Henry Hill: A budget-first approach is the only way to control welfare spending | Conservative Home

This essay appeared in ‘Mending the net? A new centre-right approach to social security’, the new collection of essays on welfare reform from Bright Blue.

There are two critical questions when it comes to trying to deliver a more efficient system of social security: do the people in charge of it have any incentive to control costs, and do they have the means to do it. As regards our current system, the answer to both questions is a resounding ‘no’; runaway costs are the inevitable result.

One could write this essay several times over describing the problem, but it boils down to two core factors. First, central government funding is on so vast a scale that people can’t really process the numbers involved; as such, the state’s resources are abstract and, too often, viewed as essentially inexhaustible. Second, the system is riddled with misaligned incentives: those with the closest knowledge of the system and the strongest incentives to improve it lack the power to do so, whilst those with the power to drive serious reform lack the incentive or knowledge to effect it.

These problems are baked into the architecture of the post-war welfare state; the structural factors have been present from the beginning, even if it took time for their effects to be felt. But the history of British social security is much longer than post-war mythmaking would have us believe, and it suggests an answer: greater local control.

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The Attlee Government did not create the welfare state – it nationalised it. Or rather, it completed the process of nationalisation which started under the Liberals. This is most easily illustrated with the case of the NHS, the ‘creation’ of which entailed mainly the annexation of hundreds of existing private and charitable hospitals (it would not open one under its own auspices until the 1960s).

But it is a similar story in social security. At the dawn of the previous century the British system, whilst by no means perfect, was vastly more extensive than is commonly imagined today. It compassed both public welfare, organised on a parish basis after the landmark 1834 report of Sir Edwin Chadwick’s Royal Commission on the Poor Law, topped up by a huge cooperative (in the form of friendly societies) and charitable elements.[i] [ii]

This system was much admired by those who we now credit with inventing the welfare state; William Beveridge extolled its virtues at length in Voluntary Action, which was published after his landmark review.[iii] It would be fair, in a sense, to say that our current welfare state was never consciously ‘created’; certainly, few of its architects seem to have thought they were destroying what preceded it. Much of this, however, is of largely historical interest today. Whatever the merits of a system powered by charities and mutual societies (and they were many, in this author’s opinion), the social architecture which made possible that system is withered and gone, and regrowing it lies far beyond what Whitehall could be expected to achieve by diktat.

We can, however, try to apply some of the core principles of that system to a redesigned welfare state – in particular its belief that small is beautiful, and that welfare is best delivered on a relatively small scale. (Note that this does not necessarily mean at a low level, although Beveridge et al certainly believed that; few today remember his original social security model offered only ‘subsistence’ income.)

Operating on a small scale has two big advantages. First, a smaller institution can afford to take a much closer interest in those who receive its aid; if it operates on a geographical basis, it will have a better sense of the particular conditions of the area. This not only helps to combat fraud, but also means it is better able to offer sustained, personal support.

Second, a smaller organisation will have a budget which people can get their head around. In other words, both those administering the pot and, ideally, those drawing from it will be able to grasp the finitude of its resources. (Assuming they are finite, of which more below.) That creates clear incentives to avoid frivolous spending and try to deliver services more efficiently; it also again offers a deterrence to fraud, as it can no longer be easily imagined as a victimless crime against an inexhaustible public treasury.

Both of these principles could be applied to a state-centred social security system. To do so would require two big shifts: to genuine local control and, critically, to a budget-based approach to welfare.

Local Control

Britain would seem, on paper, to have taken at least a half-step towards a localised system. Many aspects of the welfare state, from social housing to special educational needs and development (SEND), are administered by councils. But what we have currently is really the worst of both worlds – so-called ‘statutory responsibilities’ are basically creative accounting by Whitehall, getting expensive entitlements off the Treasury’s books whilst giving councils no power to make the smallest improvement to provision, let alone set local policy.

As with all creative accounting, it has masked severe institutional decay. Local democracy has been eroded as larger and larger shares of council budgets (some two-thirds, according to the County Councils Network) are locked into statutory spending; this has led to services which the public expects councils to discharge – such as rubbish collections, community events, and maintaining the public realm – being starved of cash.[iv] [v]

At the bare minimum, any reform should harmonise control over a particular entitlement with responsibility for paying for it. If the national government wishes to set national policy, it should be responsible for wrangling the cash from the Treasury; if a local authority must pay for something from its own resources, power over that policy area should be devolved to it.

This would be a valuable democratic reform in itself, not to mention provide central government with a powerful incentive to genuinely decentralise. It would also create conditions for policy experimentation between different jurisdictions. In this setup, central government’s role would be to mark the homework – for example ensuring the collection and publication of uniform data, which it has neglected in the case of devolution to Scotland and Wales – and help disseminate best practice.

The big problem with the above model is the one which bedevils all devolution proposals: fiscal transfers. Our objective is to fix the incentive misalignment produced by foisting statutory responsibilities on councils; we won’t achieve that by merely reversing it, and giving councils the power to spend national taxpayers’ money at will.

