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Iain Duncan Smith
Iain Duncan Smith is considering ways to decentralise the delivery of benefits. Photograph: Martin Argles for the Guardian
Iain Duncan Smith is considering ways to decentralise the delivery of benefits. Photograph: Martin Argles for the Guardian

Iain Duncan Smith plots welfare revolution despite Treasury resistance

This article is more than 13 years old
Work and pensions secretary given until end of year to prove his radical tax and benefits plan is workable and will save money

Groundbreaking plans for a single integrated welfare tax and benefit system are meeting Treasury resistance but Iain Duncan Smith, the work and pensions secretary, has been given until the end of the year to prove that his plan is workable and will ultimately save money.

Duncan Smith, wrestling with the lack of incentives and complexity of the benefit system, is determined not to just advance some gradualist reforms but to secure a breakthrough that has eluded almost a dozen previous welfare ministers.

He is also looking at whether to decentralise the delivery of benefits.

The consultation paper released today from the Department of Work and Pensions looks at three main options. The first is combining elements of income-related benefits and tax credit systems.

The second is bringing the 50 or so jobless benefits into a single "universal credit" with benefit withdrawal tapered at one fixed comprehensible rate.

The third is supplementing monthly household earnings through credit payments, reflecting changes in circumstances such as housing, disability and having children. At present, working tax credit has to be adjusted after a claimant's circumstances change.

The Treasury believes new computer software will make it possible to adjust credits on a monthly rather than an annual basis. As a result the accuracy of payments would increase dramatically.

Duncan Smith claimed previous Labour welfare ministers had wanted to do what he proposed, but realised that it ran against Gordon Brown as the man that created the tax credit system. "He absolutely adamantly refused to see any of this touched". But Duncan Smith argued that if the government continued without radical reform, the Treasury will have to pay more and more each year in an unplanned way as welfare bills rise, especially housing benefit.

His consultation paper contained no costings for his various plans, suggesting there is not yet cross-government agreement on the proposals. Lord Freud, the welfare reform minister, said: "One of the options we are looking at is to integrate not just the benefits and tax credit system but also the tax system into a single, coherent negative income tax."

The negative income tax plan was just one of several ways to simplify the current system, and ensure people on benefits were rewarded for going back to work.

The consultation paper included no costings, reflecting the complexity of the plans and the continued scepticism inside the Treasury that the reforms will save money in the long term. The consultation paper also suggested that if benefits were merged it might be possible to tighten the requirement to work at least for a few extra hours on those that work part-time, and those that have been ill. Those that refuse to work would lose benefit.

It suggests: "For those closest to the labour market this loss of benefit for the period of their non-compliance may be permanent. For others, some or all of their withheld benefit may be paid to them once they demonstrate re-engagement". Duncan Smith said that the welfare system is broken. Current arrangements, which penalised people who were trying to get off benefits, amounted to a "supertax" on some of the worst off in society.

He said: "Working for a few hours a week is completely unattractive if you lose £8 or £9 for every £10 you earn. Would we want to work if we had a 90% rate of deduction in our earnings.

"Today is the beginning of the end of this antiquated, piecemeal, multi-factional system of benefits that actually benefits few people that lands all of us with higher bills."

The report said that the welfare state is a "vast, sprawling bureaucracy" that could entrench, rather than solve, the problems of poverty and social exclusion.

Brendan Barber, the TUC general secretary, said: "Either you make those who are out of work poorer, yet we already have jobless benefit levels way below those when Mrs Thatcher was in power. Or you can boost income in work either through more generous benefits or a higher minimum wage.

"The first should be morally unacceptable, while the Treasury will not allow the second. Iain Duncan Smith is trapped in the Catch 22 of welfare reform."

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