Tagged: public spending

Redistribution, inequality and growth

A paper from the IMF finds that redistribution does not damage growth, and may help it.  “Lower net inequality is robustly correlated with faster and more durable growth”, and “redistribution appears generally benign in terms of its impact on growth”.   This is not any great surprise.  Richer countries tend to better public services and greater equality; transfer payments have limited economic effects; the evidence over many years has been that welfare does not damage an economy.  However, it may be surprising that it’s the IMF saying it.

Apology: I originally posted this with a link to an older IMF paper.  The link has now been corrected.  PS

Counting the cuts

Simon Duffy, for the Centre for Welfare Reform, has produced a short, hard-hitting report on the cumulative effect of cuts, focused particularly on England.  The report is short, but it’s backed up by a detailed Excel file where Duffy lays out his sources in some detail.

I’m not sure I agree with every word – Duffy argues that a shrinking proportion of national income should be seen as a cut in itself.  The stark facts are, however, that cuts are falling disproportionately on the poorest, more disproportionately still on people with disabilities, and most directly on people receiving social care from local authorities.

While this has been going on, the Prime Minister is having a go at the Archbishop of Westminster for saying that

The voices that I hear express anger and despair.  Something is going seriously wrong when, in a country as affluent as ours, there are people left in that destitute situation and depend solely on the hand-outs of the charity of food banks.

David Cameron’s response is that “Archbishop Nichols’ claims that the basic safety net no longer exists are simply not true”, while a Conservative source is quoted as saying the Archbishop is “ill-informed”. But the Archbishop is right. People are being left destitute and without food. And if you cut off the benefits of one unemployed person in five, there isn’t a basic safety net.

Spending on welfare and 'social protection'

One source of confusion about public spending is that it’s counted differently for different purposes.  A brief for Full Fact initially put the ‘welfare’ budget at £223bn for 2012-2013.  That’s very much higher than the amount spent on benefits, which was £201.8bn, and the difference calls for some explanation.  The Public Expenditure Survey Analyses refer to international standards to identify expenditure on ‘social protection’.  The cost of social protection was £252bn.  It includes £29bn for personal social services, and taking one from the other leaves £223bn.  The figures for social protection are not, however, the same as the figures for benefits.  They include, for example, local government services and public service pensions.  Benefits are only part of the money spent.  Spending on housing was £37bn, and spending on housing for social protection was £27bn, but spending specifically on Housing Benefit was £23.9bn.  (Update, 9th January: Full Fact, who are very good at this, promptly amended the original after I pointed out the ambiguities.)

Which part of this does the Chancellor mean to refer to when he says that ‘welfare’ will have to be cut?  The idea of ‘welfare’ used to refer generally to all kinds of social provision – as exemplified in the idea of the ‘welfare state’.  In America, by contrast, ‘welfare’ has generally been taken to refer to means-tested subsistence benefits.  When the Blair government started talking about ‘welfare reform’, they identified it with the benefits system more generally, but moved to focus on benefits for people of working age.  Most people who use the term seem to think of tax credits, contributory social security benefits and non-contributory support for disabled people as ‘welfare’.    The cuts that are being planned for ‘welfare’ are aimed at those kind of issues, rather than on social protection in general – but that  will not stop them falling elsewhere, at the same time.

How to cut £25 billion

George Osborne has announced that he wants to take £25 billion more out of public spending, principally from ”welfare’, whatever that is.  He’s previously announced that he intends to cap Annually Managed Expenditure, which is mainly made up of pensions and benefits.  But we’ve also had an announcement that pensions will continue to be protected, and indeed that they will increase.  That means, in principle, that cuts to social security have got to come out of the other benefits.

Despite the headline figure of £25bn, the level of cuts being proposed is rather less than that.  Osborne has explained that the £25bn would actually be cut over two future years:

We’ve got to make more cuts. £17 billion this coming year. £20 billion next year.  And over £25 billion further across the two years after. That’s more than £60 billion in total.

