Apparently, the Labour Party is performing a U-turn on universal benefits, or at least on the Winter Fuel Payment. So far, the principle of universality has been seen as sacrosanct. Now, a removal of the payment from wealthy recipients is no longer off the cards. Unsurprisingly, the responses have been mixed.
There are sensible economic arguments against the conversion of universal benefits into means-tested ones. If pursued on its own, without adjustments elsewhere in the welfare system, an increase in means-testing leads to a further deterioration in incentives to work and save. But there are also objections against means-testing which are a lot less sensible, especially the claims that it ‘increases complexity’.
Of course it is true that by itself, a means-tested transfer is more complex to administer than a universal one. The rate of a means-tested benefit differs from recipient to recipient, depending on their income, savings, and sometimes other variables. Thus, in order to administer a means-tested transfer, it is necessary to collect and constantly update a lot of information about the recipients. This is not true for universal transfers, which do not differ a lot between recipients, and which therefore require little detailed information about them.
But while the total cost of running a means-tested transfer system is certainly high, what is more relevant is the marginal cost: the administrative infrastructure for means-testing is already in place anyway, and there is no need to build up a new one. The most efficient way to means-test a hitherto universal transfer is to roll it into an already existing means-tested one, and piggy-back on the latter’s administrative infrastructure, rather than duplicate it. It is not as if we have a shortage of means-tested benefits, or of welfare bureaucrats.
The mess over Child Benefit, for example, could have been avoided if Child Benefit had been merged with Child Tax Credit. The Winter Fuel Payment, meanwhile, could be merged it with the means-tested Pension Credit. But while we are doing that, why not convert free bus passes and free TV licences into cash payments, and roll them into the Pension Credit as well? Or in fact, why not go further and merge the resulting super-Pension Credit into the Universal Credit, thus ending the illogical distinction between old-age benefits and working-age benefits? And once that is done, why not merge the whole package with the tax system, leaving one single system of positive and negative taxation?
In a welfare system which already relies so heavily on means-testing, the complexity argument is a red herring. It is possible to end universal benefits, and decrease the overall system’s complexity at the same time. That, however, would substantially reduce the fiscal illusion effect, and I can see why both the political class and the Big-Government intelligentsia would dread that prospect.
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