There was a time when we thought we knew where the parties stood on welfare. Labour was for handing it out, the Conservatives for cutting it back. This was always a caricature, of course. Labour governments often found themselves imposing cuts and Tory governments presiding over ever-rising welfare budgets.

But something else made the old stereotype redundant. Both parties came to see that the system simply wasn’t working. In particular, it wasn’t really helping many of the people who needed help to pull themselves out of their impoverished circumstances and get on in life. Commentators started to talk about an ‘underclass’, politicians about ‘broken Britain’.

Now something else has changed too. We have neither a Tory nor a Labour government but a Conservative/Liberal Democrat coalition. And the work and pensions department is now led by two men whose expertise is welfare reform. The new secretary of state, Iain Duncan Smith, has made the issue his prime concern since he was evicted from the Tory leadership in 2003. And the new pensions minister, the LibDems’ Steve Webb, has an academic background in the field.

This week Mr Duncan Smith set out the broad outlines of what could become a revolution in British welfare policy. But it is a revolution with a past. Back in 1997, Labour’s bright new Prime Minister, Tony Blair, appointed Frank Field, another acknowledged expert on welfare, to ‘think the unthinkable’. When Mr Field started to do so, however, he lost his job, a year later.

The then-Chancellor, Gordon Brown, took charge. Mr Brown’s approach was not so much wholesale reform but targeting money at poor pensioners, children in poverty and low-income working families. Many of these saw their incomes rise and their standards of life improve. But one of the consequences of this approach was a huge spread of means-testing which, critics argued, led both to immense complexity and also to disincentives to work. It is these outcomes which, in part, spur Mr Duncan Smith’s mission to reform.

In an interview with The Guardian he said that Britain’s welfare system was quite simply ‘bust’. “My general view is that the benefit system is a deeply ineffective and costly way of subsidising people’s lives. … What we want to do is reform the welfare system – in the way Tony Blair talked about 13 years ago, but never achieved – a system that was created for the days after the Second World War.”

In particular he wants to tackle the ‘penal disincentives’ to work, disincentives which he claims mean that people who actually do take up work are regarded by their friends as ‘bloody morons’ for doing something that makes them no better off.

“The present benefits system is so complex and unfair that no one understands it. It leads at the bottom end to one of the most regressive tax and benefit withdrawal rates that it is possible to imagine. We ask people to go to work for the first time and then tell them to pay back 70%, 80% and 90% back to the state. These are levels none of the wealthiest bankers are asked to pay – they are moaning at 50%. If you are unemployed, and you come from a family that is unemployed, all you can see when you think about work is risk. It is a real risk because for all the efforts you make the rewards are very minimal and in some cases none at all.” Mr Duncan Smith claims that it is often not worth taking a job if the annual income from it is less than £15,000.

The new secretary of state proposes a simplification of the system, replacing a whole plethora of benefits simply with two. He wants to restore genuine incentives to work for those on benefit, including for part-time work. To do this he wants to change rules so that people do not lose the whole of a particular benefit when they take on work (as is sometimes the case now) and to taper the loss of benefits as earned income rise so that people going into work don’t face very high marginal rates of tax.

Inevitably, such an approach costs money because the state is, in effect, being more generous to those going into work. Mr Duncan Smith argues that even if there are short-term additional costs to his approach, in the long term there are huge benefits, not just for the individuals concerned but for society at large and for the government coffers. But in the current economic context, in which tackling its own huge financial deficit is the government’s first priority, the short term cost may prove a real problem. Mr Duncan Smith admits: “I have yet to arrive at the point where everyone agrees that is the way forward.”

What is clear is that savings will have to be made elsewhere. Benefits to the middle class, including tax credits to those earning over £50,000 a year, seem certain to get the chop and this may prove politically difficult since the recipients of such benefits have tended to vote Tory or Lib Dem.

Mr Duncan Smith wants to get tough too on recipients of Jobseeker’s Allowance who turn down jobs that are offered to them. And in the autumn he plans for a review of the criteria by which the 2.5m people receiving incapacity benefit are judged eligible for it. Here his purpose is not merely to save money. “People basically get parked on this benefit and forgotten about. If you have been on this benefit for more than two years, you are likely to die on it.” That is good for no one, he argues.

How much of Mr Duncan Smith’s reform agenda will actually be put into practice remains to be seen: these are early days and the fate of Frank Field casts a shadow over all reformers. But what is perhaps most striking about the new Conservative secretary of state is that he is concerned not just about such issues as disincentives to work and people being trapped in poverty but also about something else, not normally of much concern to Tories: inequality.

He has published figures showing that income inequality in Britain is now greater than at any time since figures were first collated back in 1961. And he is to chair the first cabinet committee on social justice ever formed. He wants to change the criteria by which inequality is measured. It seems that inequality, just as much as poverty, is something he thinks we should all be worried about. For a non-Labour government to be saying such a thing really is revolutionary.

What’s your view? Do you agree with Mr Duncan Smith that the welfare system is ‘bust’? Do you share the view or not that in many cases people on benefits really would be ‘bloody morons’ to take work if it hardly makes them any better off? Do you think the state should be prepared to spend more in the short term to increase the incentives for those on benefit to take work or do you think that would be impossible in the current financial climate? What reforms would you make to the welfare system if you had the chance? How much do you think inequality, as distinct from poverty, matters? And do you think the new government will manage to reform Britain’s welfare system?

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