Nick Clegg has apparently said that he will oppose plans to cut benefits by a further £10 billion. “Who should tighten their belts first? I just start from a very simple principle that when we’re all having to make sacrifices … you ask people at the top and then you work down. You don’t ask people at the bottom and then work up.” He did previously agree, however, to £18 billion in cuts to benefit, at the same time as a reduction in the highest rate of income tax. That does suggest that Clegg’s ‘very simple principle’ is open to negotiation. The Guardian has reported that, according to Conservative sources, the further cuts are already agreed.
Author: Paul Spicker
Does social security spending protect the economy?
It was once received wisdom in economic theory that social security had a beneficial effect on the economy, because it increased at times when demand was deficient. This is from a book published in 1960, Richardson’s Economic and Financial Aspects of Social Security (I have it on my bookshelf):
“The two main benefits that fall in prosperity and rise in depression are unemployment insurance and public assistance payments. They put a brake on books and reduce the severity of depressions. … If social security benefits are paid, business will not decline as far as it otherwise would.”
I referred to this argument briefly in a recent interview, and a note from Adrian Sinfield has encouraged me to look at it a little further. A couple of days ago, the IMF conceded that it has got the multipliers wrong – the extent to which changes in government spending stimulate or depress the economy. (The issue is explained on the TUC’s Touchstone website.) The multipliers are probably between 0.9 and 1.7; they were formerly assumed to be 0.5-0.6. If government spending stimulates the economy, it needs to be increased during a depression; cuts lead to economic decline. The multipliers say how big the effects are. And the size of the error means IMF has been underestimating both the benefits of increased spending, and the harm to the economy caused by cuts.
Social security benefits are not, however, quite the same as public spending – treating them as if they were is one of the central confusions of current policy. Most are transfer payments, meaning that someone gets money which otherwise someone else would have had. Transfer payments should be assumed in the first place to be neutral; they stimulate the economy if the people who receive are more likely to spend it than the people who are paying. It’s likely that this condition will be met, because people on very low incomes can’t save, but the effect is not the same as either government spending financed in other ways, or as spending on infrastructure. Spending money on unemployment assistance makes a modest contribution to stabilisation; spending it on public works or job creation stimulates the economy far more.
A zero-sum game
I spent part of yesterday evening relaxing in front of the BBC Parliamentary Channel, listening to evidence given by DWP ministers to the Select Committee on 17th September. (This is, I know, a sad admission about my domestic life. I will try to get out more.) I was struck by the following statement by Lord Freud:
Glenda Jackson MP: We also had evidence that specific groups of disabled people will have a significantly lower income on Universal Credit than under the current system, even when they are not fit for work. What is the policy rationale behind this?
Lord Freud: It is just not true.
Glenda Jackson: Oh, good. Fill us in then.
Chair: When the severe disability premium goes, it is.
Lord Freud: We have maintained the amount of spending within the disabled community. We have adjusted how it is distributed.
Back to first principles. If overall spending stays at the same level, and there is any reallocation of resources at all, someone must be worse off. It is mathematically unavoidable. In this case, what I understand the government to have done is to prioritise disabled people who have prospects of work – that was the basis of Lord Freud’s spirited defence of the new system. That must mean that those who are not part of the labour market – and so, those with the most severe disabilities – get less.
Interview on Good Morning Scotland
With thanks to the BBC, I have permission to post a copy of my interview about universal benefits, broadcast on 29th September. It is obtainable as an MP3 file here.
