Opinion: The Welfare Uprating Bill is a mistake; this is not economic liberalism

I was saddened to hear during the Autumn Statement that increases in many benefits would be capped at 1% for the next three years, particularly because I was in total agreement with David Laws when he opposed a similar policy last year. I was also disappointed that after months of party figures grandstanding about any welfare cuts being contingent on reformed property taxes, no higher council tax bands were announced.

Abandoning indexation for benefits does not just affect them in the year that benefits are not indexed. To use Job Seeker’s Allowance as an example, if inflation is 3% per year over the next three (the rough average of the past decade), and rises in benefits are capped to 1%, a weekly payment will effectively have been reduced by £4.43. But even assuming that indexation is taken back up again the year after, it will be raised from a lowered figure. Without any guarantee to the contrary, the missed increases will be permanently lost, not temporarily postponed. This is a small cut in the grand scheme of government expenditure, but the idea that wages should not grow at a slower rate than benefits may well prove popular. Benefits do not rise at the same rate as wages during years of economic growth: wages outstrip inflation, whereas benefits are only meant to keep up with price increases.

If we had previously followed this precedent, JSA would be an even more meagre allowance now. In the years since 1980 (when the Earnings Link to benefits was abolished), inflation has outstripped NGDP growth in five recession years: 1981, 1991, 1992, 2008 and 2009. Had we only raised JSA by 1% in these years, by 2010 it would only have been £48, instead of the £67.50 that it actually was*. Is that a liveable amount? Yes, probably just about. But it’s also indefensible to insist that people who have become unemployed attempt to live on it, given that JSA makes up less than 3% of the welfare budget, and a full third goes to people whose incomes are already above average.

We must be realistic: the earnings link is not coming back. For better or worse, as the pre-war mass unemployment became a distant memory, attitudes toward unemployed people have hardened. Though some may disagree, this doesn’t mean we should aim to return to post-war full employment. Frictional unemployment is something that must exist in an advanced economy. It’s for precisely this reason that I find this change so regressive.  If you recognise that a conscious choice has been made by governments to construct an economic system in which unemployment must exist, treating unemployed people as if it is their fault that they are out of work is a ruthless way of reducing spending. We have signed up this policy, coming from a Chancellor who is foremost an electoral strategist, knowing that jobless people do not vote Conservative.

I didn’t join the Liberal Democrats because I thought we were moderately economically liberal. I joined because I agreed with people like David Laws: we have every opportunity to be more economically liberal than the Conservatives, showing that financial freedom works for people without unnecessarily cutting public expenditure where it hurts the worst-off. There is no chance of a long-term reduction in the size of the state if it is associated solely with reductions in the living standards of people on low incomes and who have the misfortune to be out of work.

Given Nick’s speech on welfare this week, I don’t believe that it’s now possible to stop this change from occurring entirely. What it is possible to do is to amend the Welfare Uprating Bill to insist that as soon as the median wage begins to rise above inflation, not only is indexation returned, but JSA should also be increased by the amount that it missed during the period of restraint. I hope we might be able to make this a prerequisite for our support of the policy. If a Liberal Democrat parliamentarian took this opportunity up, it will not to stop, but will at least mitigate the long term damage of such a problematic change.

* Figures used for RPI between 1980 and 2009 can be found through the ONS here. Figures for NGDP growth can be downloaded in an excel file by clicking here.

* Mike Bird is the Chair of Liberal Reform

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21 Comments

  • Really, it should be linked to inflation but perhaps a separate measure of inflation based on a basket of goods more representative of what the poor buy (or even “what they should buy” if you’re more authoritarian-minded).

    This might, of course, mean they were pushed up even higher than the RPI/CPI rates…

  • Middle class benefits are just ridiculous. Would like to see either of the main two come out to reduce them further. Before all the austerity when I was studying them, I was shocked you could get WTC and CTC at the salaries you could.

  • It isn’t an either/or question. We should have full employment AND a good level of unemployment insurance.

    Frictional unemployment is not incompatible with full employment. The ILO definition of unemployment ignores people unemployed less than 4 weeks anyway. It’s taken me 4 months to find a job and I’m a qualified accountant – that is absolutely NOT frictional unemployment. Back in 2006 I was been offered several jobs a week by agencies when I was out of work, this year they couldn’t come up with a single thing during the 4 months. Without a deliberate economic policy working for full employment, you have a government failing its citizens.

    It is precisely the failure of economic management of our economy that means we have high levels of unemployment which are expensive for the treasury to compensate. If you have very low unemployment, it is very cheap to pay them unemployment insurance.

  • jenny barnes 20th Dec '12 - 3:42pm

    “frictional unemployment”?? By no means. This is a deliberate policy to create a reserve army of unemployed, on welfare benefits that cannot be lived on, in order to increase the desperation of those both in and out of work. Thus enabling wages to be further reduced… and more lovely profits for our rich chums.