That works out as £15.5bn a year overall.  Further note, 7th January:  The third news release of the day explains that £12bn, or £6bn a year, will come from social security spending.

The prospect of drawing much of this from working-age benefits is limited.   In 2013/14, benefits to pensioners are expected to cost £110bn, and benefits to people of working age and children cost £94bn.   The forecast for 2018/19 is that in real terms these figures will increase to £116bn and £95bn.  The most important benefits in the projected £95 billion include £31.5bn in Tax Credits, £22.7bn in Housing Benefit (the rest goes to pensioners),  £12.5bn in Child Benefit and £18bn for ESA and JSA together.  The sorts of economies that Osborne has suggested – stopping Housing Benefit to people under 25 or means-testing council housing, which won’t save anything because most council housing isn’t subsidised – go nowhere near his target.  The largest benefits for people of working age are Tax Credit and HB, but the design of Universal Credit is set to make major reductions difficult or  impossible.   It’s likely that the cuts will have to extend to pensioners – not just the likes of bus passes and winter fuel, but Housing Benefit,  DLA/PIP and social care support.

Osborne is reported as ‘challenging’ opposition parties to say how they would cover the costs without borrowing or increasing tax.  There are lots of other ways for government to raise money – not to mention lots of other ways to cut expenditure.  There ought to be serious questions, however, as to why any government would want to sign up to a deflationary agenda that will impoverish, not just the most vulnerable people, but the nation as a whole.

It has never been about austerity

According to the OBR, the Autumn Statement promises that Britain will be spending less of its income on public services than at any time since 1948.  This should not be a surprise.   From the outset, the agenda of the Conservatives in government has been to reduce the role of the public sector in the economy.    Public expenditure is believed to stifle  the private sector; George Osborne complained in June 2010 of  it “crowding out private endeavour”.   Robert Skidelsky, in the Financial Times, explains the implications of that term ‘crowding out’, which was popularised after a book by Bacon and Eltis in the 1970s.  I commented earlier this year that the cuts have had ‘little to do with economic management and everything to do with ‘rolling back the frontiers of the state’’.

Austerity, by contrast,  is about making do with less.  The basic argument for the private market is that it offers choice: that implies diversity, duplication of services and a degree of waste.   That can be an expensive option – the clearest demonstration of that is the cost of health care in the United States.  By contrast, the post-war Welfare State was austere; it offered no luxury and very little choice.   Essential Health Packages in Africa are austere – they offer a restricted, essential minimum to the whole population, often excluding services that are particularly expensive (for example for older people , psychiatric care, disability and high-tech medicine).  Transferring liabilities to the private sector and to private purses is just not the same thing at all.

Capping benefits: the Autumn Statement

It may be some time before the main effect of today’s Autumn Statement becomes apparent.  The Chancellor has announced a cap on the total expenditure that can be made for benefits.  The cap “will apply to all social security and personal tax credits expenditure for the UK, with specific exceptions for the basic and additional State Pension and the most cyclical elements of welfare.”

When the cap is exceeded, governments will have to report it to Parliament.  Possibly the intention is to make the control of finance more like the process in the USA – but after this year’s performance in Washington, it’s a mystery why anyone would want that.

The process apart, the main question that bears thinking about  is what effect a cap would have, if it operated as intended. Excluding the state pension and Jobseekers Allowance means that it has to apply mainly to Housing Benefits, benefits for disability, Child Benefit and Tax Credits.  The first two categories benefit pensioners as well as people of working age; and all four categories go to people in work as well as people who are out of work.   That seems to imply that an effective cap would reduce benefits for people on low incomes.  Because those who are out of work on JSA would be protected, the main adverse effect would be felt by pensioners, people with disabilities and people in work.

I don’t see this as being a particularly plausible set of options.  It’s rather more likely that the benefits that would be squeezed would the ones that are deemed to go to those who are ‘better off’ – the contributory and non-means tested elements.  The purpose may then be to drive benefits down to a residual core, providing at most a minimum income.

