Rethinking the welfare state part 1; Birth of a new welfare consensus

Once every 20 years or so, a set of ideas coalesces which fundamentally change the politics and future of the country.

It happened with planning in the late Fifties and early Sixties - the idea that led to the neo-corporatism of the now defunct National Economic Development Organisation, to beer and sandwiches at Number 10, the great Robbins expansion of the universities, and the massive reorganisations of central and local government and the NHS that characterised the Sixties and early Seventies.

It happened with monetarism in the mid-Seventies - Keith Joseph's decisive break with Keynesian economics on whose coat-tails Thatcherism was launched.

It happened most famously with the Beveridge report of 1942, which led to the founding of the modern welfare state.

It may be happening now with the publication of a series of recent studies on the welfare state of which yesterday's Dahrendorf report on Wealth Creation and Social Cohesion is the latest.

What marks these moments is not that one party adopts the ideas, but that they come to infect all parties. They do not lead to instant consensus, in the sense that there is a new and sudden unanimity about what should be done. When they happen, the party battle around them remains fierce. But the ground on which the battle is fought suddenly shifts. And as a result the world changes.

Thus with Beveridge. Although the wartime coalition adopted Beveridge's report with its clarion calls for full employment, a national health service and a new "cradle to grave" social security system, a fierce Whitehall battle against the proposals was fought, with Sir Kingsley Wood, the Chancellor, damning the package as "an impracticable financial commitment".

Although the coalition set in train the work that became the NHS, free secondary education for all, social security, and Keynesian economics, it took the Conservatives until the late Forties to fully accept the new dispensation.

The same was true of monetarist economics. The ideas infected Labour while it was still in government. The first Prime Minister to warn that "the cosy world we were told would go on for ever, where full employment would be guaranteed by a stroke of the Chancellor's pen - cutting taxes, deficit spending - that cosy world has gone" was not Margaret Thatcher. It was Jim Callaghan in 1976. After 1979, it is true his party swung left again, fighting Mrs Thatcher tooth and nail until she fell. But that changed economic vision, though attenuated, now profoundly influences the policy of Blair and Brown.

Yesterday's Dahrendorf report may mark the culmination of a similar shift. For it is almost the last of a string of free enterprise reports strung out over the past three years which have attempted to forge a new settlement for the post-Thatcher age - one which takes the best of the tools that the Iron Lady used but rejects much, if not most, of her philosophy.

These reports have been remarkable for not being the work of government. They have been the product of the great and the good. They have been funded by fiercely independent charitable money and, where commissioned by Labour and the Liberal Democrats, have been commissioned at arm's-length to allow the parties to distance themselves from the conclusions. And - an important point in the forging of an agreement about the issues to be addressed - they have been supported not just by those never reconciled to the Thatcher project but by people who gained from the Thatcher years and who worked during them as civil servants and government advisers.

The first, in November 1992, was the National Commission on Education. Originated by Sir Claus Moser, the former Chief Statistician, and funded by Paul Hamlyn, the publishing millionaire, it demanded a massive reinvestment in education.

Then came the Carnegie Inquiry into the "third age" - those coming up to and just past retirement. Funded by "old" charitable money and chaired by Sir Kenneth Stowe, a former permanent secretary, it called for a big pensions restructuring, an end to age discrimination and improved education for older workers.

Next was Borrie. Established as the Commission on Social Justice by the then leader of the Labour Party, John Smith, its task was to construct a new policy on the welfare state after the electorate had decisively rejected by far the mildest version of tax, spend and redistribute that Labour had proposed since 1945. Its cash came through the Institute for Public Policy Research, the left-of-centre think-tank which Neil Kinnock set up.

Next came the Joseph Rowntree Foundation's Inquiry into income and wealth, funded by Quaker money and chaired by Sir Peter Barclay, a former chairman of the Government's Social Security Advisory Committee. It, remarkably, signed up both Howard Davies, the director-general of the CBI, and John Monks, general secretary of the TUC, to a set of "benefit into work" proposals that both organisations would have rejected in the Eighties when they were barely on speaking terms.

Finally came Frank Field, a uniquely prolific one-man think-tank within Labour's own ranks, whose report Making Welfare Work recommended a wholesale revision of social security so radical that it is likely that both Tony Blair and Michael Portillo flinched.

It is these strands of thinking that Dahrendorf yesterday attempted to synthesise into a new world view for the millennium. His report is no new Beveridge. Compared to its precursors, it is easily the worst written and least digestible, lacking both passion of language and original thought. But it pulls together what has gone before and some of what is to come, aiming at a new centrist consensus which seeks to define the battleground of the future.

Dahrendorf mixes and matches from what it sees as the best of the Thatcher years while attempting to rebuild an inclusive society. It accepts low inflation, a more independent Bank of England, a separation of capital and revenue in the national accounts and the use of private finance for infrastructure and perhaps for some services.

It aims for privately funded rather than state second pensions for all - in order to provide cash for investment, individuals with their own funds, and taxpayers with a lesser burden in future.

It backs lifetime learning and much heavier investment in education. And it wants a transformed benefits system, one which lets people earn more while unemployed and uses benefit to support work and training.

It creates new pension and insurance institutions which would be owned by those who contribute, most notably, employers and employees. Government would be involved only to the extent to which it contributes taxes to allow redistribution.

The commission remains vehemently opposed to the de-regulated, nakedly competitive, privately provided world to which the Tory right subscribes - one in which the state's role and the citizen's taxes would shrink close to oblivion.

Dahrendorf's world contains strong elements of compulsion. Private second pensions would be compulsory. Employers and employees would have to contribute to "individual learning accounts" or a learning bank that would finance continuing education and training. The removal of the requirement that people remain idle in order to receive unemployment assistance would be replaced by stronger requirements to train or work.

There is the making here of the new ground over which the battle for the welfare state will be fought - for a system which invests in success rather than pays for failure. One that is less statist and more individualised. And one in which responsibilities will feature as much as rights. There is not agreement here about what should be done, but there is agreement about what should be fought over - and it is a battle Kenneth Clarke would be happy to join.

The power of the ideas is reflected in the way the Government is already adopting some of them - a stream of new if small-scale in-work benefits, for example, and a promise of pre-school education for all.

But there is another view, and a catch.

The other view is Michael Portillo's and that of the Tory right, put in its most extreme form by Alan Duncan and Dominic Hobson in their recent book, Saturn's Children. It might be characterised as the "no government" view: one which provides only minimalist collective support and in which individual effort carries big rewards for success and large penalties for failure. Its lures are the theoretically low taxation that would go with it. Its siren call is individual liberty.

The catch in the Hamlyn/ Borrie/Rowntree/Dahrendorf prospectus is the price of their inclusive society. Whether as direct taxes, indirect taxes, or compulsory contributions to pension and learning funds, it will mean, certainly in the short term, more spending.

Which leaves the choice as the oldest one of all when it comes to welfare - more taxes or less provision.

Tomorrow: The Founding of the Welfare State.

Nicholas Timmins's book 'The Five Giants' is published by Harper Collins on Thursday.