When Can We Stop Digging?

WEDNESDAY, JULY 28, 2010

When Can We Stop Digging?

We are leading the world

As you will know, the man now in charge of Britain's energy supplies is one of our most notorious eco-hippies. But since we can't improve on Christopher Booker's brilliant Huhne demolition we needn't go on about that.

What we'd really like to know is when can we stop digging the huge black eco hole our grandstanding politicos have dumped us into?

We all surely understand the score by now. Our political class have presented us with a cataclysmic energy gap in the shape of closing coal-fired power stations with no practical replacement available. Common sense says we'd better delay the closures as long as technically possible, crack on with the new nukes for the long-term, and build a few Chinese style coal-fired stations for the short-term. Either that, or watch the few remaining bits of British industry leave for places that can still supply power... like China.

Some of us had somehow hoped that the new government would return us to sanity, despite Cam's personal wind turbine. But no such luck. Huhne is quite happy to continue digging just where the last lot left off, boasting yesterday:

"Britain is the first country in the world to set legally binding ‘carbon budgets’, aiming to cut UK emissions by 34% by 2020 and at least 80% by 2050 through investment in energy efficiency and clean energy technologies such as renewables, nuclear and carbon capture and storage."

Look, out here, we don't want to be the first (ie the only) country in the world to dig our own economic grave, thank you very much. 

But at least the costs of this madness are now becoming apparent to everyone. Even Huhne's department admits that everyone's domestic fuel bills are set to rack up substantially. Over the next decade, they expect 

"The impact of climate change and energy policies on energy prices [will be to increase them by] 18% and 33% on gas and electricity prices respectively for domestic consumers and 24% and 43% respectively, for medium-sized nondomestic consumers."

Which for an average UK household translates into an annual increase of around £300. And for a typical small manufacturing firm will likely be the straw that breaks them. 

According to the department of course, it won't be like that. That's because we'll all cut our energy consumption to offset the increase in prices. So we'll all be just as well off, but the planet will be that much greener (reality check - a 25% cut in our total energy consumption would reduce global greenhouse gas emissions by at the very most 0.5%... and that's assuming we don't simply export our remaining CO2 generating industries to China, which is what actually happens in the real world).

So the question is when will our anger at rising energy prices mount sufficiently to force a halt to the digging? 

Step one is to make sure everyone understands just what it's costing us all. Step two will doubtless take care of itself when the lights start going out later this decade. 

PS Hilarious contrast between the BBC/C4 coverage of the current US defence leak and the Climategate leak. Whereas the leaker/hacker responsible for the Climategate leak was branded a sneaky criminal - or possibly Russian black ops - the leakers of the defence material have been presented as courageous heroes. Yesterday's Newsnight featured Kirstie positively drooling over the Wikileaks man, even asking if he was Jason Bourne.

MONDAY, JULY 26, 2010

How We All Ended Up On Welfare

Something must be done, and it was... the trouble is it's since been overdone

Once upon a time, long long ago, welfare was paid to the poor. And only to the poor.

But these days, welfare is paid to pretty well everybody. Even Jonathan Ross and those plutocrats on the Wharf get welfare. It doesn't matter how rich you are, there'll usually be some way of getting your snout into the welfare trough. From Child Benefit, to free bus passes, to the winter fuel allowance, the opportunities are there. If you want some, you can get some.

We've been reminded of this by reaction to last week's TPA report on welfare reform (see below). It's been pointed out that the TPA's proposal to redefine the poverty line - lowering it from 60% of median income to 50% - would remove welfare support from families who, while not poor, would lose a substantial chunk of their current welfare income.

Now as it happens, the Office for National Statistics has recently published itslatest annual report on the effect of taxes and benefits on household incomes. It covers 2008-09 and it shows us just how much welfare is received by households at different income levels. 

Let's leave pensioner households out of it (as we did in the TPA report), and focus on non-retired households. The ONS figures show that households on around median incomes (gross incomes of £32-35k pa) on average get well over £3,000 pa in cash benefits. A 10% top-up to their own not insubstantial incomes from welfare benefits, including Child Benefit and Brown's various tax credits. 

And here's how it looks across the entire income distribution (non-retired households only - excluding pensioner households):

So as we can see, under our current welfare system, even the richest 10% of households, with average gross incomes in excess of £100 grand pa, still get welfare - in their case averaging £1300 pa.

On what possible basis can that make sense?

The alarming and unpalatable truth is that after 60 years of the welfare state, pretty well all of us have ended up on welfare.

It's no way to run a 21st century economy, already burdened with a massive fiscal crisis, and facing a competitive onslaught from the East. 

In the famous words of our most famous playboy prince during a previous economic crisis, something must be done.

