Fairness and the welfare bill

 

Today's row over benefits was optional: the government, by all accounts, did not need to have a parliamentary vote on the decision to raise most benefits by only 1% a year between now and 2015. But if you want to squeeze public spending as much as the government does, most economists would say that debates about welfare are not optional at all.

The debate has been portrayed as an argument over "skivers versus strivers". But others might say it was a debate about the nature of the welfare state.

The welfare budget is 30% of government spending; if you're trying to squeeze public spending, it's inevitable that you will end up trying to squeeze welfare.

And if you've ruled out most of the cuts which would directly affect retired households, as David Cameron did, during the 2010 election, there are only two potential targets for welfare cuts left: working age households that work, and those that don't.

The policy being debated today will affect both, though workless households will lose most. The policy will also leave them relatively more exposed to inflationary shocks.

According to the IFS, about 9.5 million households will be affected by the new policy on uprating - or about half of the working age households in Britain. About seven million of these "losers" will contain someone in work, and could lose, on average, around £165 a year by 2015-16.

But that hides a very wide variation. The loss for about three million of those working households will be more like £75 a year and will come only from the real cut in the value of child benefit. The roughly 2.5 million non-working households who also lose out will be worse affected, as a general rule: their average loss will be about £215 a year.

Is this fair? As ever, it depends on your definition of fairness. It might also depend partly on how you view the role of the benefit system.

When benefits started, they were thought of as insurance, to protect you from certain big events in life for which you might or might not be well prepared. Some, like retirement, were entirely predictable. Others, like unemployment, were not. The contributory principle said you got more or less what you paid in, if and when these life-changing events occurred.

Two things have happened since then: the first is that the benefit system has become much less contributory, meaning that benefits are increasingly tied, not to your contribution, but to your situation. The second, only partly related to the first, is that the system has come to involve a much larger share of working age households.

The latest figures from the ONS show that, on average, the bottom 60% of UK households by income get more out of the system in benefits, tax credits and public services than they put back in the form of taxes in 2010-11.

Obviously, a significant chunk of those households are retired people, who pay less tax. If you exclude them from the calculation, the bottom 40% are clear winners, and the 20% in the middle pay almost exactly what they get back.

In 2010-11, the average gross (before tax) income at this part of the income distribution, was £33,186. If you subtract direct and indirect taxes from that income, then add back what families get from the state in cash and in-kind benefits, the ONS reckons you get a "final income", net of taxes and benefits, of £32,305 - just slightly less than they earned in the first place.

It is these kinds of statistics that prompt critics, such as the Reform think-tank, to talk about the "money-go-round" of welfare. Their point is that the middle classes may get more now from the state than they got 20 years ago, but they have usually had to shell out more taxes to pay for those extra benefits.

Gordon Brown reckoned that the more you gave the middle classes in tax credits and other benefits, the more they will support the welfare system as a whole. Some of the welfare cuts being implemented by the coalition are putting that belief to the test. But the change in uprating for the next few years is a reform which asks most working age households to contribute, regardless of circumstance.

If you think fairness is about treating different households equally, then you will think it's fair. If you think, rather, that fairness means "asking those with the broadest shoulders to carry the heaviest burden", then you might not think this particular change is fair. But ministers are right to point out that households dependent on benefits have seen faster growth in their incomes recently than many in work.

If the forecasters are right in their predictions for inflation over the next few years, today's uprating move will mean that the benefits fall by 4% in real terms between 2013 and 2015. As it happens, average weekly earnings have fallen by almost exactly that amount, in real terms, since the coalition came to power (see my last blog), while benefits have consistently been uprated in line with inflation.

Iain Duncan Smith says the gap is even wider if you go back five years: people on out of work benefits have seen their incomes rise by 20% over that period, while average earnings have risen by 12%.

As I pointed out a while ago, one consequence of uprating benefits with inflation at a time of flat or falling real wages has been to help narrow the gap between rich and poor. It is one big reason why 2011 saw the largest one-year decline in income inequality in a generation.

