Benefits targeted for radical shake-up: Social Security spending review could pave way for restructuring welfare state. Rosie Waterhouse and Rhys Williams report

The cost of benefits

Retirement pension paid to almost 10 million people at a cost of pounds 27bn; income support paid to 5.3 million at a cost of pounds 14.5bn; housing benefit paid to 11 million people at a cost of pounds 8.9bn; invalidity benefit paid to 1.5 million people at a cost of pounds 6.1bn; child benefit paid to 6.9 million people with 12.5 million children at cost of pounds 5.8bn.

A GOVERNMENT inquiry into the future of welfare benefits was disclosed this week in the wake of the spending review being conducted by Peter Lilley, Secretary of State for Social Security.

Evidence is being invited by the all- party Social Security Select Committee on the aims of the review: to focus benefits on those who need them; to encourage personal independence; to withdraw from areas where state provision is no longer appropriate; to improve incentives to work; to develop a more efficient, simpler system; and to reduce scope for fraud and abuse. The inquiry comes as the future of the welfare state is under greater threat than at any time since the William Beveridge model was created in 1942 to eradicate the 'five great evils' of want, ignorance, disease, squalor and idleness.

Yesterday, the right-wing No Turning Back Group of Conservative MPs published radical proposals that would dismantle and privatise the benefits system, abolish benefits for the better off, and reduce the welfare system to a safety net for lower income groups. Their ideas are likely to be supported by Mr Lilley and Michael Portillo, the cost-cutting Chief Secretary to the Treasury, who are founder members of the Thatcherite group. Last month the Labour Party's Social Justice Commission published its first two discussion documents on why the welfare state would have to be redesigned for the 21st century.

In June, Mr Lilley had disclosed 10 'cautious propositions' for change which, for the first time, publicly confirmed that the Government was considering targeting benefits to fewer people and encouraging others to opt out of the state system and take out private insurance instead.

Among politicians, academics and think-tanks, there is a consensus that the welfare system - including education, social services and the National Health Service - must change.

Spending on social security is under the microscope, mainly because of the ever-increasing cost, expected to be pounds 80bn this year, while the Government is struggling to reduce the pounds 50bn public-sector borrowing requirement. Recently published Department of Social Security spending projections estimated that the cost could rise by pounds 14bn a year by 2000 even if unemployment fell to 2.25 million and total growth in the economy was 2.6 per cent a year.

However, Christopher Giles, an economist from the Institute for Fiscal Studies, said: 'The panic should not be overdone. With a fall in unemployment to 2.25 million and a growth rate of 2.5 per cent, the share of benefits (as a proportion of gross domestic product) would be no higher at the end of the decade than it is now.'

Another important reason for the review is that it is agreed that the Beveridge system is out of date.

It was founded on a model of male, full-time, life-time work, with married women, assumed to be looking after the children at home, financially dependent on their husbands. It was not designed for higher unemployment, divorce, lone-parent families, or for rising women's employment and greater life expectancy.

There is a perception that despite the vast sums spent, the system is not very effective. On the right there is a view that high benefits discourage work and have undesirable social effects, such as discouraging individual responsibility and the fostering of a culture of dependency on the state, while the left says benefits are not high enough to relieve poverty.

THE FAMILY

Benefits trap leaves little room for escape

JOHN and Carol Love do not crave wealth, they simply want to be independent. Independent of their reliance on benefits and free of their council estate in Partington, on the outskirts of west Manchester.

They were driven away from their previous home in Gorton by Carol's former husband and his constant harassment. They requested somewhere out of the way and got Partington. The bus service is appalling, one an hour at peak times. The local shops realise that they have a captive trade and charge accordingly.

The Loves barely get by on income support of pounds 90 a week and a monthly family allowance of pounds 120. In September, John, 34, starts a two-year course in hotel catering and tourism at Salford University. His employment prospects on graduation are good. It is the chance to break out that the couple, who have four children - Matthew, seven, Rachel, two, Gabby, five and Jennifer, six - have been waiting for. But in the meantime, the family will have to survive on John's annual grant of pounds 5,761.

They will no longer qualify for income support or any of the benefits that go with it. Which means that, as well as covering John's termly travel bill of pounds 87, the grant will have to fund school meals ( pounds 55 a week), rent ( pounds 26), milk tokens ( pounds 10), prescriptions ( pounds 4.50 each) and dental care. 'It'll be a struggle,' John says. 'I have no idea how we'll cope . . . But if I give up the course, what else is there?

