Transfer addiction: transparency would ease the cold turkey

Swinging the axe on benefits and tax credits is no longer taboo after the coalition’s announcements that these spending areas will be scrutinised towards the end of this year. It looks as though “middle-class benefits” are a particular target.  

Whatever the result, the debate itself provides an opportunity to dispel a few popular myths. The British Social Attitude survey, for example, continues to tell the tale of a stingy Anglo-Saxon welfare model, providing only bare-bone protection. This is contrasted with the supposedly much more generous models of the Scandinavians and the Rhinelanders.

At least in terms of aggregate figures, this characterisation has long lost its validity (if it ever had much). The UK spends 25% of its GDP on social protection benefits – less than Sweden, France and Germany, roughly level with Denmark and Austria, and more than Finland, Norway and the Netherlands.

It is not surprising that people in the bottom quintile of the (equivalised) income distribution receive on average three quarters of their household income from government benefits. But government transfers also constitute 40% of the second lowest, and 16% of the middle quintile’s household incomes. Even for the second-richest quintile, a disappearance of all benefits would be equivalent to a pay cut of 7%. State transfers have become a widely used legal drug, which will make the cold turkey all the more unpopular.  

Friends of the big state know this very well. A publication by the Fabian Society recently made the case for an even less targeted, near-universal welfare state, to “garner middle-class buy-in”:

“while narrowly targeted policies will fail to draw on the strength of middle-class political pressure to defend welfare, policies with wider coverage actively recruit the sharp elbows of the middle class” (p. 85).

But if the authors are right, and if their logic also works the other way round, then there is a powerful antidote to transfer addiction: transparency. If the coalition is seriously interested in curtailing runaway transfer spending, it would first have to simplify the tax-and-benefit system. This could include replacing Child Benefit and middle-class Child Tax Credit with an extra tax-free allowance per child for the parent(s). It could also include replacing tax credits for those on modest pay with a negative income tax, mutually exclusive with the positive income tax.

In short, keep redistribution from Peter to Paul if Paul needs it. But stop redistribution from Peter’s left pocket into Peter’s right pocket. Send the bill directly to Peter instead, and see how keen he really is on a big state.

Actually the fiscal emergency provides a good opportunity to unwind (at least part of) the welfare state. It may be that the middle classes would not welcome reducing their benefits in order to reduce their taxes. (I suspect too many middle class people wrongly think that on balance they benefit financially from the welfare state.)But they may be prepared (in the ‘national interest’) to accept elimination of some of their benefits in order to help reduce the governmment’s budget deficit.Similarly, we can end UK participation in the war in Afghanistan simply by arguing that we can’t afford it.Next step is not to embark on new wars in a hurry, or expand the welfare state further.

“The British Social Attitude survey, for example, continues to tell the tale of a stingy Anglo-Saxon welfare model, providing only bare-bone protection.”For most people, this is the case. JSA is only £65 per week and is paid for only 6 months. If you don’t rent your house or if your other half has a job (even low paid) you will get nothing extra – not even exemption from Council Tax. For people who lose their jobs, even if they have paid contributions for most of their lives, they get very little.The welfare state was meant to be a safety net for people in this situation – but it isn’t.Instead, it has become a way of life for millions who are incentivised never to work.

@HJ – Income-based JSA is paid as long as the claimant meets the criteria; it is not restricted to 6 months. The income-based JSA recipient will also be entitled to full council-tax benefit and full housing benefit. However, as you suggest, means-tested benefits will generally be denied to those with working partners.

Richard Wellings – JSA stops after six months if you have any reasonable level of savings, so it is not dependent just on income. Mortgage-payers don’t get housing benefit either. The level of income of a partner or savings that are required to completely disqualify from benefits is remarkably low, even if you have children. You just couldn’t hope to live on JSA anyway – it’s less than half what you’d get in Ireland, for example. No other Western European country provides such stingy benefits to the unemployed.This would be acceptable if we paid lower taxes and lower NI than in other countries – but we don’t. You pay heavily when working and get little back when not.

@HJ – There are two types of JSA – contributions-based (which stops after 6 months) and income-based (which is means-tested). Mortgage-payers don’t get housing benefit, but the government will pay the interest (again, subject to means-testing) on the loan.People can and do live on JSA – it is enough to cover the basics, though arguably less generous than some of the child-related payments, given the fixed costs of running a home. Once council tax benefit and housing benefit are factored in, a single JSA claimant in a social housing flat outside London will typically be on about £140 per week – perhaps equivalent to earning £180 per week plus in paid work.

Richard Wellings – I am perfectly familiar with the types of JSA.If you think that the government will pay the interest on mortgages – think again. In theory there is some (very limited) provision. In practice, almost nobody gets this. Trust me, I know.You say that people “can and do live on JSA” but the examples you give are supplemented by housing benefit and council tax benefit. So they’re not living on JSA, are they? If you only get JSA (as is the case for many), then you can’t live on it.JSA is hardly a large part of the deficit as it stands anyway. Let’s say that all the 1.6m claimant count were to get full JSA for a year – the total annual cost would be just over £5bn.

Incidentally, £5bn is just 3% of the social security budget. So the actual amount paid out in JSA is probably no more than 2% of the social security budget. That’s why people think that it provides only stingy bare bones protection if they lose their jobs – and they’re right.

@HJ: I agree that income-based JSA is spartan; that’s why I made the qualification “at least in terms of aggregate figures”. It’s not JSA which provides the large disincentives.

However, if the tax free threshold is raised to £10k that might make a negative income tax impossible? Moreover, doesn’t this assume that you’d have to run two systems – one for those on a payroll and another for those who are unemployed etc? Doesn’t sound that simple.
Wouldn’t a better solution be to scrap child credit altogether – why should people be paid for having children? The IEA’s own ‘War between the state and the family’ has much to say on this.
The Fabian Society report made me physically sick!! Hayek attacked this sort of universalist benefit concept back in the ’60s – it defies any sort of logic except the twisted one of the socialist.

@HJ – Housing costs – artificially inflated by planning and building regulations – are clearly a big problem for the benefits system, and it would appear that the current rules discriminate against mortgage-payers vis a vis renters. Nevertheless, the principle that taxpayers should be forced to bail out people who unwisely took out mortgages that they couldn’t afford is appalling. Regarding JSA, a proportion of claimants will own their homes outright and will be surviving on the basic allowance (and also getting their council tax paid).

Kris: Yes – we have a system that fails to support those that need it and who have contributed large amounts, yet supplies incentives to stay on welfare for those that haven’t.This is not what Beveridge had in mind at all.

Richard Wellings: Yes, the rules do discriminate against mortgage-payers – and the married. And against those that have made contributions but who have also saved. In fact, it discriminates against those that Beveridge intended to protect.You say: “the principle that taxpayers should be forced to bail out people who unwisely took out mortgages that they couldn’t afford is appalling.” Well, who can afford a mortgage when they lose their income? If they didn’t need an income to buy a house then they wouldn’t need a mortgage, would they?But I agree that there should be no special rent/mortgage support – JSA should represent a modest, but reasonable, income, regardless of liabilities.

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