Tax free allowances 'must be axed to pay out modest basic income', radical welfare blueprint suggests

Tax-free allowances should be scrapped and the money used to pay a flat-rate benefit to all adults, a radical new welfare reform blueprint has suggested.

The proposal, drawn up by the Fabian Society, is part of a proposed shake-up of the welfare system the think-tank says is required to stop tens of thousands of people falling into poverty over the next decade.

The report’s authors reject the idea of a “fully-fledged” universal basic income – the increasingly prominent idea of grouping all benefits spending into a single flat-rate payment for all adults. They warn such a plan would create too “many losers and not reduce poverty or improve the incomes of those with the least”.

But the Society’s researchers say a similar flat-rate “individual credit” for all adults that sat alongside the existing benefits system could “significantly reduce poverty and increase low and middle incomes”. They say child benefit could also be integrated into the same system, with a “child credit” paid to a child’s main carer.

“At this time there is not a good case for integrating universal credit, tax allowances and child benefit into a single flat-rate payment for each individual (ie a ‘basic income’),” the report’s authors write.

“There is growing interest in the idea, which has the merit of reducing the employment disincentives, complexity and intrusion associated with means-testing.

“But a basic income has significant disadvantages – any revenue neutral reform would create many losers and would not reduce poverty or improve the incomes of those with least today. Reform would be very unlikely to eliminate the need for means testing and conditionality.

“Instead, the tax-free allowances and child benefit should be converted into an ‘individual credit’ for all adults and a ‘child credit’ paid to the main carer. Unlike a basic income, this payment would sit alongside universal credit and as a result would significantly reduce poverty and increase low and middle incomes.

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“The credits would be paid on a flat rate basis either through PAYE or in cash. These new credits would take the strain off universal credit by providing another mechanism for supporting the incomes of poorer households.”

The report’s authors says their proposals could represent a “modest basic income” of around £40 a week per person (or £160 for a family of two adults and two children) and that it should be paid to people with national insurance numbers who are on the electoral register. They suggest it could be withdrawn from people who reject offers of work “to secure public consent”.

The idea bears some similarities with proposals brought forward by researchers at the Citizen’s Income Trust. That organisation has suggested a limited basic income could compliment the current benefit system. They say it would be largely revenue-neutral, though they propose a slightly higher rate supplemented through income tax and national insurance. That proposal is also unconditional.

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Researchers at the RSA think-tank proposed a more substantial basic income system late last year, which would see every adult paid £71 a week.

Other aspects of the Fabians’ proposals include creating a saving account scheme that automatically saves and matches 1 per cent of workers’ earnings unless they explicitly opt out, and higher contributory benefits for middle and high income workers who lose their jobs. They have also called for the Government’s planned Universal Credit scheme to be made more generous by indexing payments to rising living and housing costs.

The proposals are juxtaposed with the claim that by 2030 low income households will be no richer than today – even if the economy grows strongly – thanks to current welfare policies.

Andrew Harrop, general secretary of the Fabian Society, said a viable future welfare reform policy would blend different approaches.

“For six years of the Cameron government, ‘austerity’ dominated all discussion of benefit policies. But social security for non-pensioners will be worse in 2020 than it was in 2010 and will carry on getting worse in the decade that follows, unless action is taken,” he said.

“It is time to turn a page and start to consider the long-term future of social security, as part of a strategic agenda for raising British living standards. Politicians need to find the confidence to argue that generous, well-designed benefits for non-pensioners are essential for a fairer, more prosperous future. Our political leaders can grasp the nettle and create a social security system for the next decade, designed for us all.

“Policy makers should begin to weigh up two broad alternative paths for reform. The first is to breathe new life into Brownite ‘progressive universalism’ by improving the mainly means-tested system we have today.

“The second is to create something closer to our successful pensions system, by striking a more even balance between means-tested, universal, contributory and private support, while also starting to integrate taxes and benefits. The first path is easier in the short term – and would help millions of people – but the second path would bring a broader range of benefits to a wider range of families.”

Labour welcomed the report. Debbie Abrahams, shadow Work and Pensions Secretary, described the plans as “comprehensive”.

“The Tories have a long record of failure on social security – from the failing work capability and PIP assessments; the unfair and divisive bedroom tax; the forced u-turn earlier this year on cutting support for disabled people; and cuts to Universal Credit meaning work incentives have all but disappeared,” she said.

“Like the NHS, our social security system is based on principles of inclusion, support and security for all, assuring us of our dignity and the basics of life, should any one of us become ill or disabled or fall on hard times. That safety-net will be inadequate without policy change.

“I am pleased that the Fabians have produced such a comprehensive analysis of options for the future to contribute to the debate as Labour work to design a social security system truly fit for the 21st century.”

A Department for Work and Pensions spokesman said: “Our welfare reforms are supporting people from all backgrounds as we create a Britain that works for all. We have revolutionised and simplified the welfare system with Universal Credit – which is already transforming lives by supporting people to move into work faster.”

“We have record employment with wages rising faster than inflation.”

“By increasing the National Living Wage, taking millions of people out of paying any income tax and through our welfare reforms, we are ensuring it always pays to be in work.”