Welfare trap

Following from Burning our Money:

As [Secretary of State for Work and Pensions] Ian Duncan-Smith spelled out once again in yesterday's consulation paper, after 60 years of our gargantuan welfare state, Britain's workless poor face a welfare trap of life-mangling proportions.

The paper contains the following chart, showing how the trap works for a couple with a single earner on the Minimum Wage, and two children. The family can certainly increase its net income (vertical axis) as the earner works more hours (horizontal axis), but only by a horribly small amount (focus on top net income line).

This means that those at the National Minimum Wage are less than £7 per week better off if they work 16 extra hours and earn an extra £92, the result of a marginal deduction rate of 95.5% on earnings between £126 and £218. The report presents three possible reforms:

1. A universal credit - all benefits combined into one easily understood and to administer universal benefit.
2. A unified taper - existing range of benefits that would be withdrawn as earnings rise through a taper applied to overall benefit eligibility, rather than the individual benefits as is now the case.
3. A single benefit/negative income tax. 

If ease of understanding, administrative simplicity and motivation to work were the principal objectives, option 3 wins going away. But it is the most expensive in the short term and would demand - I suspect in vain, given the quality of the people involved - a major change in the mind-set of the army currently administering benefits.

The Coalition government may want to do the right thing, but it has no incentive whatever to endure the cost and disruption of a policy that will only pay off beyond the 5-year electoral cycle.