The age of Housing Benefit claimants
The PM has suggested that benefits will be cut for Housing Benefit claimants under the age of 25, so it may be helpful to view the figures. This table is drawn from the August release on Housing Benefit and Council Tax Benefit, Table 9a.
| Age Group | Total | Family Type |
|||
| Single | Single with child |
Couple no children |
Couple with children |
||
| All ages | 5,031,740 | 2,779,170 | 1,183,860 | 498,850 | 569,870 |
| Under 25 | 383,650 | 164,810 | 171,690 | 14,550 | 32,610 |
| 25 – 34 | 894,200 | 268,820 | 427,020 | 23,870 | 174,490 |
| 35 – 44 | 964,350 | 349,180 | 385,230 | 23,000 | 206,940 |
| 45 – 49 | 470,420 | 251,080 | 121,250 | 23,590 | 74,500 |
| 50 – 54 | 383,770 | 250,670 | 52,150 | 37,400 | 43,560 |
| 55 – 59 | 312,690 | 229,400 | 16,540 | 46,930 | 19,820 |
| 60 – 64 | 333,700 | 250,030 | 5,680 | 68,290 | 9,710 |
| 65 + | 1,288,810 | 1,015,080 | 4,260 | 261,230 | 8,250 |
The under-25s represent 8 per cent of claimants. Single people under the age of 35 have already had their entitlement limited to a single room rate, so the entitlement of those under 25 is less than the average claimant. It follows that government cannot achieve the level of savings it is hoping for by focusing on this group alone.
George Osborne's questions
George Osborne asks:
For how can we justify the incomes of those out of work rising faster than the incomes of those in work?
How can we justify giving flats to young people who have never worked, when working people twice their age are still living with their parents because they can’t afford their first home?
How can we justify a system where people in work have to consider the full financial costs of having another child, whilst those who are out of work don’t?
The answer to the first question is that benefits are not linked to earnings. If they were, they would be much higher than they are currently. We have linked them to a very low income standard which is increased in line with inflation. That also means that a fall in wages does not lead to a fall in benefit rates.
We don’t actually ‘give’ flats to anyone; we do help some people to rent. The second question seems to mean to ask: ‘should we pay anything towards the rents of young people who have never worked?’ and the obvious answer to that question is, ‘yes’. The young person leaving care, the divorced or separated mother, or the young person seeking work all need somewhere to live. I do not personally think that Housing Benefit is a good system – I think it made far more sense to provide public housing, than to provide a complex, variable and unpredictable benefit which may or may not achieve its purpose – but if we have Housing Benefit, neither work record nor age is obviously the most relevant criterion for working out who should be supported and who should not be.
The third question seems to be: should people on benefits be insulated from the costs of having a child? I am puzzled by that question. Which part of the benefits system has that effect?
£10 billion cuts
The Chancellor has returned to announcements made earlier this year, that ‘welfare benefits’ have to be cut by £10 billion. People on benefits are expected to live on very little, and it is obvious that cuts would hurt some vulnerable people; the question is which. The IFS have suggested that cuts will take one of three forms: more means testing (which saves little – taxing benefits would be easier and fairer), cuts in the general level of benefits (which would save a great deal), and cuts in the range of people entitled – it’s been suggested that Housing Benefit will be suspended for those under 25.
If pensioners were to be completely exempt, that £10 billion would have to come out of about £52.6 billion going to people of working age. That’s a tall order, and it’s more likely that it will come from benefits that also cover pensioners. The PM has referred specifically to Housing Benefit, which currently costs nearly £23 billion. Housing Benefit works currently by assessing rent, income, and tapering the benefit to cover the difference.
Housing Benefit could be controlled more effectively if it were not so very responsive to individual differences. The last government introduced a Local Housing Allowance, and then paid people irrespective of what their rent actually was. That makes it possible in principle to set a payable figure independent of actual rents. Once the link is broken, it should be possible to set a desired level of expenditure and design the awards to fit that level of expenditure. But the first economy that the current government made in Housing Benefit was to look at this arrangement and say, ‘that means some people get more benefit than is merited by their actual rent’ – so they cut out that difference. In other words, they did the exact opposite of what they needed to do if they wanted to make the benefit manageable and bring it under control.
The cost of free services in Scotland
Robert Black, who recently retired as Auditor General in Scotland, argues in today’s Scotsman in favour of reviewing the cost of universal services – particularly free personal care and free transport. He acknowledges that the cost of free prescriptions and eye tests is less and that they have a preventive function. His position has been consistent; it was formerly argued in an Audit Scotland report, Scotland’s public finances.
