Unsustainable welfare spending?

Writing, however implausibly, in the Guardian, George Osborne appeals to Labour MPs to support his welfare reform, and offers up some statistics as evidence.

We have to control the costs of a welfare system that has become unsustainable and risks crowding out other areas of government spending. In 1980, working-age welfare accounted for 8% of all public spending, but by 2010 it had risen to nearly 13%. While this country has just 1% of the world’s population and produces 4% of its wealth, it accounts for 7% of global welfare spending.

I’ve answered the third of these points before.  The UK’s public spending on social protection is at most around the average for the OECD, and spending on cash benefits is below average – 10.5% of GDP by comparison with the OECD’s 12.4%.

The second point is misleading – it compares the proportion of public spending rather than the proportion of national income.  For example, the proportion of public spending on housing has fallen, to be replaced by Housing Benefit – so one figure goes down while another goes up.  This is hardly ‘crowding out’ expenditure – it’s a deliberate shift of priorities from direct provision to providing cash .  It’s more pertinent to ask how much is being spent on benefits for people of working age.   In 1980-81 it was 3.7% of GDP, and by 2010-11 it was 5.7%.  That’s certainly an increase, but the comparison is somewhat  selective.  If Osborne had looked at figures for 1984, 1985 or 1986 he’d have started at 4.9% instead of 3.7%, and the increase to 5.7% doesn’t look quite so great.

The main argument Osborne makes is that welfare has become ‘unsustainable’.  That seems to me to suggest that it’s become much more burdensome than it used to be.  Welfare spending on people of working age in 1992-96 was 5.2-5.4% of GDP; it hit 5.7% during the slump after 2008, but it was below 5% for three years before that.   There has been a marginal increase, then, but this doesn’t look much like a budget that’s run wild.    The benefits do cost more during a slump – but that’s what they’re supposed to do.


A living wage?

In yesterday’s Budget, Chancellor George Osborne announced a new ‘living wage’. I’ve read several commentaries today that are highly critical of this initiative, most particularly a note from John Veit Wilson who sees it as ‘hijacking’ a different concept.  [I invited John to post his comment on my blog, and it is now the entry next to this one.]

I think the initiative is worth defending. While I regret the idea that people under 25 need less to live on than people over 25, the proposal has three very strong things to be said in its favour:

  1. Although the new levels are being introduced only in stages, it offers an immediate increase of more than 10% in the minimum wage for those over 25.
  2. The proposed level of the new minimum, by the time it is fully implemented, will be higher than the current recommendations for a living wage (£7.85 per hour), except in London.
  3. Setting the proposed level at 60% of the median earnings – it’s on pages 2 and 33 of the Red Book – builds in the prospect of automatic uprating.

60% of median earnings is not generous, but for full-time workers it is about 20% more than the standard income threshold used to identify risk of poverty in the EU.  It wouldn’t end in-work poverty altogether, but it would come close.  It will also benefit women disproportionately.  Is this really something to complain about?

That is not to say that everything else in the Budget is to be approved of.   In March, I reviewed various proposals for how the Conservatives might manage to cut £12 billion: the Chancellor has not actually managed it, but most of the measures that have survived through to implementation are  silly gimmicks (like the benefit cap and suspending Tax Credits for larger families) which will have very little effect on the budget rather than the more serious, and painful, cuts that were being discussed.   Increasing the tapers in Tax Credits from 41% to 48% must exacerbate the poverty trap; cutting Housing Benefits for 18-21 year olds will cause confusion and hardship; and ending mortgage support, limited as it now is, puts owner-occupiers at a critical disadvantage relative to tenants.  The largest savings seem to come from freezing upratings.  However, several figures in the Budget analysis ( pages 73-4 of the Red Book), especially those than depend on the roll-out of Universal Credit, should probably be classed as ‘imaginative’.

Universal Credit: a correction

Once again, I’m grateful to Computer Weekly for drawing attention to a point I would have certainly missed otherwise.  On the basis of a previously published Cabinet Office figure, I have been telling people, including the Devolution Committee, that the implementation of Universal Credit was scheduled to cost £12,845 million.  The cost this year is scheduled to be £323.8m, so it is difficult to see where this figure comes from.   The latest figures from the Major Projects Authority are buried in a CSV spreadsheet though available in some other formats. Column CU tells us that by 2020, the implementation of Universal Credit will cost £15,844.02m, a round three billion pounds more than the last estimate.    The entry claims that “Delivery remains on track against plans announced in September 2014.”

Crackers: a comparison of UK spending on benefits with other countries

George Osborne and Iain Duncan Smith have been writing in the papers to say that the UK’s spending on benefits is “crackers”.  They’re quoted as saying that “Britain makes up 7 per cent of all the welfare spending globally despite having just 4 per cent of GDP”.  The comparison lumps together rich and poor countries, and the discovery that rich countries spend more than poor countries is not exactly surprising.  The OECD countries account for just over 60% of the world’s production.

