How much should income be cut by?

The government claims to be concerned about ‘inflation-busting’ settlements.  Public sector wages have generally ‘risen’ by 2.7%; private sector wages by 6.9%.  Many benefits (not all) have ‘risen’ in line with inflation.

I have put ‘risen’ in inverted commas because incomes have not risen at all.  As a simple matter of maths, a rise ‘in line with’ inflation is not an increase in income; it is a reduction.

Initial income 100
Inflation 10.7%
Value of income after inflation 89.30
Increase of:
2.7% (recent public sector awards) 91.71
6.9% (recent private sector awards) 95.46
7% (NHS in Scotland) 95.55
10.7% (‘in line with’ inflation)
98.56
12.32% (break even) 100
19% (the claim made by the RCN) 106.27

Increasing benefits ‘in line with inflation’ implies a cut in real income. It would take an increase of 12.32% before that did not happen.  And the supposedly unaffordable claim by the RCN for 19% is actually a request for an increase in real terms of 6.27%.  Since 2010, the real wages of nurses have fallen by 8%.  The RCN claim would not restore that level of income.

A case for higher taxes

Professor Richard Murphy argued yesterday in a tweet that the government should be aiming to cut taxes in a recession.  He duplicated that tweet in his  blog, but the core point he makes is this:

When facing a recession a government should
– cut interest rates
– cut taxes
– increase its spending.

In a recession, a government needs to stimulate the economy, and that can be done by injecting resources.  I’d question, however, whether either of the first two would actually stimulate the economy as things stand.  Interest rates have been close to zero for some time, and while lowering them further (perhaps into negative rates) would have some effect on economic activity – primarily, dis-saving, converting holdings from money to goods (such as houses) and diverting money to activities or locations which offer higher interest rates  elsewhere – most of those effects have already been realised. Cutting taxes – the policy of the catastrophically inept Truss government – would primarily release money to those who pay more in taxes, and the resources released will go in large part to rentiers.

The simple case for higher spending is made by Keynes:

Pyramid building, earthquakes, even wars may serve to increase wealth …. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

Higher spending doesn’t have to be financed point for point, and it doesn’t have to be financed by tax – there are lots of other options.  However, it can be inflationary if it means that ‘too much money is chasing too few goods’.

A large tranche of what we call ‘public spending’, however, is something different.  Benefits and pensions are transfer payments, a point I’ve made in previous blogs.   Government doesn’t spend the money it allocates to pensioners; it passes them the money so that they can spend it.  Taxation to fund cash transfers doesn’t withdraw money from the economy.  When transfer payments are directly financed – that is, being transferred from someone else – they are presumptively neutral in economic terms. This is not inflationary, because the amount of money in the economy remains the same after the transfer.  Any differences will depend on whether the recipients spend money differently from those who pay. That will be true to some degree, but it’s marginal: people on lower incomes spend proportionately more on food and energy, and save less.

Taxation is not the only way to finance public spending, but there are particular advantages in funding cash benefits this way.  If transfer payments are funded by ‘helicopter money’ – like the extra £20 pw for Universal Credit during the pandemic – they’re politically vulnerable and implicitly temporary.  Transfer payments financed by taxation, or by an equivalent mechanism such as national insurance, imply a more equal distribution of income than the same payments financed indirectly through creating credit.  They will fund markets that function better for people on lower incomes. They do it without risking inflation. And they offer a better prospect of growth. The IMF have argued that a 1% increase in the income share of the lowest paid 20% produces growth of 0.38%, four and a half times the growth that comes from increasing the income share of the top 20%.

 

The uses of theory in social policy

States and welfare states is my twenty-third book. Its main arguments are that:

  • All states provide some welfare; all leave gaps.
  • The main methods used in comparative social policy don’t tell us what’s happening.
  • The ‘welfare state’ refers to guiding principles, not specific actions.

This leads to some distinctive insights about the subject matter:

  •  An examination of the sources of legitimacy in modern government, founded in a distinctive understanding of sovereignty and governance;
  •  An explanation for the burgeoning of social policy initiatives in many states which in the past would not have engaged with it; and
  • A new model of the development of greater universality, moving from particularism to solidarity and solidarity to welfare states.