This cut in the real value of benefits between 2013 and 2015 may undo some of that. But probably a better objection to this policy is that it leaves the poorest households very exposed to inflationary shocks.

We don't actually know what inflation will be over the next few years. The majority of forecasters expect it to continue to be weak - because they don't think there's much chance of a rapid economic recovery which pushes up domestic prices or wages, and because they think the new sources of energy coming on stream in the US and elsewhere will help keep a lid on the world price of oil and gas.

If those forecasts are right, inflation in the UK will be lower in the next few years than it has been since 2009, and the real value of benefits will fall by not much more than 1% a year, between now and 2015, as a result of this policy.

But quite a lot of economists think that, sooner or later, the hundreds of billions that the Bank of England and other central banks have been pumping into the global economy will come back to bite us, in the form of runaway inflation. That is unlikely to happen right away, but others think there could be another surge in global commodity prices this year, which the Bank of England will not able to prevent filtering into inflation.

If either or both of those things happens, this policy would mean that households who depend on benefits for all or most of their income could see their real incomes fall by a lot more than 4% between now and the next election. But right now, ministers would probably say that runaway inflation was not their number one concern.

 
Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    0

    Comment number 296.

    @ 259: That's because benefits went up in line with inflation, which was around 5% in September 2011. That was the old rule. Wages went up less, because the economy is in such a mess. That's politically untenable for the government, hence the change to 1%.

  • rate this
    0

    Comment number 295.

    '2011 saw the largest one-year decline in income inequality in a generation. '

    If this happened under Labour it would be on every billboard in the UK but because it is the Tories who have taken so many out of poverty it goes unheralded.

    Instead we must listen to Labour apologists whining about non-existent 'cuts'.

  • rate this
    -1

    Comment number 294.

    @293
    EmpNI, BusRates, ClimateLevy, InsPremTax, EnergyVAT (but may be net better off thanks to CI VAT change) plus Fuel Duty&FDE indirect (RoyMail wld prob be bust if not for Amazon) then directly VED, APD-APT, Customs, Landfill tax &finally maybe StampDuty on any property deals - phew.

    AndyC555 will be quick to point out if anything should/shouldn't be here. No idea how it relates to turnover.

  • rate this
    +1

    Comment number 293.

    #286 Up2Snuff - does the 'lot of tax' include VAT and NI and what proportion is it of turnover?
    #288, 291 BlueEyes2 -(288) most of us have no choice but to pay the going rate. If the big corporations avoid tax, the going rate becomes more!
    (291) So workers wages compete with SE Asia but prices are set in UK terms?

  • rate this
    +1

    Comment number 292.

    This year will probably be the hardest. 2014 will see handouts and tax cuts in an attempt to ensure electoral victory in 2015.

  • rate this
    0

    Comment number 291.

    We live in a global econmomy and industry will move to where it can get the best deal. So if it is cheaper to make things in SE Asia and ship them to the rest of the world that is what they will do. Nothing any Governemnt can do will stop this. It is time we woke up to the fact we cannot afford to continue borrowing money to try and sustain a standard of living we are not earning.

  • rate this
    +2

    Comment number 290.

    There is nothing fair about anything this shambles of a government do - how the Lib Dems have the front to back the Tories is utterly shameful- in fact quite disgusting.

  • rate this
    +1

    Comment number 289.

    don't bash the poor

  • rate this
    -2

    Comment number 288.

    Fact the Government has no money what it spends it either raises from taxes on the people or is borrowed to be repaid through taxes. It is those in work who earn the money to provide the Governments income. So the question to those who pay is are you prepared to pay more of what your earn to support others? It is time the left stopped kidding themselves the answer is NO.

  • rate this
    +1

    Comment number 287.

    Accepting that an average person in Briton will be paying around 90% of their income on the basics of Housing, Heating and Food while David Cameron and his Millionaire’s Cabinet are likely to be paying less than 10% of their income on equivalent basics why do they begin to think that they are in any position to tell the rest of us about what is fair or that everyone else should pay more?