*****

Much reaction to last week's post on redefining the poverty line. Mainly supportive.

Picking up from the TPA report on welfare reform, we argued that the official definition of the poverty line should be cut from 60% of median income to 50%. We calculate that would save £20-30bn pa in welfare costs currently spent on the able-bodied working age poor, money that could be better spent making work pay (ie reducing the scandalously high effective marginal tax rates faced by the working poor). As far as we can see, that is the only realistic and affordable option for reforming the current iniquitous system that traps so many millions on welfare. 

Of course, the left will never buy it, and Labour blogger Hopi Sen spells out why:

"If you’re the Taxpayers’ Alliance, the way to cut the gordian knot of Welfare reform without spending any money seems to be to redfine poverty to a much lower level, reduce support for those a little above that level, and abandon pretty much all support for those on medium-low incomes.

In other words, if you’re near the current definition of poverty, struggling to get by, and find tax credits and child benefit and income support useful- Watch out. They’re coming to get you."

We've posted a full response to Sen on the TPA site, including the fact that he and the left offer no affordable alternative for reforming our current shambolic and dysfunctional system. But there's one point that it's worth amplifying here. 

As things stand, the official poverty line is benchmarked off a median income figure that includes existing welfare benefits. And Sen reckons it ought to stay that way. 

We reckon that's wrong. The reason is that it's a circular calculation. It means that both median income and the poverty line are artificially inflated by the welfare system itself. The system ends up chasing its own tail towards ever higher costs and an ever worse welfare trap. 

This highlights a key difference between us and the left on welfare. Whereas the left see welfare as a tool for compressing income relativities throughout the income range, we believe that for able-bodied adults of working age, welfare payments should, in principle, be confined to a safety net, designed to relieve absolute poverty among those towards the bottom. 

Paying income support to those who are at or around median incomes means paying them with one hand and taxing it back with the other. Which is not only administratively expensive and wasteful (we have previously estimated the cost of this so-called fiscal churn at at £5-6bn pa), but it is also certain to distort the way people choose to work, and to spend their own earnings. 

The dispute over the definition of poverty goes back half a century. That's when the left dreamed up their definition of poverty as a relative concept. They have since argued that welfare should focus on relative income distribution, and they have prevailed, which is how we ended up with the current official definition of the poverty line at 60% of median income. 

But that's not what most of us actually think of as poverty, which tends to focus on not having enough food, or a roof over your head, etc. That is the traditional definition of poverty, known as absolute poverty, and in principle, it is the approach we favour. Which is why in Appendix C of our paper we recommend that the Department for Work and Pensions conduct some proper analysis in this area and publish a measure of absolute poverty, comparable to the one produced by the US Census Bureau. 

Meanwhile, Labour have left us with a gigantic unaffordable mess, in which welfare is paid not just to the genuinely poor, but also middle income earners, and in some cases all the way up the income distribution - as noted above.

*****

What exactly is a negative income tax?

As you will recall, the TPA welfare reform calls for the scrapping of a slew of existing benefits and their replacement with a single negative income tax (NIT). But no less a person than the Devil himself has since asked us to explain exactly what the devil a NIT actually is. So here goes. 

The NIT is an idea atrributed by many to the late great Milt. It's easiest to think of it as a particular kind of means tested welfare benefit. All households are guaranteed a certain minimum income paid to them by the government, whether or not they have any income of their own. But instead of being paid through a separate benefits agency, this one is paid by the tax authority. So it ought to be a lot cheaper to administer. And it ought to make it easy for poor households to increase their own earnings without constantly worrying about how that might impact their benefit entitlements and their net incomes.

Each household is assessed for eligibility on its gross income, much as current income taxes are assessed. Households with no other income get paid the maximum possible amount for their type and size of household (eg more children generally means more cash). And that is paid by the tax authority as a negative income tax - ie instead of money being deducted from their pay packet, a payment is made directly to the family.

Households with some income of their own get scaled back from the maximum, according to an agreed and explicit "taper rate". And depending on the taper rate, at some level of own income, households lose all entitlement to a negative income tax payment.

Now, Milt's original proposal envisaged that the taper rate would be the same as the standard rate of income tax. So as a household's own income increased, their negative income tax receipt would run smoothly into an income tax payment - they'd hardly notice the join, and the whole scheme would be very cheap to administer. In fact, in its simplest form, the NIT idea has often been combined with a flat tax - ie a single rate of income tax no matter how high your income. As in this neat chart:

Unfortunately, given the existing level of welfare benefits a NIT will have to replace, such simplicity is not currently an affordable option. Which is why the TPA proposal envisages a taper rate for the NIT at 55%, rather than the 31% standard rate of income tax plus National Insurance.

OK, is that any clearer? If not, there's more here.