Category: Politics and economics

£3.7 billion cuts in benefits

The Autumn Statement is out. The figures for public expenditure on benefits are liable to confuse, because there are so many totals drifting around: some refer only to DWP benefits, some include Child Benefit and Tax Credits managed by HMRC, some include the Departmental management budget (which isn’t paid to claimants, of course), and some do not. As a general proposition, if Tax Credits and Child Benefit are included, about half the payments go to working age claimants; if they are not included, only a third does. Table 2.5 puts working age benefits at 3.7% of GDP, payments to pensioners at 6.3% and Tax Credits at 1.8%.

There had been reports that the Chancellor wanted to cut £10 billion from benefits, focused entirely on claimants of working age. Among the threatened changes were cuts to families with three children, young people under 25 and Housing Benefit – but that would still not have come to £10 billion. The announcement that has actually been made is for £3.7 billion cuts in 2015-16 (para 1.152). The biggest cut takes the form of a reduced annual uprating, set below the rate of inflation, and the rates used to set Housing Benefit and Tax Credits. There will be some further reduction of basic income benefits in the longer term, because the plan is to do the same with the Universal Credit rates.

Some of the projected savings, however, seem implausible. The government thinks it can save £520 billion from an estimated £2.2 billion (page 57, table lines 28 and 29) by requiring evidence of high child care costs, getting evidence that children over 16 are still at school, and recovering overpayments from the legacy of Tax Credits (para 1.169). Unless the purpose of these rules is to deter people from claiming at all, entitled or not, that final figure looks like another castle in the air.

The Curse of Wikipedia

I’ve not finished reading the Leveson report yet – Lord Justice Leveson is not a man to use one word when fifteen will do, and I have two volumes still to go. I was amused to read that the report has been led astray by Wikipedia, treating it as a reliable source without any attribution. This is the sort of thing I tell my students off about. The names of the founders of the Independent had been tampered with by someone from California, and Leveson used the adulterated list.

I contributed to Wikipedia myself a few years ago, adding to articles on the welfare state, social security, the Poor Law and such like, but I haven’t touched it for some time. The sticking point was the article on “Socialism”, which took it for granted that socialism was equivalent to Marxism. I put in five alternative definitions of socialism, with appropriate academic references; it was all deleted. (There is a short version of this on my website.) So I put it up again, puzzled, and it was deleted again, by people who were not prepared to accept that anything apart from their belief should be included. Then I put up a flag to say “this article is disputed”, and that was taken down too. There was no effective system for moderation, and I gave up. Wikipedia’s article on socialism is still desperately misleading. I have no idea whether this happens very widely, but it says something about ‘the wisdom of crowds’ – and the reliability of Wikipedia as a source.

For what it’s worth, the alternative definitions of the ‘welfare state’ have been taken down, too. US contributors find it difficult to understand that in much of Europe, the “welfare state” is not simply run by government.

Bad news for the Work Programme

Despite a bullish report from the DWP, the Work Programme appears to be failing. This is not a surprise. The Office for Government Commerce had expressed doubts about the DWP’s ability to manage this kind of contract effectively. Comments from the National Audit Office in relation to Pathways to Work suggested that private contractors had not appreciated the difficulty of dealing with the client group, that the effect of out-sourcing and sub-contracting had been to reduce accountability and control, and that Jobcentre Plus actually did the job better. (Hardly anyone, in the DWP’s outcome figures, is coming off ESA and into work.) Jonathan Portes was suggesting six months ago that the Work Programme was appearing to slow down the rate at which people got back to work. That impression seems to be supported by the headline figures, which show that the Work Programme produced worse outcomes than doing nothing.

The failure of the programme rests, not just in its management, but in its basic concept. Improving employability does not, and can not, make jobs; it can only improve the relative position of participants in competition with others. The main way through the problem is to stimulate the demand – by injecting resources into the economy, by commissioning work, or by creating jobs. The government has set its face against all three approaches.

The World Bank on jobs

The new World Development Report 2013 is available, with a focus on jobs. One of the straplines on the website, also on p 57 of the report, claims that

“Jobs are created by the private sector; public action sets the stage”.

Sometimes the balder claims are qualified, but similar sentiments keep cropping up in the course of the report:

“it is not the role of governments to create jobs … as a general rule it is the private sector that creates jobs. The role of government is to ensure that the conditions are in place for strong private-sector-led growth …” (pp 21-2)

This is ideological claptrap. Do we think that police, teachers, firefighters, roadbuilders or health workers don’t have real jobs?

“The private sector is the key engine of job creation, accounting for 90 percent of all jobs in the developing world.” (p xiii)

Doesn’t that imply that the public sector in developing countries is small by comparison with countries that are economically more successful? And where would the private sector be without the demand for infrastructure generated by governments?

There’s yet more doctrinaire stuff:

  • “Any taxes create distortions” (p.27)
  • “The solution to all these demographic and technological challenges rests with the private sector.” (p.58)
  • “Different labor outcomes among persons with disabilities stem from productivity differentials, from disincentives created by the system of social benefits …” (p.84)
  • “policies should aim at removing the market imperfections and institutional failures preventing the private sector from creating more of those jobs.” (p 257)

This tone isn’t maintained consistently all the way through the report, but it’s troubling to see that the Bank still gives so much prominence to the discredited economic purism that led to Structural Adjustment. I thought, or hoped, that we had moved on from there.

Can Europe act on poverty?

The European Commission has proposed the development of a new fund to give European aid to the ‘most deprived’, mainly homeless people and children in poverty. The money would be directed through Member States or ‘partner organisations’ – that is, through NGOs.

I’ve written in the past about the Commission’s attempts to establish competence by developing programmes that create a precedent (see The principle of subsidiarity and the social policy of the European Community, Journal of European Social Policy, 1991 1(1), pp 3-14; Social policy in a federal Europe, Social Policy and Administration 1996 30(4) 293-304). When the Lingua programme allowed the EU to fund language teaching in schools, the responsible commissioner claimed: “we now have competence in education”. It’s been a long time since the EU did much to pursue that agenda; but if this fund is approved, the EU will have competence in poverty relief.

Scotland and the EU

First Minister Alex Salmond has been accused of lying in a TV interview, when he said that yes, the government had sought the advice of legal officers about Scotland’s position in the EU in relation to debates and documents. In the Parliament, Salmond defended himself with chapter and verse about which documents he meant. I have just checked them out for myself, and I think Salmond has the right of it. Two of the three papers he cites, Choosing Scotland’s Future (2007, p 24) and Your Scotland your referendum (2012, p4) do make statements about Scotland’s position in Europe and will have passed the law officers, even if they are somewhat thinner than a proper legal consideration might offer. The main problem the Scottish government might have in giving a fuller account would not, I suspect, be the question of the confidentiality of advice; it would be that obtaining such advice would be a breach of the Scotland Act, which deliberately and explicitly prevents the government from contemplating the breakup of the United Kingdom. Following that line of enquiry has only been made legally possible following the Edinburgh agreement.

The more important question is where an independent Scotland would stand in relation to the EU. A helpful article last month by Alan Trench in the Guardian explains that while Scotland’s position is uncertain, it is debatable whether the EU could deny a Scottish application without breaking its own rules. Europe has a federal structure, in which every citizen is a citizen of Europe as well as of the member state; denying access to Scotland would deny citizenship to EU citizens.

Further note, 1st November: The press have caught up with this argument this morning, with an honorary member of the Commission confirming that EU citizenship cannot be withdrawn and that terms of entry would be negoatiated on that basis between a referendum result and independence.

The Liberals and benefit cuts

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.

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.

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?

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.