Part of Bob’s case is unarguable – that public expenditure has an opportunity cost, and we should always be prepared to consider what the implications are of one decision relative to another. Some of the figures he uses, however, are contentious. The increase in prescription costs to £1 billion is a general cost of the NHS, not a specific cost of ‘free prescriptions’. They cost nearer to £80m, though I’ve been struggling to find an accurate figure – the rest of the £150m cited in costs is down to eye tests, which have been separately justified in terms of savings elsewhere. We’re told that the cost of the National Concessionary Travel Scheme (bus and travel passes) ‘could rise’ to £500m. Well, it could do anything in theory; much depends on inflation, much on future policy; but the budget for 2012-13, 2013-14 and 2014-15 has been set at a constant £194m. There are certainly pressures on the public finances, but it’s not clear that it’s the universal benefits currently in dispute that are driving them.
Youth unemployment
The trend is clear in much of Europe: young people are much more vulnerable to exclusion from the labour market than older people, and as economies have faltered the differential is growing. The response has often been interpreted in terms of ‘activation’, emphasising the preparation of unemployed people, and at a discussion I was at yesterday, considerable emphasis was put on employability. But employability is not the problem. The preparation of young people for the labour market is not worse than it was ten years ago; in many places it is better. The fundamental problem is that there are not enough jobs. No amount of preparation is going to change that.
Changing young people is not the way; we have to change the job market, or employers, or the economy. There are arguments for all of those, but I’d argue that the core problem rests in the job market. Entry-level jobs are limited; middle-grade opportunities, that make it possible for people to develop their experience and opportunities, are disappearing. This is not going to improve spontaneously; it implies that governments have to act to develop jobs for people to do. That implies some expense, but as Keynes argued, long ago, it is better to waste some money doing something useful than to waste a lot doing nothing.
Alternatives to DLA
Disability Living Allowance has been widely defended – I’ve signed a petition myself – but there are problems with it, and those problems seem set to continue into the reformed PIP.
The first problem is comprehensibility. The DWP’s evidence on claims suggests that people don’t understand the criteria, that they have a go at claiming benefits regardless, and that for many people it’s simply seen as an add-on to Incapacity Benefit/ESA.
The second problem is fairness. Older people don’t get DLA, and that means they don’t get the element in DLA for mobility. That’s been the case since the 1970s; older people were excluded, simply enough, because most people with mobility problems in the UK are elderly, and it would have cost a lot. However, older people who become entitled before the age of 65 can get an extension of DLA – which means that two people who have had strokes, one at age 63 and the other at age 67, will be treated differently – and the older person will not get the benefit if if that person’s condition is more serious.
The third problem is testing. Disabilities don’t always come in neat, predictable packages. People have good times and bad times. Their capacity varies. PIP is supposed to take fluctuating conditions into account, but frankly there’s little hope it can do it effectively. There is also the problem that people who make the best of things will be penalised for doing it. The most practical way of dealing with this is to have different types of qualifying condition. In the same way that we don’t test someone with no feet – that exception is made in the current system – we should be able to rely on a diagnosis of blindness, or paraplegia, or terminal illness, or brittle bones, and so on. The more conditions we can identify in these terms, the less the scope for testing. If that means that some people will qualify who might not otherwise get the benefit, so be it.
Attendance Allowance and DLA are not carefully designed benefits catering for identifiable needs; if they were, older people wouldn’t be cut out. They’re benefits for severe disability, and the tests and the components are a complex way of separating out people with more severe disabilities. Currently, nearly 5 million people get the benefits – 3 million on DLA, 1.9 million on AA. About a million DLA claimants are over working age, so it’s true that most claimants of both benefits are older, but when that’s set against the population of people with disabilities, older people are probably still under-represented. Let’s imagine that we want a benefit to cover five million people with varying degrees of disability. What should it look like? We should be aiming to create a system that is comprehensible, to respond globally to specific conditions, and to support people reliably into older age. The ideal is probably something like the ‘Disablement Allowance’ long advocated by the Disability Alliance. It wouldn’t look much like DLA, or PIP.