  • Clearly Nick Clegg supports Camerons idea of the “big society” and that we should rely on the ever increasing charities and food banks to feed those in poverty who are struggling to make ends meet.
    I thought it was the responsibility of the state to abolish child poverty and I thought the Liberal Democrats constitution thought that also.
    Maybe it’s time for the party to change the constitution because at the moment it’s looking very similar to the broken pledges it made on tuition fee’s

  • Mike Bird,

    “Though some may disagree, this doesn’t mean we should aim to return to post-war full employment. Frictional unemployment is something that must exist in an advanced economy.”

    I am one of those who would disagree. I believe we should aim to return to post-war full employment or as Keynes put it “take care of unemployment and the budget will take care of itself.”

    While there will always be an element of frictional unemployment i n an advanced economy, what we have had since the 1980’s is a policy aimed at maintaining a level of unemployment that is consistent with a target rate of inflation, the so called non-accelerating inflation rate of unemployment (Nairu) based on the work of lerner and Friedman. This policy seeks to maintain a reserve army of unemployed labour.

    The Federal Reserve in the USA has long had a dual mandate of stable inflation and employment level. The fed has recently announced its comittment to unlimited monetary easing aimed at reducing unemployment levels to 6.5%. That still leaves an awful lot of people out of work. Even if we follow suit in the UK and adopt NGDP targeting we will not address this fundamental issue of long term unemployment.

    The alternative to reliance on monetary policy is an economic policy proposal aimed at providing a sustainable solution to the dual problems of inflation and unemploymentJob guarantees . Its aim is to create full employment and price stability. It is related to the concept of employer of last resort (ELR). A job guarantee program, a buffer stock of employed people (employed in the job guarantee program at minimum wage ,) provides the same protection against inflation without the social costs of unemployment, hence fulfilling the dual mandate of full employment and price stability.

    The post-war period relied on Keynesian stimulus and restrictive labour practices, particularly in nationalised industries to maintain full employment. The result was that each time the economy was stimulated in this way, unemployment and infllation would soon return at greater levels than before.

    We cannot rely on monetary or fiscal stimulus or austerity programs to tackle long term structural problems. They are tools for coping with short-term shocks. Tinkering with Welfare benefits without addressing the underlying weakness in the job market will have no more impact on the public finances than cuts in essential infrastructure investment , when there is an economy wide deficiency in aggregate demand.

  • I also think that benefits should be linked to inflation for a number of reasons (best stated on the Joseph Rowntree Foundation website). People in poverty have to pay a high proportion of their income on food and energy costs, both of which are rising at a higher rate than general inflation. It is unfair and it is wrong to freeze benefits at 1%. I welcome that fact that the Chair of Liberal Reform is challenging this along with the Social Liberal Forum (for different reasons maybe!). Please can everyone send a strong message to our leadership that this is wrong and that the money CAN be found to pay for this despite the Tory spin.

  • Thanks all for the comments:

    @Jedibeeftrix – I do want a smaller state. I don’t think cutting one of the most needed benefits is a good way to encourage people to favour less government though.

    @Jenny Barnes and Joe Bourke – I suspected there might be some reactions to that section of the article. Personally I don’t agree with government-backed full employment, simply because of the inflationary pressures it causes. There are other ways we can seek to promote high employment which don’t suffer from the same effects (like the requirement for price controls).

    However, I would very much be willing to consider NGDP targeting, as it’s worth trialing such new ideas. Your article on job guarantees is interesting but it’s worth noting that the Indian policy has seen considerable criticism that an employer of last resort was not always the last resort at all, and has led to labour scarcity in other areas, often ones which are more productive than the alternative government employment. I don’t know about the detail of schemes in other countries, but it’s an important consideration.

    @Rob Heale – There’s less between the SLF and LR than often perceived!

  • Mike,

    “Personally I don’t agree with government-backed full employment, simply because of the inflationary pressures it causes. There are other ways we can seek to promote high employment which don’t suffer from the same effects (like the requirement for price controls).”

    The attached article lays out how a job guarantee program should be organised The Job Guarantee: A Government Plan for Full Employment .

    The Indian program suffers from endemic corruption, lack of a skills training component and is more a substitute welfare scheme than a job program. While it has kept 193 million families in rural poverty from absolute destitution, it has not addressed the lack of employment skills that prevent so many of these workers from entering the productive economy.

    Argentina’s limited job guarantee program for Unemployed Male and Female Heads of Households, (Jefes) was better targeted. Participation in the program peaked at about 5% of the population, and about 13% of the labor force in the wake of Argentina’s financial crisis. Female heads of households accounted for some 75% of program participants. Formal surveys indicate that the program is well-targeted to intended households (poor families with children) and is highly popular among participants. Studies by international researchers (including the World Bank) find that projects are generally well-run, completed on time, and provide needed services to poor communities

    By the way Mike, it would be inconsistent were we to be inflation hawks and support price controls while at the same time advocating NGDP targeting. A principal focus of NGDP targeting is to raise inflationary expectations as a means of stimulating investment and consumer spending.