Forty years ago, while being interviewed for a post in a relatively prestigious university, I said that I wanted to work on the theory of social policy. I was told that that didn’t exist as a subject.  This is my ninth book set in that non-existent field, and I’m not convinced that people out there are any more persuaded of  the relevance of theory now then they were then. One reviewer complained of the ‘high level of abstraction’; two others said it was ‘connected to policy’ and ‘clearly (and always) topical’.  Two reviewers thought it was original; one that ‘it will not say anything new to academics in the field’; and one more commented that, rather than being distinctively original, ‘it does draw together a variety of ideas … ‘ Yes, that’s what original theory does. Theory is used to clarify, to structure and to identify the relationships between ideas and evidence. The originality comes from the distinctive synthesis and critical evaluation of material, not from new facts.

 

Retrenchment after the pandemic

An outstanding report by Isabel Ortiz and Matthew Cummins explains what’s been happening to welfare around the world as the pandemic recedes.  A disturbingly large number of countries – 143, covering 85% of the world’s population – have been introducing ‘austerity’ measures, aiming to scale back the role of the state.  More than 50 countries are planning to cut services back to less than they were before the pandemic.

For many of these countries, the policies which seem most vulnerable have been introduced relatively recently – notably expenditure on health care and cash benefits.  A commitment to health care seems to have been maintained in most, while changes to cash benefits or ‘social protection’ have tended to focus on ‘targeting’ (or limiting entitlement) rather than the wholesale abandonment of such policies.  It’s worth considering, too, that in the past the legacy of managing major crises – famously, through the impact of war – has been to increase, not to reduce, expectations and the role of the state.  On that basis, I don’t believe this retrenchment represents a long-term trend – but it is a major setback.

The Natcen report on disability benefits is disappointing

The DWP declined to publish the Natcen report on The uses of health and disability benefits.  It’s now been released to the Work and Pensions Committee, and is available here.  The report is presented as a qualitative study; wisely, the authors have avoided numbers.  However, the form of the report is disappointing, and I cannot suppose that it is an adequate reflection of the work that was done.

Qualitative social research works, or needs to work, on two guiding principles.  The first is that what people tell you is evidence.  That is often derided by people in love with quants, but it is fundamental to the nature of evidence.  Courts of law judge evidence by looking for corroboration – probabilities and statistics aren’t enough.  As a broad proposition, evidence is corroborated when two or three witnesses  say the same things, confirming what the others have said.  This report doesn’t do that. It consists very largely of the researchers’ summaries of what people told them.  In a 79-page report, there are 15 ‘case illustrations’, and only 27 direct quotations from respondents.  That means, simply put, that while there are plenty of judgments, there is hardly any evidence given for those judgments.

The second principle is voice: what people tell you, and the way they tell it, matter.  Direct quotations, right or wrong, have a purpose and a moral authority.  Researchers have an ethical duty to report what people are telling them.  The way the respondents express themselves is fundamental to any adequate qualitative social research.

It may well be that this format was demanded by the DWP.  (I’ve been asked by other commissioners, in the past, to dump direct quotations and to just say what I think instead – and I’ve refused to do so.)  It’s very likely that the researchers intend to provide the evidence for this report, and to reflect the voice of the respondents,  in a separate publication.  However, they will need the DWP’s permission for this.  Their report, as it stands, does not do what it needed to do.

The TUC proposes a ‘replacement’ for Universal Credit

It’s been obvious for many years that Universal Credit is failing. On this blog, I’ve considered a long series of critical reports.  When I first made criticisms of the benefit – that was done on the same day that Iain Duncan Smith announced the measure – my concerns were about the concept and its practicability.  Then the criticisms moved on to its implementation, and the impact of further complexity to make up for the deficiencies.  Nowadays, the areas of concern are more likely to be focused on the abundant empirical evidence of failure – for a benefit that has still not fully been rolled out.

The TUC has realised that Universal Credit is a ‘disaster‘, and a new report makes proposals for its ‘replacement’.  The detailed report covers six main areas:

  • making work pay
  • increasing the level of benefit
  • changing rules about conditionality and the initial waiting period
  • changing the process
  • altering the assessment periods, and
  • changing rules for payment.

