Liberals who support a limited public safety net are faced with a dilemma. On the one hand, they want government to fulfil the role of a provider of last resort. They envisage a situation in which people provide for the vicissitudes of life through savings, asset accumulation, private insurance, mutual assistance, the extended family, private philanthropy and an active charitable sector. The government’s job should begin when all these things have failed – but only then.

However, the crowding out effect makes this situation hard to achieve in practice. Once a government programme is in place for the case that all else fails – why try all else first? If there is a ‘free’ provider of last resort, why not take the shortcut, and make it the provider of first resort? If, for example, a government programme only kicks in once people have depleted their savings and assets, it is not irrational to respond by simply not building up savings and assets. In this way, welfare programmes initially designed for a small section of the population have a tendency of enlarging their own client base.

A possible way out of this quagmire is conditionality, meaning that government aid always comes with stringent requirements attached. The US state of Wisconsin has enacted a system has in which the equivalent of Income Support can only be received in exchange for participation in job search and work programmes. While sometimes misrepresented as a back-to-the-workhouse approach, this simply means that the daily life of a Wisconsinite welfare recipient is not that different from the daily life of their working peers.

In ‘Transforming Welfare’, my chapter in Sharper Axes, Lower Taxes, I show that this logic can be extended to cover many other government payments, both in-work and out-of-work. Meanwhile, the chapter makes the case for ending universal or near-universal benefits.

Most middle-class households would presumably not want to participate in workfare schemes, and neither would they qualify for in-work transfers any longer. This would lead to a surge in demand for private insurance products and other forms of non-state risk provisioning. Instead of trying to protect everyone from everything, the remaining welfare state could then concentrate on the genuinely deprived.

But this area requires huge organisational changes. Welfare/workfare should be devolved to local governments, largely funded through local taxation. The national government can top up local funding, but welfare provision would largely cease to be the remit of Whitehall. There would be large regional differences in welfare policies and in tax burdens. This would result in intense competition and mutual learning between local governments, under scrutiny and pressure from local taxpayers.

Combined with other measures, annual savings of over £30 billion would be possible towards the end of this parliamentary term. But the emphasis of my chapter is not on the fiscal aspect. Our present welfare system is dysfunctional, on many levels failing those it purports to protect. Reducing the system’s scope to a manageable dimension, while subjecting it to competition and transparency, is the way to break the dependency trap. That would be a good deal for the poor, and a good deal for the taxpayer.

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Dr Kristian Niemietz joined the IEA in 2008 as Poverty Research Fellow, becoming its Senior Research Fellow in 2013 and Head of Health and Welfare in 2015. Kristian is also a Fellow of the Age Endeavour Fellowship. He studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). In 2013, he completed a PhD in Political Economy at King’s College London. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and at King's College London, where he taught Economics throughout his postgraduate studies. He is a regular contributor to various journals in the UK, Germany and Switzerland.

3 thoughts on “A smaller and better welfare state”

  1. Posted 18/07/2011 at 06:29 | Permalink

    “Liberals who support a limited public safety net are faced with a dilemma”

    The way out of the dilemma is to give up the “support for a limited public safety net” bit. The idea that we need the state to do this is just utterly bogus – humans will look after the desrving poor without needing the state to make them.

  2. Posted 18/07/2011 at 13:23 | Permalink

    You cannot deny that decades of welfare statism have left their mark, which will not disappear overnight. We need a gradual reversal, not button-pushing.

  3. Posted 19/07/2011 at 04:43 | Permalink

    Gradualism wont / cant work. Think about it some more.

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