Welfare: right policy, wrong reasons?

Many column inches have been filled with comment over the government’s decision to restrict a number of benefits and tax credits to increases of 1% over the next couple of years.

This piece (£), however, by the FT’s economics editor, Chris Giles, warrants a special mention, not least because it is makes some interesting points that nobody else seems to have done.

Here’s a (fairly lengthy) extract:

In any case, good evidence exists on living standards to assess the merits of restricting benefit uprating. According to the most recent year of data, 2010-11, the crisis has caused real household net incomes around the middle and upper-middle tiers of the income distribution to fall back to levels last seen in 2002-03. In the bottom 30 per cent of households, real incomes are 3-4 per cent higher than they were. This squeeze in middle incomes relative to lower incomes is more modest than the Tory slogan implies and was entirely unplanned. It is therefore reasonable for the government to seek to redress it, though it is harder to argue that only non-pensioners should bear the burden.

Allowing incomes towards the bottom of the income distribution to be eroded by inflation is also more palatable than we would normally think because we know real incomes have grown faster than 3-4 per cent. That calculation is too low because actual incomes have been adjusted for inflation using the deficient retail price index, which overstates price rises through the use of a biased formula.

The evidence from the income distribution also tells us that another reason for the squeeze on middle incomes is that the jobs market over recent decades has increasingly become polarised into lovely jobs paying good wages and lousy jobs paying little. Again, this change was unplanned and is not particularly welcome, as graduates such as me have done better than we reasonably could have hoped when making a choice to go to university while those taking an alternative path have lost out. The government’s inclusion of benefits for working people in the 1 per cent cap on social security rests, therefore, on much more shaky foundations.

Government cannot be expected to compensate all parts of society fully for unexpected changes in their living standards but the available evidence shows that the middle and upper-middle tiers of the income distribution have been hit harder than most in recent years and so the redistribution in the form of a temporary cap on out-of-work benefit uprating, fuel duty freezes and higher income tax allowances is perfectly reasonable.

What was unwise was to justify the move on the basis that an index of average earnings has grown slower than one of prices in recent years, creating a reasonable expectation among poorer families that social security payments should be uprated with earnings once these are growing faster than prices again.

We all must hope that productivity improves sufficiently for average earnings to begin to rise again in real terms soon. When that happens and the Treasury refuses to link social security and tax thresholds to earnings, everyone will complain and the government will have little comeback. By using the wrong arguments, ministers have pandered to Britain’s infatuation with indexation and the desire to chant “it’s not fair”. The decision will come back to bite them.

Comment away…

* Nick Thornsby is Thursday Editor of Liberal Democrat Voice and blogs here.

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16 Comments

  • Kirsten de Keyser 10th Jan '13 - 11:56am

    ” …the available evidence shows that the middle and upper-middle tiers of the income distribution have been hit harder than most in recent years and so the redistribution in the form of a temporary cap on out-of-work benefit uprating, fuel duty freezes and higher income tax allowances is perfectly reasonable.”

    We should probably mention that, here in the UK, we start from a pay differential between the highest and the lowest paid of 262:1 and the pay divide in Britain between the highest and lowest earners has grown more sharply than in any other high-income country since 1975

  • No, the IFS shows that overall distributional impact after all tax/benefits changes hits the top decile hardest but is regressive after that – i.e., the middle and upper-middle classes are already doing quite well out of the changes., compared to the poorest. So the government is already making up for the fact that their incomes may have been hit hardest.

    But even if that wasn’t the case, this is no justification for a real terms cut of £4 or £5 a week for someone on JSA who only gets £71. The ONLY way this can even begin to be acceptable is if you make the argument that such benefits are above subsistence level – comparisons with how much middle class people’s incomes have been hit in the last few years are not relevant. In fact this is the point nicely made by David Miliband in his intervention:

    ‘The Chancellor reminds me of the man in the 1929 election poster, standing above others on a ladder. Water is up to the neck of the man on the bottom rung, while the man at the top shouts “Equality – let’s all go down one rung”’

  • And also, why should it come as any surprise that the very poorest have real incomes higher than they were in percentage terms, relative to those on middle incomes, as a result of the financial crisis? Isn’t that a necessary consequence of the ‘automatic stabiliser’ effects in any recession? It’s hardly going to be a long term trend.

  • What’s an “upper middle” income level? Does it include people hit by the CB change?

  • the cut are actually much deeper the the 1 per cent above inflation cap. Come April a lot of those people will also be asked to pay council tax and rent on spare rooms. I guess the Tories just like to plunge people in poverty into deeper poverty, It’s a pity that our glorious leaders are so keen on helping them do it.

