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Hate-Mongering Will Not Fix the Welfare System, Common Sense Will

29/04/2013 17:35 BST | Updated 29/06/2013 10:12 BST

Britain's lynch mob mentality is at fever pitch. We want someone to blame for the hardship in which we find ourselves; it's the tax avoiders, the benefit scroungers, and let's not forget the bankers with their bonuses. The bloodlust can consume any of us, no matter how well-honed our critical faculties may be, such that some find themselves (inexplicably) blaming the welfare state for the clearly psychotic actions of one man, a la Philpott. But what do tax avoiders, benefit scroungers, and bankers have in common? They are all taking advantage of a flawed system in much the same way that most of us would in their position.

Now, I say 'most' because there exists a small minority who do not act to maximise their own gain, and are instead driven by a robust social conscience. I commend such people but, unfortunately, the majority of us are quick to take a holier than thou attitude when others make self-serving choices, while possessing the same propensity to take advantage of loopholes, government handouts, and ludicrous payouts, if given the opportunity.

Recipients of hardship benefits have taken the lion's share of our collective outrage and moralising. It is both understandable and justified to feel cheesed off when the hours you put into your job do not earn you as much as your neighbour on welfare cheques. But our anger is woefully misplaced. The welfare system, not benefit claimants, deserves the full, unmitigated might of British grumbling. Why? Because the current system does not reward any attempt to find work and no one should be expected to develop a social conscience while foregoing personal gain. No. Our bitterness will not change reward-seeking behaviour. We must instead harness this behaviour to fix the problem, and in the following paragraphs I propose to outline just the ingredients to achieve that lofty aim.

A successful welfare system must achieve just two things. It must provide adequate support to those who genuinely need it, while encouraging those who can, to find employment. The current system fails on both counts. Due to the sheer complexity of welfare legislation, many of those eligible for certain benefits fail to apply for them. In 2011-12, only 57% of those eligible for working tax credit applied for it. With over fifty different benefits and tax credits, each with its own application process, it should be little wonder that the take-up rate is so low. Unsurprisingly, the low take-up rate has not received as much criticism as the system's inadequacy at encouraging claimants to find work and come off income support. To understand why, let's revisit the statistics for 2011-12.

Last year, 130,000 people on benefits stood to gain only 58 pence for an extra hour of work at minimum wage. At that kind of hourly rate, an eight-hour day would earn you a pitiful £4.64 (ironically less than an hour at minimum wage). Around 1.7 million people on benefits last year would earn only 30% of their minimum wage salary had they chosen to go to work - that's just £13.92 for a full eight-hour day. It is this sharp drop in welfare payments on entering the workforce - what economists call the marginal deduction rate - that has such a devastating effect on the incentive to find work.

I hope that these figures at least illustrate the point I am trying to make. No rational person would get up and graft hard for 58 pence an hour, and the honest reader will sympathise with their reluctance to do so. What is needed then is a much simpler welfare system, with a centralised application process and, crucially, a low marginal deduction rate. It is imperative that work pays; few would pass up the opportunity to almost double their income by taking on a job at minimum wage.

Inevitably, a handful of lazy people prefer no work over work, whatever the incentive, but they do not reflect the vast majority of households struggling on benefits, yearning to be valued, paying members of society, if only their work would sufficiently supplement their income. Once employed, claimants would see their benefits tapered away gradually to a minimum value depending on their salary. At no point should it ever be better, all things considered, to be on benefits than working. These are not just fanciful vaporings of a student with limited life experience; various think tanks - the Centre for Social Justice and the Adam Smith Institute included - have crunched figures and demonstrated that a simplified welfare system, with the right kinds of incentives built into it, would be far more affordable.

We will always be self-centred, reward-seeking, ambitious, goal-oriented creatures. That is our nature. If you are happy to work for an hourly rate of 58 pence for the good of society then by all means direct your anger toward 'the scroungers'. However if, like me, you would take that government cheque, ignoring the feelings of slight guilt and unease, then your frustration should lie solely and squarely with Whitehall.