Tackling The Welfare Problem

TUESDAY, MAY 25, 2010

Tackling The Welfare Problem

"My Government’s legislative programme will be based upon the principles of freedom, fairness and responsibility...

The tax and benefits system will be made fairer and simpler... People will be supported into work with sanctions for those who refuse available jobs and the timetable for increasing the State Pension Age will be reviewed."

Thus spake Her Majesty today.

As we mentioned a couple of days ago, the welfare bill is now running at £200bn pa, around 15% of GDP, and increasing rapidly. The chart above shows how it has soared over the last century since the Liberals began the huge expansion of welfare just before WW1.

And under successive governments since then, it's grown into a serious problem. The blunt truth is that we can no longer afford it, and Dave is quite rightly set on cuts.

But what cuts? And how can we cut without having people starve in the gutter?

Here's how that £200bn breaks down between the three key "client" groups (2008-09):

• Old people - £90bn, mainly in the shape of the state pension.
• Sickness and disability - £40bn, including the 2.5m people of working age who are on those notorious incapacity benefits.
• Families and children - £30bn, plus another £20bn in the form of tax credits which also largely goes to them.

The remaining £20bn goes mainly on housing, spread between all three groups. Unemployment support comes in at just £5bn - the rest having been redefined as something else.

So what to cut? In truth, there are no easy answers, and there will inevitably be losers. But the current level of welfare benefits is targeted on 60% of median income, which is now around £23,000 pa*. By no stretch of the imagination is that starving in a gutter, and given our dire fiscal straights, a 60% target is no longer sustainable.

And all those old people are going to have to be even older before they can retire. Given their increasing tendency to have 100th birthdays, the state pension age is going to have to rise to 70 soonest. Because if Her Majesty can still work at 84 -and wear that huge crown - working to 70 without the crown ought to be a breeze for everyone else.

The poverty line redrawn at 50% of median income; state pension age raised to 70; and forced sterilisation for anyone who has children they can't afford to support. Well, no, OK, the last one was the Major's and might not make it through to the final programme. 

Nobody would start from here, but Dave does sound like he might be ready to take some real decisions. Let's hope he gets on with it.

*Footnote - The government's poverty benchmark is median household net income on an equivalised basis. Que? That's median household income, adjusted for household size and composition (equivalised), net of income tax and National Insurance, and gross of social security receipts (for more detail see here). Gross of social security receipts? But surely that means the target is chasing its own tail, and the higher the government makes social security, the higher will be the poverty benchmark, and the higher will be social security payments to close the gap, and the greater will be the cost. Well, yes, that's right - it's one of the very many bonkers features built into our current system of poverty relief. 

PS So what does the Imperial State Crown actually weigh? An incredible 32 ounces. All set with 2,868 diamonds, 273 pearls, 17 sapphires, 11 emeralds, and 5 rubies.

 

 

FRIDAY, SEPTEMBER 11, 2009

Cuts - Must We Suffer Another Dunkirk?

Concentrating minds

Today's joint report from the TaxPayers' Alliance and the IOD sets out 34 specificspending cuts that would together save £50bn pa.

Here's the summary (click on image to enlarge):

The cuts include many of BOM's old favourites (perhaps unsurprising since The Bloke was a co-author):

• Abolish Sure Start - a failed programme (eg see this blog) - saves£1.5bn pa
• Abolish Building Schools for the Future - wasteful and unaffordable (eg see this blog) - saves £2.3bn pa
• Scrap the NHS supercomputer - unwanted, way behind schedule, and far too expensive (see many previous blogs, eg here) - saves £1.2bn pa
• Halve spending on consultants (eg see this blog)- saves £1.1bn pa

However, as you will see, the biggest proposed savings come from abolishing universal child benefit (estimated net saving of £8.4bn pa from switching tomeans tested system with all benefit lost for families earning over £50k pa), and a two year freeze on public sector pay, saving a cumulative £12.4bn pa.

It goes without saying that none of the proposed savings are painless. Even if it's only consultants losing their government contracts, spending cuts always involvesomebody feeling pain. And we should never expect they'll simply grin and bear it.

At this very moment, Tyler is listening to the TPA's Matt Sinclair being lambastedby listeners to BBC R5, calling to say that abolishing Child Benefit for families earning over £50 grand would be cruel and unnatural. People on fifty grand do not consider themselves rich, and they don't see why they should be whacked. "We don't think the money should be taken from us," they say. "We think it should come from the rich".

Of course, fiscal sophisticates like you and I understand that there aren't enough rich Rich people to go round, and that in reality, an annual income of £50k pa puts a household in the top 20% of the income distribution (see here) - ie by the standards of the other 80%, they are the rich. But that doesn't alter the way £50k households feel about the prospect of losing their Child Benefit.

So what if we can't cut spending?

Yes, that's right - taxes will have to shoot up. And as it happens BDO Stoy Hayward have just produced a useful report looking at what that might mean.

They've combed through the various pronouncements of the three main political parties and come up with the following menu of tax increases to raise £16bn pa (click on image to enlarge):

There are a couple of points to make.

First, none of these tax increases are any less painful than cutting Child Benefit - it's just that the pain may fall on different people.

And second, £16bn is nowhere near enough. If we scaled it up to the £50bn offered by the TPA/IOD proposals, we'd be looking at the following possibilities:

• 25% VAT
• 30% Capital Gains Tax on your first home
• 6 percentage points increase in National Insurance rates (total employers and employees contributions)

Wonder how R5 listeners would react to that lot?

The truth is we are in a very bad place, and we can't stay here. Either we cut spending or we have to increase taxes. A lot.

Our problem is that most of us have not yet understood our plight. We're not yet ready to face facts and recognise we'll all have to make sacrifices. We're in the Phoney War and Dunkirk hasn't yet happened.

But watch this space. If the bond and currency markets turn on us - believe me - subjecting child benefits to means testing will be the least of the sacrifices we'll have to make.

And not everyone will get off the beaches.