These are all ways to improve the benefit.  I don’t think this goes anything like far enough.  The fundamental problems will remain:  a tapered benefit, a central focus on getting people to work  when most of its claimants are either already in work or aren’t going to be in the labour market, and a reliance on information that can’t be supplied or managed. The TUC’s proposals are well meant, but they leave all of those elements in place.

 

 

 

What kind of support can be offered to people on low incomes?

Many people in the UK are facing destitution; at least 2.4 million people are there already. One of the complaints we hear most about proposals to cope with current threats to household income is that the proposals are not adequately targeted.   What that usually means is that some people on higher incomes will benefit.   The call goes up, repeatedly, for any benefits to be confined to people on low incomes.

It’s not easily done. Introducing a new means test would be complex, hard to roll out and liable not to reach large numbers of the intended population. There are ways forward, however.  The mechanism used for Cold Weather Payment, for example, gets the benefit to recipients of Pension Credit and to a range of recepients of Universal Credit, including those with children under 5 or people with a range of disabilities – there doesn’t have to be cold weather to call that mechanism into play.

If the aim of benefits is to redistribute income in general terms, there’s an  argument for doing something like this.  That’s true because overall, the effect of making payments on this basis is to improve the average income of people in the lowest parts of the income distribution, generally at the expense of those on higher incomes.  What it can’t do, however, is to protect the full range of people who stand in need of protection.  More than a third of all pensioners who should get Pension Credit don’t.  Official figures claim that Universal Credit goes to 80% of those entitled, but that is highly implausible  – Jobseekers’ Allowance had a takeup of less than 60% and Universal Credit has subjected hundreds of thousands of people to sanctions, exclusions and delays.  And that, of course, only takes account of the people who are supposed to get the benefit.  More people are on very low incomes, but not entitled because they have some savings, because they have theoretical or imputed income attributed to them, or because they fail to meet other conditions such as availability for work.

Any process which calls for a selection to be made has to be subject to some kind of test, and any test is likely to exclude the people who we are supposed to be helping.  The situation has been made worse, however, by the progressive limitations on the scope of benefits that have been imposed by successive governments.  We might have been able to argue, forty years ago, that we had a safety net – an effective minimum income, even if there were some gaps.  We no longer have the same.

That, then, leaves the outstanding question: what can we do to help the people who are most at risk now?  Coming back to the figures on destitution, we know there are three factors which come up repeatedly about destitute people.  They are people with complex needs, migrants, and they are likely to be single.  Any scheme which does not cover those three contingencies is not going to protect others from becoming destitute; and we know that this coverage is not on offer within the scope of the existing benefits system.

There are two main options.  One is to address the specific issues which are causing the current crisis – in particular, the costs of fuel, food and housing.   Labour has proposed a temporary cap on energy prices.  A cap on energy costs, certain foods or rents would would imply direct interference with the market.  We have done all of these in the past – the control of milk, eggs and meat in the 1950s and 60s, the use of rent control, and the current price cap on energy – so we can say that this is feasible.    This would, however, require a fundamental change in the way that governments manage the economy, and indeed on how they think.

The alternative is to think about ways that people can manage in a market-based economy, increasing their command over resources overall.  That can be done both by removing limitations which work particularly against people on low incomes (such as the pernicious effect of laws on debt and debt recovery, or the price discrimination against prepayment meters) and by finding alternative ways for essential costs to be met – such as child care, general needs housing and travel passes.  What wouldn’t work, in this context, is simply giving people more money to pass to the energy companies. Giving people generic money will not cope with the pressures that specific commodities are creating – it will just put up the prices of those commodities.

Additional material, 25th August

The Resolution Foundation has just published a careful and considered approach to targeting.  They recognise that supplementing people on means-tested benefits would fail to reach 40% of everyone in the lowest income quintile – that is, the bottom fifth.  Their suggestion is for a social tariff, more broadly based than current means-tested benefits, covering benefits, pensioners and low earners; but that still suffers from the outstanding problem that it is not possible to target people on lower incomes without introducing ‘a new means-tested benefit outside the benefit system’.   Coverage of people with complex needs could be improved by extending this to cover disabilitiy benefits, and coverage for migrants by removing restrictions on claiming after entry to the country, but there would still be gaps.