Nor is it politically plausible to expect local authorities to take on full responsibility for funding local welfare. This is a problem; if the system runs on national funds, it undermines the local connection. Not only will recipients still feel that they are drawing on a vast state pot, rather than the resources of their friends and neighbours, but more importantly so will local politicians and officials. They have no incentive to be mindful of money that isn’t theirs. But if we can’t expect them to fund welfare via their own taxes, how can we give them that essential sense of proprietary ownership?

Budget-led Spending

At present, welfare spending is only indirectly controlled. There is no predetermined budget to inform spending decisions. Instead, government creates criteria by which individuals become entitled to this or that benefit and then discovers how much this is going to cost – invariably, more than expected.

The creation of unlimited liabilities is, unless you have unlimited resources, absurd. Only the state can do it without going swiftly bankrupt, but that lack of immediate consequences only lets politicians dig the country into an ever-deeper hole and has left government increasingly at the mercy of the bond markets.

It also guarantees runaway costs, because it excises any consideration of means from the calculation. In theory, the system is based on need. But in practice, ‘need’ is a protean concept that changes with circumstance. The wealthier we get, the more expansive our definition of need; yesterday’s luxuries become tomorrow’s basics. This is fine, a civilised welfare system should aspire to do more than keep people out of the Stone Age – but only if it actually tracks means, down as well as up, rather than simply running ahead of them.

A shift to a budget-led model is thus the only way to bring welfare costs under control. But it would also be a spur to inefficiency and innovation. At present, as we have described, nobody really has both the power and the incentive to try and deliver welfare more intelligently or efficiently. A social security system based on annually-fixed local budgets would change that: town halls (or whichever level to which we chose to devolve) would have full control over policy for any area of welfare for which they were responsible. They would receive fiscal transfers to account for regional wealth disparities, but would not have carte blanche to sign cheques for national government to cash.

Such an approach would offer local politicians – and by extension, local electorates – much more democratic control. If they wanted to tailor spending to fit local priorities, councils would have the freedom to do so. A finite budget would also change the character of the electoral bidding war: if councils wanted to make their pot go further, they would have to spend it more intelligently; fortunately, they would have both the legal and, in many areas, political freedom to experiment.

They would also face a much more manageable task combatting fraud; a smaller jurisdiction is easier to police, especially when it comes to identifying serious or serial offenders. This is very important: not only does fraud undermine public support for the welfare system, but effectively combatting fraud is the best way to deliver serious cost savings (which will become a necessity sooner or later) without reducing payments to legitimate claimants. The latest government figures suggest the national welfare fraud bill for the latest financial amounted to some £6.3 billion – a sum larger than the projected savings from the Starmer Government’s attempted reform to disability benefits.[vi]

Finally, such an approach would avoid the unintended consequences which can arise from disconnected decision-making in our current, hybrid model. For example, the IFS has shown that individual UC claimants can face very different marginal tax rates on any return to work in part because of different council policies with regard to Council Tax rebates: “This is why the majority of workers face a METR [marginal effective tax rate] of 60–70 per cent under the UC reform, despite the taper rate being 55 per cent.”[vii]

Here again, one solution would be to nationalise control of Council Tax rebates. That would be fair, in a sense, inasmuch as it would eliminate another vector for postcode lotteries. But it would also be another nail in the coffin of local democracy, further stripping town halls of control over what would remain nominally their responsibility – and for which they would, based on current evidence of public anger over local services, still be held accountable by the voters, deepening the democratic deficit.

So why not instead resolve it in the other direction by giving councils control over Universal Credit? This would allow taper rates to be harmonised locally, by politicians responding to local priorities and conditions, and expand the scope for experimentation between different local authorities to find what works best.

It would also be a powerful shot in the arm for local democracy, because town halls would now have control over a major area of public spending. That would not only give voters more input but also confront them with trade-offs at a level which is easier to grasp. It’s easy to demand of the distant, abstract state that spending be higher and taxes be lower; it would be a different matter to have a real choice – and have thus to make a real decision – about how your council divided its budget between welfare, services, and lower taxes.

The obvious danger is that some authorities would make decisions which I or you, the reader, dislike. But accepting their right to do so is essential to any meaningful decentralisation agenda. It may also, in the long run, lead to better continuity of policy: a local area might reach a stable consensus on welfare; at the national level, it will be forever a tug of war between left and right.

• [i] Poor Law Commissioners’ Report of 1834. Copy of the Report made in 1834 by the Commissioners for Inquiring into the Administration and Practical Operation of the Poor Laws. Presented to both Houses of Parliament by Command of His Majesty (London, 1905).
• [ii] This system is described in some detail in Bartholomew, James, The Welfare State We’re In (London, 2004).
• [iii] Beveridge, William, Voluntary Action: A Report on Methods of Social Advance (London, 1948)
• [iv] PWC. Independent Review of Local Government Spending Need and Funding: Technical Report 2019. County Councils Network, May 2019.
• [v] Public Accounts Committee. Local Government Financial Sustainability: Thirty-First Report of Session 2024–25. Parliament, 18 June 2025.
• [vi] Hansard HC Deb. (15 May 2025). vol. 767, col. 26WS.
• [vii] Ray-Chaudhuri, Sam, and Tom Waters. Universal Credit: Incomes, Incentives and the Remaining Roll-Out. Institute of Fiscal Studies, June 2024.