The Times reports today that certain benefits to pensioners are likely to be cut “amid a growing consensus that they are no longer affordable”. It’s true that the numbers of pensioners are growing, and that benefits have improved. Thirty years ago, in 1982/83, we had a massive slump, major cuts and serious problems of pensioner poverty; at that time payments to pensioners accounted for 6.0% of GDP. In 2012/13 we also have a massive slump, major cuts and serious problems of poverty, although it’s less likely to be pensioner poverty. The numbers of pensioners are increasing, and we have hit a new high in payments to pensioners; the estimate is that and payments to pensioners in 2012/13 account for … wait for it … 7.0% of GDP. This is not about affordability. It’s about the willingness of governments and an hysterically Americanised press to accept that social security is a legitimate part of what they do.
Tag: public spending
Capping the benefits bill
Both major parties have announced a commitment to a cap on social security expenditure. In the last budget, George Osborne announced he was going to fix the level of Annually Managed Expenditure, a term which refers to the element of the budget that isn’t set within cash limits. On Wednesday, Ed Miliband announced that he, too, intended to fix the budget, with a three-year cap on social security payments. Beyond that, Miliband pledged to address only “structural social security spending” while Osborne said his cap “will be designed in a way that allows the automatic stabilisers to operate to support the economy.” Both Osborne and Miliband have said that they won’t cut benefits that reflect the state of the economy – apparently a pledge to maintain JSA.
Social security expenditure has not been capped in the past, because it’s been considered that the government was bound to honour entitlements secured by contributions. The bill is not increasing because of out of work benefits; the proportion of GDP spent there has fallen, and in recent years gross expenditure has been fairly static. The two elements that have increased are benefits for those in work, and pensions; but payments to older people are much the greatest part both of the overall bill, and projected future increases. It may be possible to trade off increases in pensions against cuts in other benefits to hold expenditure level, but the scope to do this is very limited – and that is not the same process as capping the benefit bill. If pensions are not capped, there is no way of holding benefit expenditure level. Yesterday, Ed Balls, the Shadow Chancellor, explained that he does indeed intend to cap pensions.
A map of the cuts
The Financial Times has published a striking ‘austerity map‘ showing the impact of cuts by area. The worst affected places in Scotland are, predictably, Glasgow and Inverclyde, followed by West Dunbartonshire; but the place hit hardest in the UK is Blackpool, where the effect on the local economy is likely to be shattering.
The policies of Mrs Thatcher: "we will not reflate"
Margaret Thatcher’s political approach was founded in a central belief in individualism. Milton Friedman famously commented: “the thing that people do not recognise is that Margaret Thatcher is not in terms of belief a Tory. She is a nineteenth-century Liberal.” Her assertion that ‘there is no such thing as society’ was not a slip of the tongue, nor was it misrepresented; it echoes related statements by Bentham and Hayek (who she much respected), and it was central to her beliefs.
The strong political convictions were not accompanied by any understanding of economics. In 1981, 364 economists signed a letter in which they wrote: “there is no basis in economic theory or supporting evidence for the government’s belief that by deflating demand they will bring inflation permanently under control and thereby induce an automatic recovery in output and employment”. Mrs Thatcher was still prepared to say in 1985 that “we will not reflate”. The statement is listed in the Thatcher archive as being followed by applause; as I remember the broadcast, there was rather more embarrassed silence. She had just said that the government would do nothing to support economic growth (reflation) in the apparent belief that she was saying that the government would not devalue the currency (inflation).
Her economic policy was based not just in a belief in markets, but the argument advanced by Bacon and Eltis in the 1970s that the public sector stood in the way of the growth of the private sector and that markets had to be permitted to operate. Most economists recognised in the 1970s that Britain had fundamental economic problems, reflecting its reliance on the ‘old staples’ – coal, cotton, and heavy engineering. The Wilson government had sought to modernise and ‘redeploy’, moving workers gradually to new industries and guding the relocation of industry to move work to workers. The Heath government initially said it would not support ‘lame ducks’ but relented when it realised the implications for national defence and stepped in to save Rolls-Royce. Thatcher, the first Prime Minister too young to have served in the war, pledged not to support declining industries regardless of the consequences. Cuts, widely condemned by economists at the time, exacerbated the slump. Unemployment soared to over 3 million – it would have been 5 million if the government hadn’t repeatedly changed the way unemployment counted. Manufacturing industry disappeared. Many parts of the country never recovered; we are still in the resulting slump.