A Charter for Tax Cuts

The contest for the leadership of the Conservative Party has been focusing on the issue of tax cuts.  The case for these cuts has been made by economist Julian Jessop, in a pamphlet for Conservative Way Forward.   (The format of the online version makes it exceedingly difficult to read, but the author has sent me a clean copy I can work from, for which thanks are due.)

The first step is to consider whether or not we need to take measures, at this point, to stimulate the economy through an injection of resources.  I was uncertain about this a year ago.  We’ve moved on from then. We were facing a clear threat of an economic recession at that time, which argues for some kind of stimulus, but now we also have the immediate prospect of rampant inflation.  Injecting money into the economy would fuel inflation – simply put, too much money chasing too few goods. This paper talks about a ‘dash for growth’.  That would be risky, and previous experience argues against it.  The ‘Barber Boom’ (1971-73) destabilised the economy and left us in a parlous position when further problems arose.  The Conservative government of the time had believed that the obstacles to sudden growth were self-imposed, and that if they rushed at the barriers hard enough, the economy would break through those barriers. The conventional economic analysis of the time suggested, on the contrary, that the effect would lead to ‘overheating’ – generating a demand that couldn’t be satisfied, fuelling inflation and forcing money abroad because the domestic economy couldn’t meet the demand.  That is exactly what happened.  By the end of 1973, we had the three-day week; and then there were the deflationary terms dictated by the IMF, which made a bad situation worse.  The problems of the 1970s weren’t caused by the unions, who only responded to the situation, or even by the oil crisis, which only took hold when we we already facing a slump.  They were created by economic mismanagement. There’s every reason to think that pumping money into the economy will have the same effects as it did in the 1970s: fuelling inflation and diverting money abroad.

The second part is the question of what tax cuts will do.  The idea that a modest tax cut of one or two pence from income tax will shield people from rising prices in any meaningful sense is, frankly, preposterous.  There’s a good argument for reforming much that goes on in our tax system – it’s too complex, and there are too many anomalies, and in so far as it creates perverse incentives, the most destructive is the incentive to load companies with debt (because that is tax-deductible) rather than building  viable structures for the long term.  Fiddling with corporation tax or VAT won’t address these problems; both measures are indiscriminate.

Third, there’s the question of values.  The demand for tax cuts is linked here with a set of familiar claims:  that the frontiers of the state should be rolled back, that people should keep more of their ‘own money’,  and that the ‘formula for success’ is (in a short appreciation by Lord Frost) ‘free markets, low taxes and personal freedom’.   The idea that people’s income before tax is ‘their own money’ is spurious (salaries and wages are largely  based on social conventions, including tax rates) and there is no evidence to support the contention that low taxes promote more successful economies.

There are points in the argument which I’d agree with.  The tax system is too complex, there’s been far too much of an obsession with debt, and we should be looking for ways to support effective demand.  However, if we are talking about government using national resources differently, tax cuts are just about the worst possible choice -ill-directed and primarily beneficial only to those who don’t need it.  If we really wanted to inject money into the economy, we should do it at the other end of the income distribution. Let’s get the money to people who can’t afford food or heat.

Further thoughts, 31st July

Since this initial blog, the arguments have been gathering pace.  Some of them seem to me, frankly, half-witted.  One really stupid argument is based on the ‘Laffer Curve’, which claims to demonstrate (as a matter of theory, not practice) that there are circumstances in which lowering the rate of tax will increase the amount of revenue a government receives from tax.  There are two problems with that.  One is saying that there are circumstances where this could happen is not the same as saying that it happens in every case: clearly, it doesn’t.  The other relates specifically to its application to Corporation Tax.  It seems abundantly clear that offering people the option to pay one kind of tax rather than another will lead to those people, especially if they have a competent tax advisor, to choose to pay the lower rate of tax available to them.  That is done, of course, at the expense of revenue from the higher tax.  Corporation Tax is already set at a rate which is lower than the upper rates of income tax, and accordingly those who have a choice will put the money through the Corporation’s books rather than their personal income.  That is not evidence of getting higher revenue – the opposite is the case.