  • There is no logical reason to link benefits to earnings. Benefits are a safety net, earnings provided for services rendered. Safety nets need to be set at an appropriate level or they are not fit for purpose. Once set, they should then be adjusted in line with an appropriate index to ensure they always meet that level. If the level is wrong on some benefits – as the Tories imply – then they should be re-evaluated using an evidence based approach.

    Either the Government believe they are currently too high and exceeding the needs of claimants or they are are willing to see claimants fall beneath the safety net over the next three years. Neither of which they will ever admit to.

  • @Simon,

    No, I think the latest attacks on the very concept of tax credits as ‘taking your money then giving it you back’ is overly simplistic and disingenuous. They are more targeted than that. So it’s not just to say that lower-middle income earners (I assume you mean nurses etc here) are being defended at the expense of the poorest. Without working tax credits, the single mother with two kids wouldn’t even be able to afford to be a nurse in the first place. That’s why tax credits had a huge impact on relieving child poverty, and I think they should be defended as they are not gradually whittled away by this government.

    The main beneficiaries of tax credits were lone parents (overwhelmingly women). To me, the achievements in incentivising these people to work should not be jeopardized by what amounts to a real-terms cut of hundreds of pounds a year for such people.

  • Although I’m not sure why you are asking me about Labour when it’s nothing to do with the reasoning given in the article or my objections to it. The Miliband quote I assume.

  • Michael Parsons 11th Jan '13 - 9:59pm

    There is plenty of money in the idle balances of the largest 100 companies (about equal ot half UK GDP I read), and in the pockets of tax-avoiders. And our wonderful country and people, unlike the insolvent and largely criminal finance industry, have plenty of resources, The problem is (in a nutshell) our economy, pensions an d welfare-system are being smashed and looted by the parliamentary oligarchy in the interests of their financial paymasters and backed by their lobby. Tinkering with tax rates can have at best a marginal effect in face of the ongoing massive upward transfer of wealth. This will continue until we redefine “money” and link its creation to real effort, and halt proprietorial trading by “banks”, returning them to their lost usefulness. Meanwhile all an alliance with the Tories for “national redemption” will do is wipe us out, as it did, as a Party, in the 1930’s.

  • Matthew Huntbach 12th Jan '13 - 9:21pm

    Simon Shaw

    As to getting more tax off tax-avoiders, that’s easier said than done. I’m not saying things can’t be tightened up (as they have been, for example in relation to pension contributions) but it’s not as simple as the impression you give.

    Indeed. That is why, while I am very much against the party leadership for the presentational tactics it has chosen, I don’t make such a big thing about attacking then for the cuts in government services that are having to be made. There simply ISN’T a magic wand that can be waved to bring in more money for the government. If tax-avoidance could so easily be stopped, why did not Labour do it when they were in power? I am very tired of people who moan about this government but when asked “OK, so how would YOU pay for things?” just do some vague hand-waving, with “end tax avoidance” being a typical example. Yes, I would very much like to think we could stop a lot of what is obviously breaking the spirit of the law but wriggles its way out of breaking the letter of the law. However, if you look at it in practice, it’s not so easy. I wouldn’t bank on being able to do it unless I had crystal clear plans which told me how to do it and I could be assured they would work and the avoiders would not find other loopholes.

    As it is, when the LibDem leader DID try to do something about loopholes, with his “tycoon tax” proposals, what happened when the first aspects of it were put through? They were attacked by Labour in alliance with the right-wing press, misleadingly labelling them as “granny tax” and “charity tax”. Claiming some money spent is “charity” is classic tax avoidance stuff, so why when something was done about it as LibDem initiative in the government, did the Liberal Democrats get NO support from anyone outside for it? Why were the points they raised in defence of not suisiding rich people’s follies disguised as “charity” so ignored and misrepresented?

  • 1,300 people had died after being told they should start preparing to go back to work, and another 2,200 had died before their assessment was complete, that’s according to the governments own figures.
    http://www.guardian.co.uk/society/2013/jan/17/atos-attack-emotional-commons-debate

    “Atos was paid £110m a year to carry out the assessments for the DWP but and a further £60m of public money was being spent on administering appeals, because so many decisions were contested. The British Medical Association had described the assessments as “not fit for purpose”,”

    I wanted to raise this on another thread but unfortunately it had been locked. I hope people take the time to read the article and hear some of the horror stories that some people have faced with Atos and the DWP and the “not fit for purpose” wok capability assessment.

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