In terms of social policy, however, Thatcherism is remembered more for what was said about welfare than what it did. It is easy to forget, for example, that Margaret Thatcher was one of the prime movers of the 1980 Education Act, concerned with the integration of children with learning disabilities into mainstream education. If the welfare state is seen as an ideal, then Thatcherism was opposed to it; the Thatcher governments were criticised for the development of unequal provision, privatisation and the ‘residualisation’ of welfare (especially in housing). If, however, the welfare state is seen as a range of services, the practical impact seems more limited: welfare expenditure was largely maintained and even (in health and social security) increased. The greatest impact seems to have come not from the reduction of state welfare, but from the reform of public sector administration and management intended to imitate the workings of the private market. Much of the current policy of the Conservative Party today is concerned with the more fundamental task – a programme which may be presented as austerity, but has little to do with economic management and everything to do with ‘rolling back the frontiers of the state’.
The coverage of Margaret Thatcher’s record in the last week has emphasised how divisive her politics were, and still are. The Economist notes in their appreciation that in the early 1980s “She was, for a time, the most unpopular prime minister on record.” In July 1984, a Gallup poll for the Daily Telegraph showed that 34% thought Mrs Thatcher would be the best Prime Minister, when support for her party was at 37.5%; in July 1986, Mrs Thatcher had 28% satisfaction, and 66% dissatisfaction, when her party had 33% support. That, as I recollect, was the pattern throughout her premiership, with one exception – her management of the Falklands crisis. It is often forgotten – and it was denied by her supporters at the time – but she was consistently less popular than her party.
The ‘pensions timebomb’: don’t panic!
There are reports today that an independent Scotland would face a ‘timebomb’ from increasing numbers of older people. Scotland on Sunday mangled the figures when it reported that “an independent Scotland would have to increase the proportion of GDP spent on welfare from the current level of 14.4 per cent to around half.” That would be three-and-half times current spending. This is obviously wrong, but I’m not going to criticise – one of the hard lessons I’ve learned from writing this blog is that it’s all too easy to jumble figures from different calculations before hitting the ‘send’ button. (And yes, I confess, I just did that again on the first version of this very post.)
The actual increase that’s being reported is that the ratio of pensioners to workers will double, going from 25.8 pensioners per 100 workers to 51.7 by the year 2060. (The figure for the rest of the UK is 45.9). If that is translated into public expenditure at current rates – which probably won’t happen – it implies that two workers will need to pay for pensions what four workers pay now. As pensions currently cost half the ‘welfare’ budget, that implies a 50% increase in that budget, not a 250% increase. There’ll be increased calls on health and social care, too. These are contingencies that need to be planned for, but none of them is catastrophic.
I’ve previously considered the general principles of managing the costs of an ageing population in this blog.
The cost of benefits
Discussion of the cost of benefits has been plagued by apparently conflicting accounts of what is happening. The Office of Budget responsibility has put the figure at £182 billion; the Daily Mail has recently cited costs of £180 billion and £200 billion; I have heard £210 billion from the BBC. Two recent defences of the welfare system (Owen Jones in the Independent, and Toby Helm in the Guardian), point out that 40% of the money goes on pensioners; that is a serious underestimate.
Much of the confusion happens because different figures refer to different ways of counting. The benefits administered by the DWP are expected to cost £166 billion in 2012-13, though the latest Budget adjustment has that at £164.5 billion. £12.1 in Child Benefit, £5.5 billion for Northern Ireland and some other additions bring this to £182.8 billion. Then there is £28.6 billion in Tax Credits, which are not part of the benefits system. That means that people might cite approximate figures of £165 billion, £183 billion and £211 billion, all of which are correct from different perspectives.
Where the commentators tend to go wrong is calling all of this ‘welfare’, and assuming that it is driven by the ‘out of work’ benefits. Apart from the State Pension and Pension Credit, pensioners receive a range of other benefits, including not just those associated with pensioners – Attendance Allowance and Winter Fuel Payment – but Housing Benefit, Council Tax support, Attendance Allowance, and (perhaps surprisingly) Disability Living Allowance. The DWP’s current tally is that £107.5 billion is spent on people over working age. That means that two thirds of the lower figure, and more than half of the high figure, goes to pensioners.
Have pensions just been capped?
I’ve been trying to follow the Budget. One of the most important statements for welfare policy could be this:
“the Government will strengthen the public spending framework by introducing a firm limit on a significant proportion of Annually Managed Expenditure (AME), including areas of welfare expenditure. This will be designed in a way that allows the automatic stabilisers to operate to support the economy.” (page 3 and paras 1.61-62)
If there is a firm limit on AME and welfare expenditure, that must mean that benefits are capped. Two thirds of relevant expenditure on ‘welfare’ goes to pensioners and nearly all the projected increase in the costs of welfare is attributable to the numbers and entitlements of people over retirement age. Here’s a table taken from the Benefit Expenditure Tables:
| 2012/13 | 2013/14 | 2014/15 | 2015/16 | 2016/17 | 2017/18 | |
| Forecast | Forecast | Forecast | Forecast | Forecast | Forecast | |
| Nominal terms £bn |
||||||
| Children | 1.7 | 1.6 | 1.6 | 1.6 | 1.6 | 1.7 |
| Working Age | 54.7 | 50.6 | 50.6 | 51.1 | 51.8 | 52.2 |
| Pensioners | 109.7 | 111.0 | 114.5 | 118.1 | 121.4 | 124.8 |
| Real terms, £bn, 2012/13 prices | ||||||
| Children | 1.8 | 1.7 | 1.6 | 1.5 | 1.5 | 1.5 |
| Working age | 54 | 54.7 | 49.6 | 48.6 | 47.8 | 47.3 |
| Pensioners | 109.7 | 108.8 | 110.1 | 111.3 | 112.1 | 113.1 |
If AME expenditure is capped, it seems to imply that payments to pensioners have to be capped. Is that what the government intends?