  • rate this
    0

    Comment number 286.

    218.FauxGeordie
    They trade & profit here - they should contribute - hardly controversial
    ~ ~ ~
    They do.

    Not sure I want to get dragged into this but Amazon not only pay a lot of tax in the UK (re-read that last bit carefully then think about it) they also help wholly UK-based businesses (a lot of SMEs) find customers.

  • rate this
    -1

    Comment number 285.

    The govt are targeting the sort of people you would read about in the SUN newspaper, 6 kids, neither parent working, earning more through benefits than many that work.Its a shame that those genuinely not able to find work are going to be punished for those that are lazy spongers.

  • rate this
    0

    Comment number 284.

    "LOL

    You don't even know what the Swiss/UK tax disclosure agreement is about do you?"

    Wrong.

    Lord Green (HSBC) was all over that like a cheap suit. And noticed any stories about HSBC recently? Massive fines?

    Amazon can no longer flog CDs through Jersey. Other corporate loopholes - yes, Luxembourg dead letter offices - will be tightened.

    Bragging you know all the loopholes merely shames you

  • rate this
    +1

    Comment number 283.

    ~279 AndyC555
    "Why don't you write to HMRC and explain it to them?
    I take it that even you have heard of Dave Hartnett?
    Just because HMRC are aware that something is a tax-avoidance vehicle doesn't mean that they will do anything about it.
    This countries Govt and Govt Offices will ALWAYS do deals with the wealthy as it minimises effort on the officials part.

  • rate this
    +1

    Comment number 282.

    Walks like a huge duck. Quacks like a huge duck. Huge UK offices and earnings. Input into government policy (the head of Google UK is part of Cameron's advisory panel on technology).

    Thats why they spend so much time/money lobbying ministers.

    You think 'efficient'. You are so obsessed with it being 'legal' and your own cleverness you are unable to grasp this very simple point

    It STINKS.

  • rate this
    0

    Comment number 281.

    "FauxGeordie
    Thats why the world & his wife... are beating a path to the door of Switz/ L'bourg demanding they open their books"

    LOL LOL LOL

    You don't even know what the Swiss/UK tax disclosure agreement is about do you?

    That's to do with EVASION. Mainly by individuals. Nothing at all to do with international trade

    You're giving me a laugh, if nothing else

    Actually, nothing else

  • rate this
    -1

    Comment number 280.

    252 "Govt accounts for almost 1/2 of total US healthcare expenditures"

    Meaning - the taxpayer is getting skinned alive for an inefficient system that takes 20% GDP to give worse outcomes than about every other industrialised nation at vastly higher cost

    Same as welfare is being used to subsidise corporate wage bills (here and there)

    How you think you have responded to any point there defeats me

  • rate this
    0

    Comment number 279.

    "276.FauxGeordie

    "rolls eyes". So you can prove Google have a UK taxable presence yet HMRC can't?

    Why don't you write to HMRC and explain it to them?

    Pointing at a cow and saying it's a horse doesn't make it a horse, even if you repeat it again and again, louder each time.

    Have you read the manual at #277? I have.

    I've 25 years professional experience behind my opinion. you?

  • rate this
    +2

    Comment number 278.

    "The braying left think it only works one way but we have UK exporters and we'd loose their profits to overseas tax"

    They DO. SOME tax. Its commonplace. Thats what trading agreements and tax treaties are for.

    Thats why the world & his wife - even Osborne - though not you - are beating a path to the door of Switz/ L'bourg demanding they open their books.

    Google etc are merely trying it on

  • rate this
    -1

    Comment number 277.

    273.Andrew MacGregor

    You're wrong. Amazon UK and Amazon EU are two different companies. They are not 'hiding' anything.

    If you're going to join in, at least understand the subject.

    Read this (as I have had to on many occasions) and then come back.

    http://www.hmrc.gov.uk/manuals/intmanual/index.htm

 

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