When the UK is compared to other OECD countries, its expenditure starts to look at little more moderate.  The figures are here.   The OECD countries pay on average 12.4% of their GDP on public cash benefit.    The UK pays 10.5%.  The UK average is brought down because some of the other countries pay cash for health care, and the UK doesn’t, so a fairer comparison is total public expenditure on social protection: 21.7% for the UK, 21.6% for the OECD.  So, depending on the figures we use, the UK’s public spending on social protection is average, or below average.

A new way to budget

Once upon a time, planning a budget was supposed to have something to with how much an agency planned to spend.   My notes for students start off with this definition, from the Chartered Institute of Management Accountants:

“A quantitative statement, for a defined period in time, which may include planned revenues, expenses, assets, liabilities and cash flows.”

I’m going to have to rewrite this, because it seems I’ve been getting it wrong all this time.  The Chancellor of the Exchequer has just explained how he’s going to get a new round of cuts from government departments. According to the Treasury website, the cuts are going to be achieved through

Tightly managing departmental budgets in-year, so that instead of spending up to budget, departments deliver underspends.

So it seems that a budget isn’t about what you plan to spend at all.  It’s  about identifying the money that you might have spent under different circumstances but aren’t now going to spend.

The departments have all signed up to underspend something, it seems.  While the biggest underspend is going to be in Defence, the next from Education non-schools (marginal stuff like child protection, then), the smallest underspend will apparently be from … the Treasury.  I wonder how they pulled that one off?

Budget 2015: might Osborne's agenda alienate the Conservative press?

I couldn’t get round to the Budget yesterday,  but I’ve had the chance to look over the documents now. Probably more important than anything in the detailed figures is the global target for  future cuts. In the budget speech, Osborne suggested that £30 billion savings would be found, consisting of £12 billion from working age benefits, £13 billion from departmental spending and  £5 billion from tax evasion.  The budget includes short-term savings in relation to some departments, but in the short term they mainly come from the Home Office, Defence and the DWP.  That seems to imply cuts in policing, immigration control and defence procurement.   Cuts in local government imply cuts in child protection, including action to prevent child sex abuse,  as well as public services such as roads and waste management.  Cutting all the things that the right-wing press is most exercised about doesn’t seem designed to win support in the coming election.  The most plausible explanation seems to be that he doesn’t think the public, or his own supporters, will make any connection between doing the things that the polls say matter  and the need to spend money on them.

Given the relatively large size of the sector, there’s remarkably little about social security payments.  The main measures are listed on pp 82-3 of the red book:

  • extra child care costs for parents of children with disabilities
  • more work on real time information for fraud prevention
  • limiting access to Universal Credit for EEA nationals
  • extra waiting days for Universal Credit
  • tax exemption for Bereavement Support Payment
  • a requirement for self-employed claimants of Tax Credit to be engaged in commercial activity that is at least ‘working towards’ a profit.

There have been generalised noises about knocking another £12n off the benefits bill, but no clear indication how it’s to be done – the measures in this list have very little financial impact.  The freeze on uprating will apparently save £2bn.  Is it impossible to save another £10bn?  I suppose it’s possible to imagine ways.  After all, the projected  cost of Universal Credit through to 2021 is a staggering £12.8 billion.





Why spend 2% of GDP on defence?

NATO’s guidelines ask its members to devote 2% of  GDP to defence spending, and currently there is a debate in the UK about whether spending plans are consistent with that.   Most NATO members don’t meet the 2% target;  it comes from a time when defence was about the prospect of a major land war in Europe, and as the prospect of such a war receded, most countries took advantage of the ‘peace dividend’ to wind down.  As it stands, the figure is difficult to defend – not because there may not be a case, but because it isn’t visibly related to  defence needs.  It seems fairly basic to public spending decisions that we ought to know what money is being spent on and what the spending is supposed to achieve.

It’s fairly unusual, in public policy, to start with a fixed amount of money and then to thrash around looking for ways to spend it.  Most spending starts with a set of commitments or  a recognisable set of demands or needs, and the purpose of budgeting is to try to do what’s necessary with the resources available. There is however a parallel in another field.  We are also committed to providing 0.7% in Official Development Assistance (ODA), and in recent years we’ve managed to do that.  ODA has been taking a battering from the political right, often for the same reasons that might lead to reservations about defence spending – the distribution of benefits  doesn’t seem to be related to the needs (why does so much go to Afghanistan and India?),  it’s not self-evident that the money is being spent on the right things, and it’s difficult to tell whether the money is being used to best effect.

