Belfast Telegraph

Sunday 28 December 2014

Beveridge's bright idea morphed into uncontrollable expenditure

Revolutionary William Beveridge
Revolutionary William Beveridge

It seems a long time ago, but the standard cartoon of the Minister for Finance on Budget Day used to have him dressed as Santa Claus.

Ridiculous - although in one shop I saw a version on a card which combined Mr Noonan dressed as Santa while holding the Grim Reaper's scythe. A sign read, 'Reduced to €1.50', which perhaps says it all.

Yet there was something Christmassy about the Budget. You know: old faces one hasn't seen for ages come around and make their presence felt - many of whom one wishes had not turned up at all.

Perhaps the strangest of this year's festive visitors is the social insurance fund. It made a brief appearance last year and, it was so long since anyone had heard of it, that I had to look it up. This year, it is quite the centre of attention with ministers defending the removal of the PRSI exemption for the first few thousand of earnings on the grounds that there was a deficit in the fund, which is supposed to cover welfare payments.

The timing was certainly apt. It is 70 years this month since the 'Beveridge' report proposed a wide social insurance system for Britain - a scheme which, significantly, soon became known as the 'welfare state'.

The former civil servant and academic William Beveridge took just 18 months to produce his revolutionary report.

The point was then - and seemed to be again in the current Budget discussions - that this is supposed to be insurance. Money was paid in and would fund benefits, such as help with unemployment and sickness and the cost of pensions.

Instead, we got the welfare state, where it is perceived as the duty of government to minimise poverty and reduce disparity of income, rather than individuals buying protection for themselves.

The problem with abandoning the insurance concept, where payments are related to contributions, is that the choices become purely political, with little reference to the cost and, worse, the potential cost.

This is most extreme in the case of pensions. The ink was hardly dry on Beveridge when unfunded state pensions were introduced, to be paid for by future taxpayers.

Last week's report from the ESRI highlighted the importance of the welfare system in preventing and alleviating poverty. No one can dispute that. But it also raises questions about the consequences of the politically-driven creation of a welfare system divorced from the funds required to sustain it.

The intriguing question thrown up by the Government's tying of one hand behind its back with its veto on tax and welfare rate changes, is whether the idea should be resurrected, that the welfare budget is financed by social insurance.

That argument was implicitly trotted out to justify the end of the PRSI exemption. Like the PRSI ceiling, it was a relic of the insurance idea, where one was not expected to pay for benefits to which one would not be entitled.

PRSI receipts amount to almost €10bn (£8.1bn) a year. The USC should amount to over €2bn (£1.6bn) next year, although it is vaguely intended for the health system.

Now that PRSI has been extended to things like rental and dividend income, the last vestiges of an insurance system are gone.

There may still be merit in seeing PRSI/USC as paying for pensions, jobless benefit and sickness pay - as Beveridge had in mind - with other poverty-reducing policies squarely a matter for re-distribution of income through the tax system.

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