The other daft argument is that tax cuts don’t alter the money supply, and so aren’t inflationary.  That is daft partly because tax cuts (as opposed to cancelling proposed changes in taxation) clearly would inject money into the economy – unless they are paid for by reduced government spending, which would be disastrous for millions of people – and partly because it’s a misunderstanding of inflation.  Inflation depends not just on how much money is going round, but on what that money can buy – it’s a matter of balance.  In current conditions of high inflation, which are already leading to higher production costs and higher wage demands, that balance is at best precarious.  I see no good reason for the current optimism that inflation will fall of its own accord.

The way out of poverty is not to be found ‘holistically’

I attended a session the other day that was intended to discuss the Scottish Goverment’s current plans for tackling child poverty.  A word that was used repeatedly in that document, and so in the presentations, jarred with me.  The word is ‘holistic’.  The plan promises a ‘holistic’   response at many points, and in a range of different contexts – such as employability, support, income generation.  What could be wrong with that?

To my mind, there are three great flaws in this approach.   The first is the implicit assumption, in much of this, that the appropriate way to respond to poverty is ‘person-centred’, personal or individualised.  Here are some examples:

We will invest [in] Whole Family Wellbeing Funding … This will help transform services that support families to ensure that all families can access preventative,
holistic support which is wrapped around their needs, and provided when they need it and for as long as they need it.

Through direct efforts to get more cash in the
pockets of families now, alongside a genuinely holistic, person-centred package of family support, we can help to ensure families receive the right support at the right time, for as long as they need it, creating the  conditions for families to navigate their way out of poverty.

It takes all of us, across Scotland, working together – united in focus  and purpose – to deliver the change to  how public services are delivered, moving to a person-centred holistic approach to supporting families.

In the published document, there are more than thirty similar phrases to choose from.  It should be recognised, however, that the circumstances that lead people to be in poverty are not, for the most part, specific to the individual or of the family.  The central purpose of the strategy is not to deal with the individual circumstances of poor families, but to reduce overall the numbers of people who are falling into poverty.   To do that, the focus has to be, not just on those who are poor currently, but on the throughput – the very large numbers of people, actually most of the population, who will pass through poverty for an extended period.  That calls for a structural perspective, not an individualised one.

There are strong hints in the figures where the problems are likely to be concentrated.  Why, for example, are most children of young mothers likely to be poor?  The answer has little to do with personal or individual factors.  It’s because the capacity of women to earn is critical to household income,  the children of young mothers  are far more likely to be young, and young children have to be looked after.  The situation calls for higher income for people with responsibility for children, and extensive, affordable  child care – ours is almost the most expensive in the OECD.

The second problem about the claim to be providing ‘holistic’ services is that it’s not true.   It doesn’t happen, anywhere, ever.  The reason why we have medical practices delivering health care, schools providing education and social security providing money is that these are all things that matter, that need to be done, and require specific routes and channels to be delivered.  We often hear the complaint that Scottish services are based in ‘silos’.  Of course they are. The doctor doesn’t teach your children to read, the social security officer doesn’t allocate houses  and the social worker is not there to take your appendix out. It’s true that specific services can be transformative, changing every part of a person’s life. Decent housing can turn someone’s life around in days, but that doesn’t happen because of an holistic assessment; it happens because housing is so important for people’s lives. The most effective strategies for  dealing with poverty have generally worked by focusing on one of the elements that lead people to be deprived – elements such as health care, education, income support or housing – and removing part of the burden from poor people.

The third issue is about policy. Targeting resources on  poor families has a clear value here and now, but it is not the only  way to deal with the problems.  We could do much more. To safeguard people now and in the future, we need to change the conditions which underlie the experience of poverty.  I have already given the  example of  child care; that needs to be done as a universal basic service, not a process targeted on poor families.  Let me take another: the case for free school meals.  That contributes to poverty reduction precisely because it is universal and basic.  Neither  child care support, nor free school meals, are ‘holistic’ policies. The same arguments extend to a wide range of services – energy, communications, transport.  Public services can make a major contribution in improving the command over resources of people on low incomes.