The parallel is instructive.  Spending on ODA is  elective in its character – despite the international obligation, we can spend most of it as we think fit.   Whatever we spend, the problems of development are bigger than our capacity to deal with them, and we can only make a limited contribution.  In some ways, that’s liberating.  We don’t have to do the things we do in other forms of public spending – identify needs, assess the demand, or determine priorities.  It’s possible simply to do anything that seems effective and worthwhile.  If it turns out that ODA is not being used well in some cases, we can divert the money to other activities which work better, and there are plenty of those.   We’ve been refining these approaches  for some time, which is why ODA appears to be rather better used than many of its critics suppose.

Back to defence.  What is implied by setting defence spending at a set proportion of national income?  On one hand, the proponents of higher spending are arguing that expenditure on defence represents an irreducible minimum for any government – it’s something that governments absolutely have to do.   On the other, the case is being made for a figure that’s almost completely unrelated to that irreducible minimum – that treats defence as if it was elective, like ODA.  The two positions seem woefully inconsistent.  If defence is a necessity, then we should be paying what is necessary.  If defence spending is really an area where we can do as  we think fit,  we can use the money in any way we think effective, and it needs to be justified in those terms.

I’m not convinced that defence money is used effectively at present.  I don’t really understand – maybe someone out there can tell me – why we have maintained separate defence services fifty years after supposedly unifying the Ministry of Defence; why we try to do bits of everything in international cooperation rather than specialising in what we’re good at; or why we’re so focused on international actions that we don’t have the capacity to defend our territory or maritime  interests.  If we are going to spend 2% of our income on defence, let’s have a defence policy that works.

I must defend the Conservatives: they're right to set spending against GDP

The Conservative Party has been criticised for claiming that they have halved the deficit, when in monetary terms they have not.  I have to leap to their defence.  The test they have used, treating the deficit as a proportion of GDP,  is entirely legitimate and appropriate.   It sets spending against income, which is how it needs to be seen.   I have used the same indicator myself in this blog.

Let me, however, take the case a little further. The figures in the first two lines come from the OECD and the World Bank.  It’s not surprising that total social expenditure has been cut; but many people will not have realised that, by the test the Conservatives are now applying, spending on health care, which was supposed to be protected, has also suffered.

2009 2010 2011 2012 2013
Social expenditure 23.9% 22.8% 22.7% 23% 22.5%
Health care 9.9% 9.6% 9.4% 9.2%
Benefits and tax credits
– working age and children
6.1% 6.0% 6.0% 6.0% 5.7%
Tax reliefs 18.3% 18.8% 20.5% 21.3%


The third line comes from the DWP.  It’s true that benefits have increased over the years, but that is mainly down to two factors:  pensions, and Tax Credits for the low paid.  If we look only at the DWP benefits for people of working age, which include the ‘out of work benefits’,  another story emerges.  The figures are

1979  2.2%
1984  3.6%
1989  2.7%
1994  4.2%
1999  3.3%
2004 2.8%
2009  3.3%
2014  2.9%

There have been some fluctuations with economic conditions, as we might expect; but the high point was twenty years ago, during the Major government, and the narrative we often hear, of increasing dependency and a relentless increase in costs, is hogwash.

The last line in the table, drawn from a National Audit Office report earlier this year, shows the cost of tax reliefs as a percentage of GDP over the same period.  It helps to make it clear where the government’s priorities lie.

Austerity for ever

Danny Alexander, the Chief Secretary to the Treasury, has expressed concern about the the Conservative Party’s desire to have ‘austerity for ever’.   It has taken him a little time to notice.  David Cameron gave a speech over a year ago arguing for a permanently ‘leaner’ state.

I argued at the time that it has never been about austerity.  Austerity is about saving money.   The Welfare State was founded in a society where resources were excessively scarce, where food was still rationed; the NHS was a model of austerity.   Transferring resources and responsibility to the private sector is something quite different – not to mention more expensive.  Nor is it about the deficit:  if George Osborne was serious about reducing the deficit, he would be looking to increase taxes or otherwise to increase government income.     This is part of a long-standing commitment to roll back the frontiers of the state – in Alexander’s words, “an ideological demand, not an economic necessity”.


Social security in the Budget

The Budget didn’t have very much to say about benefits, and what it did say cannot be taken as gospel.  The main figures are based in reduced spending commitments,  which for the next two years are as follows:

  • restriction on migrants’ access to benefits   £120m
  • helping people to work £270m
  • recovering debt £150m
  • restricted uprating of Child Benefit £445m
  • restricted uprating of Housing Benefit £65m
  • Universal Credit £55m
  • recovery of Tax Credits £370m
  • Real Time Information for Tax Credits £445m

With the main exception of savings from upratings, most of those figures look like aspirations (or wishful guesses) rather than genuine savings.

As for the supposed cap on ‘welfare’ spending, the main sanction is that a Chancellor who exceeds it will have to explain why to Parliament.  It would be a very feeble Chancellor who found it difficult to explain why a range of benefits condemned by the Council of Europe as ‘manifestly inadequate’ shouldn’t have more spent on them.