Tag: public spending

Cutting the minimum

An article in today’s Observer argues:

“Make no mistake. The 1% uprating means that for the first time since 1931, the income of the poorest will fall as a deliberate act of government policy.”

That’s only half true. This is the first general cut since 1931, but there have been other, less wide-ranging cuts, and many have been deeper.

The minimum income standards that apply in the UK have never been complete, and they have not been maintained very faithfully. The rates of the system in 1948 were represented as being based on Rowntree’s 1936 standards, but they were actually less, and known to be inadequate at the time. (I have amended this from the first posted draft, in recognition of a comment from John Veit Wilson, whose authoritative study I can’t do justice to here.) In the 1980s, there were changes in the structure of the basic rates, leaving some people markedly worse off – for example, householders under the age of 25. And various provisions have been made for money to be taken off benefits, for example deductions that apply to people who fail to take up work – the suspension of benefits through sanctions is currently affecting very large numbers of people (3 million claimants have had varied length sanctions, and 1.3 million fixed length sanctions, since 2000). There has never been a true national minimum. Perhaps there should be.

£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 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.

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.

£10 billion cuts

The Chancellor has returned to announcements made earlier this year, that ‘welfare benefits’ have to be cut by £10 billion. People on benefits are expected to live on very little, and it is obvious that cuts would hurt some vulnerable people; the question is which. The IFS have suggested that cuts will take one of three forms: more means testing (which saves little – taxing benefits would be easier and fairer), cuts in the general level of benefits (which would save a great deal), and cuts in the range of people entitled – it’s been suggested that Housing Benefit will be suspended for those under 25.

If pensioners were to be completely exempt, that £10 billion would have to come out of about £52.6 billion going to people of working age. That’s a tall order, and it’s more likely that it will come from benefits that also cover pensioners. The PM has referred specifically to Housing Benefit, which currently costs nearly £23 billion. Housing Benefit works currently by assessing rent, income, and tapering the benefit to cover the difference.

Housing Benefit could be controlled more effectively if it were not so very responsive to individual differences. The last government introduced a Local Housing Allowance, and then paid people irrespective of what their rent actually was. That makes it possible in principle to set a payable figure independent of actual rents. Once the link is broken, it should be possible to set a desired level of expenditure and design the awards to fit that level of expenditure. But the first economy that the current government made in Housing Benefit was to look at this arrangement and say, ‘that means some people get more benefit than is merited by their actual rent’ – so they cut out that difference. In other words, they did the exact opposite of what they needed to do if they wanted to make the benefit manageable and bring it under control.

Benefit cuts

The announcement that the government wants a further £10 billion in benefit cuts is not a great surprise. I wrote in 2010: “What is happening, on the contrary, is an incremental series of cuts which cannot have the effect the government intends. It follows that, before very long, they will be back for more.” And so they are. (The paper is part of Radical Statistics 103, The Cuts.) The fundamental problem is that two thirds of benefit expenditure – scheduled to rise to 70% in the next five years – goes to pensioners. Less than 10% of the benefits bill goes on unemployment and incapacity benefits. The main targets will be disability and housing benefits, because that’s where the money goes, but the scope to cut benefits is very, very limited.

Saving for a rainy day

Why don’t public sector agencies have any savings to protect them against unforeseen events? The answer is, simply, because they’re not allowed to. If government agencies were able to decide for themselves when or what to spend, the Treasury would not be able to control public expenditure at any particular time. And public sector agencies aren’t allowed any slack, which is viewed as “waste”. They’re not generally permitted to transfer money between specified budgets, or across financial periods (a process known as “virement”). Danny Alexander, the Chief Secretary of the Treasury, has announced that the Treasury is winding down its contingency funding, and that government departments must now set aside 5% of their funding to meet contingencies. This presumably means that they must be prepared to reallocate budgets – which is equivalent to having no contingency funding at all. It also means that the capacity of every department to deal with major events is conditional on its own resources, rather than risks pooled across the sphere of government. Perhaps this is prudent housekeeping, but I can’t see how.

Budget 2012

The Budget documents are generally available as soon as the Chancellor sits down, and as always there is a convenient summary in tabular form (though annoyingly, this time it is in the middle of the document, starting at page 50). I am always puzzled by the elements that the press pick out for attention, and those they do not. For example, this morning’s reports include coverage of the measures that benefit Dundee (which is of great interest to me, but possibly not to all of you) while some important measures seem to have passed under the radar. Examples include announcements of

  • a single-tier State Pension, ending the state second pension (para 1.212); and
  • the intention to allow the minimum wage to be eroded by inflation – it will no longer be uprated to maintain its value (1.242).

Although it has been announced more than once that plans to stop mobility payments for people in residential care were to be dropped, the savings from that measure are back in the tables (top of page 53).

I should add that the numbers of unemployed people are predicted to fall by about a quarter in the next five years (para 1.23), and the numbers of unemployed claimants are predicted to fall to 1.2 million. This will happen at a time when more than half a million people currently on ESA will be reclassified as fit for work and required to claim Jobseekers Allowance instead. The figures are not credible.

Public sector pay

The government expresses concern that public sector pay has risen above private sector pay. That is only to be expected. Whenever services are commissioned from the private and voluntary sectors, lower-paid workers are moved out of the public sector. Those who are left behind are the senior managers whose task is to commission services, and their pay tends to be higher than those of the employees who have been transferred out. This has been the policy of both Labour and Conservative governments for more than twenty years.