The opponents of the ESA cuts are right for the wrong reason


With a clear majority, the House of Lords has voted against the proposed changes to Employment and Support Allowance (ESA), the successor of Incapacity Benefit. The opponents of the changes, inside and outside of Parliament, had a good point. But many objected for the wrong reason, repeating generic anti-cuts phrases. The problem with the coalition’s plans is not that they are cuts. The problem is that they would erode the contributory principle in the British welfare state, largely a farce already, even further.

ESA comes in two varieties, contributory and means-tested. Contributory ESA is more generous and independent of a recipient’s income or savings, but it is conditional on a past record of National Insurance payments. The coalition aims to limit entitlement to contributory ESA to a period of one year for recipients who are deemed capable of returning to work eventually. Those recipients would then have to apply for the non-contributory version, and subject themselves to a means-test, if they are still in need of support.

What’s wrong with that? According to the Comprehensive Spending Review, it will lead to savings of around £2bn by the end of the term, and those who are truly in need still have the means-tested strand of ESA to fall back upon. But regardless of the immediate consequences, there is a problem of design here.

There are, simplistically speaking, two types of welfare design. The first is the Bismarckian or contributory system, in which entitlements are primarily assigned on the basis of past contributions. The second one is the needs-based system, in which entitlements are assigned via a means-test or a similar mechanism. In other words, contributory systems provide a strong link between what you pay into the common pool and what you are entitled to take out of it, while needs-based systems do not. Payments into need-based systems are not distinguishable from payroll taxes, even if they are nominally labelled ‘contributions’. For payments into contributory systems, on the other hand, there is some justification in the use of the term ‘contribution’.

There is much to be said against contributory systems, especially from a liberal perspective. But compared to need-based systems, their advantage is that they are not penalising work and saving too harshly. While you pay into the system, you build up a future entitlement with each payment. While you receive payments, you are not subject to a means-test, with its punitive withdrawal rates.

In principle, the two can run side by side, with the contributory tier being the ‘business class’ and the means-tested tier being the ‘economy class’ of the welfare state. Originally, the British welfare state was indeed a bit like that, but there is always a temptation for politicians to undermine the contributory principle because it allows short-term savings to be made in a relatively painless way. However, eroding the principle creates adverse dynamic effects, because it gradually converts contributions into just another payroll tax. The introduction of an arbitrary time limit to contributory ESA would take us even further down that road.

The coalition should have gone after payments which are neither contribution-based nor means-tested instead, while going easy on what little there is left of contributory elements.

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian 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). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

2 thoughts on “The opponents of the ESA cuts are right for the wrong reason”

  1. Posted 08/06/2012 at 10:18 | Permalink

    The above article should be shouted from the roof tops so that all become aware of the governments raid on what was intended as a support mechanism for people who became unable to work and support themselves. You will be aware that the web site encourages you to go for the Income Based version of ESA in the first instance, stating that if you go for the Contribution based ESA and fail – then your benefit payments will be delayed as you have to starte the process all over again. No recycling of information then! Because the Income based version of ESA is means-tested the DWP now have your financial information.

    It is generally believed that the Contribution based version is not means tested – THIS IS INCORRECT! If you have an income, say through a pension, of over £85 per week then ESA is reduced by that amount!!

    I cannot find any reference to this fact on the relevant government web sites.

    Being of a cynical nature (some would say grumpy old man) I can’t help but wonder why this fact is not in the public domain. Is it because most people think that they have the ESA system to fall back on in times of hardship and that they are doing the right thing by continuing to pay into there own personal pension to support them in there aged years, not realising that the pay role tax (NI) they have made all there working lives is to be further subsidised by there pension contribution.

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