebstock fails to address the policy shift 25 years ago away from full employment and other policies such as low-interest home loans that helped low-income working families.

"If we follow the welfare working group's example in failing to address the historical forces that have given rise to the current situation, but only put more pressure on beneficiaries through lower income support and more draconian job-search requirements, the result will be an intensification of poverty," he says.

Holman, the Glasgow community worker who befriended Duncan Smith, wrote in the Guardian recently that he could "no longer recognise the Iain Duncan Smith with whom I have had a cross-party friendship for eight years".

"The Duncan Smith I knew was a politician who almost wept at the plight of the poor. My guess is that, in order to reach his goal of a universal credit scheme, he has had to mollify the Chancellor ... and that can only be done by being like those Tories who take pleasure in punishing the poor."

Iain Duncan Smith's UK welfare reforms

* Benefits replaced by a "universal credit" plus extras for children, housing costs, disability and caring.

* Household total capped at £500 ($946) a week.

* Housing allowances based on cheapest 30 per cent of local rents for each family size.

* Each extra pound of income cuts benefit by 65p ($1.22).

* Tighter medical work tests; sick notes replaced by "fit notes" stating what a person can do.

* Sole parents must look for work when youngest child turns 5.

* No restrictions on sole parents having more babies while on a benefit.

* Help for beneficiaries to get work contracted to companies and non-profits who will be paid by results

Paula Rebstock's NZ proposals

* Benefits replaced by Jobseeker Support plus extras for children, housing costs, disability and caring.

* No cap per household.

* Housing allowances fixed at flat rate for each region.

* Each extra dollar of income cuts support by 55c above $20 a week.

* All sick and disabled assumed capable of working unless medical tests shows they can't; sick notes replaced by fit notes stating what a person can do.

* Sole parents must look for part-time work when youngest child turns 3 and full-time work when child turns 6.

* Sole parents on benefit who have new baby must look for work when infant is 14 weeks.

* Work help for beneficiaries run by firms, non-profits and iwi.