Universal Credit: there are reasons to question the supposed net benefit of £38bn

I’m grateful to Andrew Jones for drawing my attention to a table in the NAO report (Figure 2, page 15) which explains how the DWP proposes to find a net benefit of £38bn from the current  annual expenditure of £65bn on the benefits that will become Universal Credit.  The figures look like this:

Net benefits of Universal Credit (£ billion, 2011-12 prices)

Twelve years from 2010-11 to 2022-23 Annual impact from 2022-23
Total saving (cost) to government (DEL) (0.6) 0.4
Total saving (cost) to government (AME) 10.8 2.3
Total benefits (cost) to wider society 27.8 4.4
Net benefits 38.0 7.1
Net present value 27.0 4.7


The benefits are supposed to be over 12 years, so that the actual benefit is just over £3bn a year, rising to £7bn after the system beds down; more than 60% of the benefits, and nearly three-quarters in the initial period, are to the ‘wider society’.

Quite apart from iffy use of a 12-year period, and the long lead times, there are two other problems with the figures as they stand.  First, the  scheme has already been delayed, and a system that isn’t up and running can’t possibly deliver the benefits claimed.  As the schedule is now at least two years behind, two years of the final benefit disappear.  Second, net present benefit is supposed – as the term implies – to be net.  In the plus column go the benefits to society; in the minus column go the costs, to anyone who experiences them.  That’s how cost-benefit appraisal works.  If claimants are getting less, that is a cost to claimants.  Taking these two points together, the apparent net benefit falls, on the government’s own figures, from the claimed £38bn to £19bn: that is, £27.8 bn minus twice £4.4 billion.

That, of course, is only what’s apparent.  It’s rather difficult to say how good the remaining figures are, because the basis of the DWP’s Dec 2012 ‘economic case’ hasn’t been made public.  What is publicly available is the Dec 2012 Impact Assessment, which includes hardly anything of this, but which states overall (and rather more plausibly) that the measure has a net cost  of zero.  If the impact statement is right, and the government expects to save £0.2bn per annum on fraud and error, there is still another £18bn of supposed benefits to account for.

Giving evidence in September to the Public Accounts Committee, Sharon White of the Major Projects Authority said that the Treasury had not actually seen the business case: “We expect the net benefits to be substantial,  but we shall not sign off a specific number until we see the final business case.”   It seems, then, that no justification has been offered to the Treasury for the claims of social benefit; and that makes it look, bluntly, as if the figures have  been made up.

Views from above and below

The morning newspapers offer two rather different perspectives on benefits.  The headline on the front page of the Times tells me:  “Benefits fuel workshy culture, says pensions czar“.   Lord Hutton, a minister in the last Labour administration, issues a “stark warning”: “Successive governments ‘lost the plot’ over a ballooning benefits bill.  We’re spending an absolute fortune every year on working age benefits …”      Out of work benefits have been fairly static in real terms, and have actually fallen as a proportion of GDP.  With apologies for repeating myself, in 1992/93 DWP benefits for people of working-age took up 4.3% of national income.  In 2012/13 the equivalent figure was 3.5%, and the projections are all downward.  The relative cost of ‘out of work’ benefits fell from 3.9% to 2.5%.  (See the third table in this spreadsheet) What has increased in the interval are the Tax Credits, the complex system of payments covering families in work on low wages; they account for the extra costs shown in the first table in the spreadsheet. 

Meanwhile, on the same day, there are complaints that people with the most common degenerative disorders are routinely being declared ‘fit for work’.  The conditions specifically identified are cystic fibrosis, multiple sclerosis, Parkinson’s disease and rheumatoid arthritis. Caroline Hacker, of Parkinson’s UK, commented:

To set up a system which tells people who’ve had to give up work because of a debilitating progressive condition that they’ll recover is farcical and simply defies belief. These incomprehensible decisions go to show that many assessors, and those who rubber-stamp the decisions in government, don’t apply the most basic understanding of the medical conditions they are dealing with.

These are, of course, the self-same claimants of ‘out of work’ benefits, who are being described as ‘workshy’.

