Universal Credit is not ‘spending’; it’s a transfer payment

At the risk of generating more fog than light, I’ve just tried to squeeze a complicated little argument into a tweet. Benefits are commonly presented, in public accounts and in the media, as a form of public spending.  That’s not strictly true.  Benefits are technically a form of ‘transfer payment’.  The government doesn’t actually spend the money; they pass the money to the people who receive benefits (pensioners, families and so forth) so that they can spend it.

This has one of two effects.  If the transfer is paid for by personal taxation – that’s not the only way for governments to raise money – then benefits are simply redistributive.  On the face of the matter, redistributive transfers are economically neutral  – they have very little effect.  If they do have an effect on economic activity, it’s because people on lower incomes may well spend their money differently from people on higher incomes.   Typically, they save less (so the money is used more) and they spend more on food as a proportion of their income.

If the transfers aren’t paid by personal taxation, the situation is a little more complex.  If the cost can be tracked to a specific form of finance, that may imply a different pattern of economic behaviour, and the transfer payment may not be so neutral.  However, government finance doesn’t work to a strictly balanced budget, and it’s quite possible that the money will simply have been created, like ‘quantitative easing’ or ‘helicopter money’.  In the present circumstances, there’s a very strong argument for government to maintain a flow of money in order to shore up economic demand.  Quite apart from that, of course, the case  for protecting people on low incomes while that happens is strong in its own right.

2 thoughts on “Universal Credit is not ‘spending’; it’s a transfer payment”

    1. It counters that particular argument, but there are others. I’m more concerned about the distributive consequences of UBI, especially if it’s financed by removing other benefits. You can find my detailed arguments

Leave a Reply