  • I do indeed suspect that would happen with NGDP targeting – but as I said, it’s new, untested and thus worth trying. Price controls aren’t, they have been tried, and I don’t think they are an adequate replacement for market prices.

    Do you have a link for the studies of Argentina you’re looking at? I have no particular qualms with the idea that jobs guarantees provide jobs. They would be poorly named if they didn’t! My big concern is with productivity, and whether such government jobs are preventing reskilling and perhaps relocation required after large instances of unemployment. It’s Bastiat’s unseen – are there jobs in the private economy that are going unfilled because of a government requirement to employ, perhaps in positions that would not otherwise exist?

  • Mike,

    the attached is a link to a 2005 research paper by economists from the University of Missouri <a href="http://www.cfeps.org/pubs/wp/wp50.htm "Gender and the Job Guarantee: The impact of Argentina’s Jefes program on female heads of poor households.

    I think one of the major benefits of a job guarantee program in the UK would be the ability to prevent a lost generation developing during economic downturns. At present we seem to be shedding local community workers in large numbers.

    The flip side of a job guarantee program goes back to issues raised in your article. By making employment, disability or reaching retirement age a condition of eligibility for social housing tenancies and housing benefit, much of the argument about welfare and the uprating of in-work benefits will be automatically covered by the annual uprating of the minimum wage.

    Existing unemployment benefit could then be rolled into an unconditional flat rate citizens income that would not be supplemented with housing benefit or tax credits unless a guaranteed job offer was taken up.

  • @Henry R – did you try offering your services to end users directly. In other words knocking on doors of small firms and offering to do their books for them? No one owes it to you to be a middleman.

  • Jonathan Price 22nd Dec '12 - 9:07am

    What all those commenting so far seem to fail to realise is that the UK is not a closed economic system. There is no prospect of reducing unemployment significantly in this country while it exists in other major EU economies at much higher levels, particularly in France and in Spain. If job creation were to take off spectacularly, the only result would be mass immigration from those countries into the UK. This would help the Exchequer in the form of greater tax revenues, but it would not help the unemployment figures.
    The presence of other EU citizens in this country is another reason why JSA and other benefits have to fall in value, because other EU citizens are as entitled to receive those benefits as UK citizens are. At the moment we are subsidising other EU states by paying their citizens the JSA.
    Apart from anything else, it must be realised that the cap on benefit increases is tremendously popular amongst the electorate in general, as it the housing benefit cap incidentally.

  • @Jonathan, in which case why not implement a system whereby you can’t take more out in benefits than you have already paid into the system and apply that rule to all workers, foreign and local. Slovakia already operates such a system (not explicitly but the benefits are calculated that way) – with extra money available only at some very minimal level, and also for 3 years paid maternity leave – and benefit tourism is not an issue.

  • Richard S

    What a stupid idea!

    Does this apply to the Royals as well?

  • Bill le Breton 22nd Dec '12 - 10:30am

    Mike Bird, welcome to the small but growing band of NGDP targeteers. By my reckoning that makes five of us. I hope you use your influence to get those who can make the decision – our Cabinet members + DL to campaign openly to use their powers to change the Bank of England’s mandate.

  • Jonathan Price,

    You might be interested in this article Cameron urged to follow Spain’s new EU edict:

    Note:

    – More than 400,000 Britons live in Spain and about one million UK citizens spend part or all of the year there. In contrast, only 71,000 Spaniards are resident in the UK.
    – Britons account for 25 per cent of all medical procedures carried out on foreigners in Spain, according to official figures. More than 74,000 procedures were performed on British patients, compared with 57,000 on French expats and 49,000 on Germans.
    – In total, 2.3 million citizens from other EU countries were registered as residents by the Spanish authorities in 2009, many of them pensioners.

    “Under EU law, citizens of member states are entitled to receive health care in any member country. But Spanish authorities say their finances are being drained by the arrangement, with local media claiming Britons are the worst offenders.”

    A UK Border Agency spokesman said: ‘EU nationals who want to stay in the UK for more than three months must have proof they are working, studying or are self-sufficient.. Wherever we encounter someone breaking the rules, we will take steps to remove them.’

    It is estimated there are approximately 1.6m Brits living in the the EU, predominatly in France, Spain and Ireland. It seems that it is only the influx of migrants from Eastern Europe in recent years that has levelled the field to the point where similar numbers of EU citizens are now living in the UK.

    Census data indicates there are approx. 4m foreign born residents in theUK i.e. approx 6.5% of the popoualation. 2.6% are from the EU 27 states and 3.9% from outside the EU.

    As regards the problem you highlight of unemployment and dwindling export markets in Europe, would not a sensible solution be an EU wide minimum wage job guarantee and Citizens income based social security program that recycled inter-community export surpluses into consumer demand creation in struggling defict countries.

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