Public employment as a protection from poverty
Working in preparation for the budget, I’ve been looking at some stats from the OECD. I was interested to find out to what extent public sector employment could be thought of as a way of protecting the economy, and that led me to the nearest approximation I could find, “Employment in general government and public corporations“. The figures don’t show any clear relationship to economic performance, but I wondered if they might show a different kind of effect. Here is a table tracking the OECD’s listings of public sector employment and child poverty.
| Employment in general government and public corporations | Poverty among children, %, late 2000s | |
| Norway | 29.3 | 5.5 |
| Denmark | 28.7 | 3.7 |
| Sweden | 26.2 | 7 |
| Finland | 22.9 | 5.2 |
| France | 21.9 | 9.3 |
| Hungary | 19.5 | 7.3 |
| United Kingdom | 17.4 | 13.2 |
| Belgium | 17.1 | 10 |
| Canada | 16.5 | 14.8 |
| Israel | 16.5 | 18.7 |
| Australia | 15.6 | 14 |
| Ireland | 14.8 | 11 |
| United States | 14.6 | 21.6 |
| Italy | 14.3 | 12.2 |
| Czech Republic | 12.8 | 8.8 |
| Spain | 12.3 | 17.2 |
| Portugal | 12.1 | 18.7 |
| Netherlands | 12.0 | 9.6 |
| Austria | 11.4 | 7.2 |
| Turkey | 11.0 | 23.5 |
| New Zealand | 9.8 | 12.2 |
| Germany | 9.6 | 8.3 |
| Chile | 9.1 | 24 |
| Mexico | 8.8 | 25.8 |
| Greece | 7.9 | 13.2 |
| Japan | 6.7 | 14.2 |
There are reasons not to trust the figures here – is child poverty in the UK only 13.2%? – and simple statistics can mislead, but a correlation of the two columns comes out on Excel at -0.56, which is unusually high for social data. It does look as though public sector employment and job creation in the public sector are key elements protecting people from poverty.
How an independent Scotland could manage the cost of pensions
The Herald reveals that the Scottish National Party is apprehensive about the potential size of the benefits bill. As benefits are the largest element in UK spending, there should be no surprise. Equally, it should be obvious that the largest element in the benefits bill – two thirds of spending – goes on pensions, and while Scotland has slightly lower expenditure on pensions than England, this is the part of the benefits bill that is most likely to increase over time.
It would be difficult however to manage pensions in an independent Scotland, for two reasons. The first is that state pensions are contributory, and the existing system could only be maintained through a massive transfer of detailed work records. The second is that transitional people’s rights will be complex, and it is liable to last for fifty years or more. Fortunately, there are straightforward answers to both problems. The quick way to deal with the first problem is to move to a Citizens Pension. The government could de-couple basic pensions from prior commitments, dividing any legacy fund available for S2P among those entitled, and otherwise ignoring for the purposes of benefit administration additional income or additional pensions. The way out of the second problem is to buy out people’s rights.
Another way to pay for welfare
The veteran US journalist, George Will, has commented that there seems to be a new political consensus in the US: that “we should have a large, generous welfare state and not pay for it.” There is an uncomfortable truth in that observation, and it prompted me to think about whether there might not be ways to square the circle – to provide welfare without seeming to pay for it.
There are lots of ways of raising money besides taxation: they include mutualist contributions (many welfare systems are non-governmental), voluntary payments (e.g. lotteries), nationalisation and sequestration (governments can, and do, claim or confiscate resources), and raising other government revenue (e.g. returns on investment, profits on government enterprise, or the sale of resources). The last of these categories is possibly the most interesting: if governments can make a profit, for example out of banking, energy or telecommunications, the money can be used for the common good. The Alaska Permanent Fund – possibly a model for Scotland – has allowed the State of Alaska to save resources for the long-term benefit of its people. It appears to be a principle that even American Republicans can accept. But we seem in Europe to have set our face against the idea that a government can legitimately take profits in order to benefit its citizens.