The most obvious problem with cutting the real value of benefits is that it will plunge people further into poverty. It’s not a great surprise that people on benefits and low wages might be going without food; that’s been a recurring problem since at least the early 1980s. It’s been estimated that there are two and a half million people in Britain who are destitute. There will be more. Expect growing malnutrition, and the short and long term harm to public health that goes with it.
A policy of impoverishing benefit recipients, however, will affect more people than just the recipients. There are the macroeconomic effects. Cutting the value of people’s benefits would cut the demand for goods and services, at a time when the economy is teetering on the edge of a slump. We know that people on lower incomes spend proportionately more of their income than richer people do – that much is self-evident, because people on lower incomes don’t have resources to save. Research for the IMF has calculated that benefits for poorer people produce more of a multiplier – a beneficial ripple outwards – than tax cuts for richer people. Conversely, withdrawing money from poor people will reduce demand more than withholding it from richer people.
Next, there are sectoral effects. Poor people spend proportionately more on food and energy than people on higher incomes do. Local shops and community businesses depend on their customer base; if that base withers away, so do the businesses that serve them.
Now to labour markets. Most benefits, by quite a long way, are not concerned with whether or not people are part of the labour market: pensions, child benefits and disability benefits account for three quarters of the cost of benefits, and other benefits, notably Universal Credit, extend to people who are working as well as those who don’t. The mean-minded reluctance to support people on benefits is often justified in terms of the ‘incentive’ to work. As benefits for unemployed people currently stand at something like 15% of the average wage, one might have thought that there was every incentive to work for pay. But there’s more going on here. Many years ago, I heard a senior executive from the Danish social security system explain that they didn’t want to make too little provision, because if people got used to living on very low income that would undermine their incentives to work. I dismissed that argument at the time – the evidence didn’t seem to show much of an incentive or disincentive effect in either their system or in ours. But the speaker had a point. If we want people to engage in a high-wage economy, the last thing we should be asking those people to do is to survive on a pittance and take any low-skilled job that comes up. Forget the gibberish about preparing CVs: we should be training, getting people into education and funding internships. We have to put more money into the process, not less.
Finally, microeconomics. One of the central arguments that’s made by free-market liberals is that markets need to be able to operate. Indeed they do, but markets have to be fed. When people get cash benefits, those benefits are spent in the market. When incomes are very, very low, people have less ability to participate in markets, and market providers have less reason to engage with them. Lower incomes mean more uncertainty for businesses and for poor people, more debt, and more debt defaults. This is the opposite of anything a free-marketeer should want.