'I don't want to be rolling in money, just enough to get by on our own. I don't like the idea of somebody else paying for me. I'd always worked for my money. It's just that marrying Carol and having a family, you take on responsibilities. Every time I sign on, I'm conscious of taking money and I don't like it.

'Sometimes the system is blind. When you appear to be coping and your children look fit and healthy, nobody gives you any help. You try not to think about being poor, but you are really. Pride keeps you above thinking that.'

One solution might be for Carol, 40, to work. 'We're a bit stubborn that way as well,' John said. 'Carol says she would go for a cleaning job or something, but I don't want the children to be neglected. I don't want them to turn into latch-key kids. We want them to grow up knowing that their mother and father have time for them.' More practically, the couple would not find child care for less than pounds 55 a week.

THE PENSIONERS

Couple's 90 years of work end in financial struggle

AFTER working for 90 years between them, Harry and Florence Brown feel they deserve more than to spend the rest of their lives struggling to get by.

Harry, 71, and Florence, 70, of Poulton-le-Fylde, near Blackpool receive a pension of pounds 107.46 a week. This means they exceed the Department of Social Security ceiling of pounds 95.26 for income support, which would have entitled them to free prescriptions, eye tests and dental care. Instead, they must pay.

An eye test to check if Harry's pounds 120 glasses need replacing will cost him anything between pounds 10 and pounds 25. He has just paid pounds 20 to have a broken tooth repaired: 'You've worked all your life and paid your stamp duty for dentists and stuff like that, and when you retire, they hit you in the face with that. It really makes you wonder what you've been working for.'

'There must be hundreds like us,' Florence added. Help the Aged estimates there were about 1.1 million pensioners in Britain who, like the Browns, narrowly missed out on income support and its benefits.

Harry feels he has worked for nothing. 'We've been working all our lives, never drawn a penny from the state. If we wanted anything we saved up until we could pay for it. Yet when I went to draw my pension the first time, they gave me the feeling I was getting something for nothing.'

Florence said that people saw their bungalow and assumed they were well off. They did not think of the costs that went with it. Their cooker, washing machine and fridge have all recently worn out after more than 20 years' service. Each week they set aside pounds 50- pounds 60 for bills. They feed and clothe themselves with the rest.

'All we've got is our pensions. We're not destitute. We manage because we're careful. We've been brought up to be careful. Anything left over we put on the side for bills. In other words we've prepared for retirement. We've never gone out drinking, we've always thought about the house and the children.'

Their major worry is the Government's proposal to introduce VAT on fuel. The last quarterly gas bill was pounds 107. Electricity averages pounds 40 a quarter. Water rates were pounds 93 for the first half of this year. 'How far can you stretch a pension?' Florence asked. 'I got a pounds 1.25 rise this year. I wrote to Mr Major and thanked him very much. I told him that it bought me a large loaf and a small loaf.'

The Browns have already begun to raid their life savings to pay for bigger bills. 'I've always believed in never having debts. They're making it harder and harder for us,' Harry said. 'Unless they bring up pensions to match these things, I can't see how we can manage.'

THE LONE PARENT

When it pays to stay bored by unemployment

'THERE'S only so much housework you can do,' Wendy Dadds sighs as Blackie, a pet rabbit, runs round the living room apparently hell-bent on creating some more.

Ms Dadds, 29, lives with her two sons David, nine, and Ray, six, in a council house in Shoeburyness, Essex. She would like to work - and does as much voluntary work as she can fit in around her children - but as soon as she earns more than pounds 15 a week, she loses pounds 60 a week income support. While her earnings would almost certainly be topped back up with family credit, she would miss out on the substantial benefits that accompany income support.

Each week she would have to find an extra pounds 44 for rent, pounds 10.80 in school meals, as well as pounds 3 for milk. She would no longer be entitled to free prescriptions and dental care. Put simply, Ms Dadds cannot afford to work. 'I need to do something, I get so bored. What is the point of sitting here all day when I could be doing something? It seems silly that you can earn more by staying at home.'

A job would not only have to match what she receives in income support, child benefit and single- parent allowance, but would also have to fund child care. 'I certainly don't like the idea of working and leaving the boys to come home to an empty house. They might be safe, but it's not very nice for them.' The minimum that Ms Dadds can expect to pay for registered care would be pounds 1.55 an hour. In school holidays that would mean around pounds 55 a week.

Ms Dadds has an interview for a job with a local charity which arranges home help for the elderly. It will pay pounds 30 a week and could develop into a full-time position. Sadly for her, she cannot afford to take advantage of either.

(Photographs omitted)