Benefits in an independent Scotland

A recent report by the Institute for Fiscal Studies has received a lot of press attention, and it has some helpful facts and figures, but it actually does very little towards breaking new ground. It says that benefits in Scotland cost relatively more than England for some groups (notably, for people with disabilities), and relatively less for others. It says that most of the money goes on pensions, which is hardly news. And it says that if there is radical reform, there will be losers as well as gainers, and that it is only possible to mitigate the losses by spending more. So far, so obvious.

The remit of the IFS briefing note is limited; it’s concerned with expenditure rather than equity or methods of paying benefit. It doesn’t actually provide key data on the issue which most people want to know, which is what Scotland could afford. To work that out, it would be necessary to compare Scotland’s national income and government revenue on one hand with liabilities and expenditure on the other – we have a good idea of how much money is spent, but how much revenue there would be is another issue entirely. Without that, it’s not really possible to say anything about the affordability of benefits. There are no indications that Scotland’s liabilities exceed its income to such an extent that benefit payments would be impossible; but beyond that, it’s difficult to draw any firm conclusion. What a country can afford depends on what it’s willing to pay for.

There are more serious challenges to developing a devolved or independent benefit system, but they are as much about mechanism as about cost. One example which emerged earlier this week was the question of what happens to occupational pension schemes: a cross national scheme has to be funded, so any Scottish schemes would need to be separated out. That points to a general issue about such schemes, which is that the smaller the scheme is, the more difficult it can be to balance the contributory base with existing liabilities. The basic way to overcome that problem is through pooling of risks between pension schemes – which generally happens in France (it’s referred to as a form of ‘solidarity’), but not in the UK, and its absence is a major reason for the instability of current UK schemes. A larger problem is the question of what happens to the contributory National Insurance system when all the records are currently held in Newcastle. I’m doubtful that the system is susceptible to devolution. It’s hard to see on what basis records could be transferred; Scotland would need a new and different pensions scheme, like a Citizens Pension.

There are, too, problems of cost control generated by a range of benefits which pay people to buy specific services in the market – housing, social care and child care among them. This approach is inherently defective; in every case it has led to accelerating costs without providing adequate basic protection. Any government, whether it is for Scotland or the UK, would need to rethink.

The Spending Review

There is an element of wishful thinking in the latest round of cuts.  As part of the Spending Review, George Osborne has announced a series of measures intended to penalise people looking for work:

the Spending Round announces a significant reform package that increases the support and requirements placed upon claimants by:
•  introducing upfront work search, requiring all claimants to prepare for work and search for jobs right from the start of their claim;
•  introducing weekly rather than fortnightly visits to Jobcentres for half of all jobseekers;
•  requiring all unemployed claimants, and those earning less than the Government expects them to, to wait seven days before becoming eligible for financial support;
•  requiring all claimants who are subject to conditionality to verify their claim every year;
•  requiring all claimants whose poor spoken English is a barrier to work to improve their English language skills; and
•  requiring lone parents who are not working to prepare for work once the youngest child turns three.

Together these reforms will deliver over £350 million in annual savings, including savings from claimants leaving welfare more quickly. (Spending Review, pages 7-8)

One has to ask what there is in these reforms that could possibly save £350 million.  There is only one measure in the list which will save money immediately, which is the introduction of four extra waiting days on the first claim – but for people moving in and out of work, there are linking rules which lead to the later claims being treated as the first, and that is essential to avoid disincentives to accepting short-term work.   Any further savings would have to come from deterrence and sanctions for non-compliance.

There is also a theoretical cap on benefits expenditure, which has the same kind of enforcement as the cap on inflation: when it is breached, the OBR will write to the government about it.  The cap is to be set at £100 billion, excluding the State Pension (estimated at £83.4 billion in the current year) and JSA (£5.3 billion).  Currently expenditure on DWP and HMRC benefits for this year is estimated at £204 billion, so the current bill comes out at something in the range of £15 billion more than the cap.  There will no doubt be extensive jiggery-pokery with the figures to make the sums work.