Tory welfare reforms combine carrot and stick

Tough new sanctions for jobless people who refuse to accept a job were announced by Iain Duncan Smith as he promised to sweep away the "complex, outdated and wildly expensive" benefits system.

The Work and Pensions Secretary claimed that the Coalition Government's plans to introduce a universal credit for claimants would amount to the biggest overhaul of welfare for a generation. He told the Tory conference that the shake-up would ensure no one was out of pocket if they moved from unemployment to a low-paid job.

But he coupled the offer of carrots for leaving the dole queue with the stick of financial penalties for the unemployed if they refused to accept jobs. "We will break down the barriers to work and ensure work pays, but in return we have the right to insist that when work is available you take that work. For those who want to choose not to work, under this government this will no longer be an option," he said.

The penalties will mean jobless people being stripped of all or most of their benefit entitlements. Tory sources said further details would be disclosed within weeks, but stressed that some existing sanctions were barely used.

Mr Duncan Smith also announced that a new scheme under which the long-term unemployed would get help to set up their own company would be set up by next summer. They would receive financial support and expert advice worth up to £2,000 to transform a bright idea into a small business.

The proposed enterprise allowance scheme will be targeted at people who have been out of work for more than six months in parts of the country hit most heavily by the recession.

Mr Duncan Smith, who claimed the party had "concern for the poor running through its DNA", confirmed that the Government intended to establish a universal credit to replace the existing system of benefits, allowances and tax credits.

He promised: "Our implementation of the credit will make sure that everyone out of work will be given every financial incentive to stay in work, because work will pay." The former Tory leader added: "This is the biggest reform of the welfare system in a generation. No longer will they be able to say it isn't worth their while going to work."

He stressed that the sick, disabled or retired had "nothing to fear" under the reforms. "I want to look every taxpayer in the eye and be able to say that their money is either going to people who are on the path back to independence or their money is going to people who deserve society's care," he said.

Mr Duncan Smith, who received two standing ovations, said hard-working households did not want to see their taxes going to pay for an unemployed family living in a house costing £100,000 in rent.

"They see their money fund a system that rewards worklessness and penalises the choice to work. Labour may call that welfare – but I call it unfair."

Q&A: So how can the system be fixed?

What are the problems?

It is vastly expensive – benefits and pensions will cost the country more than £195bn this year, representing 28p of every pound spent by the taxpayer. It is also notoriously complicated, with an array of more than 50 benefits and credits, administered by two Whitehall departments as well as town halls. Its complexity also makes its vulnerable to fraud and error costing the country some £2.3bn a year.

Critics also protest that claimants are trapped on welfare because the way the system is structured means they can be out of pocket if they take a low-paid job.

How can benefit claimants be worse off if they take a job?

Because they can lose almost all of their benefits when they start work – each year an estimated 170,000 claimants forgo 90p of their allowances for every pound that their new job pays. By the time that travel, childcare costs and other work expenses are taken into account, they are actually poorer. The system is so opaque that unemployed people have to turn to advisers to establish whether working is worth their while; some turn down jobs automatically for fear of losing out.

Many people are also deterred from taking full-time jobs by the so-called "16-hour rule". If they work more than 15 hours and 59 minutes a week, they can no longer claim jobseekers' allowance, relying on tax credits to top up their income.

What about people who still refuse to take a job?

A new back-to-work programme is being set up. People who refuse to co-operate face losing benefits. Details of the planned sanctions are yet to be disclosed.

What does the Government propose as an alternative?

Ministers have agreed in principle to sweep away the myriad benefits with a single credit with the underlying principle of "making work pay". Ten million people would receive the replacement, which would include tax credits as well as jobseeker's allowance, incapacity benefit, housing benefit and council tax benefit.

How would 'universal credit' work?

Unemployed people would receive their cash in one lump sum into their bank account. Those who find a job would be able to keep some of their benefits to ensure they are better-off. A new pay-as-you earn computer system for income tax would mean their benefit top-ups could be instantly adjusted to reflect pay increases.

How much benefit would they keep?

Ministers are considering allowing people to retain between 60p and 65p of their benefits if they swap the dole for a minimum wage job, tapering away as their income rises.

Won't that cost the country money?

Yes – and the expense of creating the ystem is a sticking point between Iain Duncan Smith, the Work and Pensions Secretary, and the Treasury. An announcement of how much benefit new workers can retain will be made at the comprehensive spending review on 20 October or in a forthcoming white paper. Initial costs of at least £3bn to implement the revolutionary change would have to be raised by Mr Duncan Smith in savings from his budget.

When would the new system launch?

The aim is late 2013, initially among the unemployed, and eventually to roll it out to all benefit claimants by 2020. The delay in getting it off the ground reflects both the anxiety of introducing such a massive reform with a minimum of hitches – and Treasury hostility over the up-front cost of introducing it too quickly.

Nigel Morris