Case 54: Blockchain Can Increase Government Welfare Distribution Efficiency

Overview
Novel payment models will enable HM Treasury (HMT) and the Department for Work and Pensions (DWP) to distribute welfare support more efficiently and improve policy delivery. By applying DLTs in the registration and payment processes for government grants and benefits, DWP will be better equipped to:
• Prevent financial losses through fraud and error
• Support the most vulnerable citizens by offering them the benefits of full financial inclusion
• Support the achievement of the government’s wider policy objectives, especially getting people out of poverty in a sustainable way
• Offer good value for money and place public expenditure on a sustainable footing

Background
The DWP pays out roughly £166 billion of taxpayer’s money in welfare support per year. Some £3.5 billion of that sum is overpaid through fraud (£1.2 billion), claimant error (£1.5 billion) and official error (£0.7 billion) of which £930 million is recovered. Adding in the fraud and error that exists in the current tax credit system, which will be moving to DWP over the next few years as an element of the new Universal Credit regime, there is a total baseline of over £5 billion per year in gross overpayments.

Apart from the direct financial cost of overpaying money to those not entitled to it, the taxpayer also bears the cost of post-payment intervention (debt collection, investigation and prosecution, claimant queries and dispute resolution).

A further, as yet unquantified, proportion of welfare support spending will fail to meet policy objectives in less identifiable ways. For example, it may effectively fund expenditure by claimants that arises from the way that welfare support is distributed, ultimately servicing non-bank debt and paying the ‘poverty premium’.

DLT proposition
A large number of welfare claimants are un- or under-banked and face barriers to greater financial inclusion such as credit checks, access to traditional financial products, and the costs of unauthorised transactions. DLTs offer a cheap and supportive means of getting these claimants into the benefits system.

Digital identities could be confirmed through distributed ledgers running on securely-encoded devices — or even through software on a mobile device — which would allow end-users to receive benefits directly, at reduced transaction costs to banks or local authorities. This may allow them to become more fully included in the financial system through a secure distribution point that is more reliable than a bank account. Such a solution could also be linked with other systems to reduce the level of fraud and official error in the delivery of benefits, as identities would be more difficult to forge.

Such activities may help to achieve one of the DWP’s principal policy objectives: to lift people sustainably out of the cycle of poverty and state dependence. Through the innovative application of such technologies, it would be possible — with agreement from the benefit claimant in question — to set rules at both the recipient and merchant ends of welfare transactions. This may present the opportunity for ministers to consider options for achieving better policy outcomes from the distribution of welfare support by agreeing or setting rules around the use of benefits.

Outcomes
• Reduction of losses due to fraud and official error
• Enable ministers to assure taxpayers that public funds are being used more
effectively for the purposes of meeting genuine need

Maturity level
• Requires a lot of education for the recipients
• Requires some integration of sterling onto a distributed ledger for benefits
• May create a subset of the economy with a stigma attached to ‘benefit coins’