Yesterday Vince Cable gave a speech on tackling poverty to the Joseph Rowntree Foundation. He addressed the growing poverty faced by working families and called for changes to Universal Credit – including putting back the £3 billion a year that George Osborne took out with indecent haste the minute we Lib Dems were out of the picture.
He said that the principles behind UC were right, but the implementation was wrong and called for its rollout to be halted until the problems were fixed.
Universal Credit hits Edinburgh, Glasgow and Aberdeen at the end of November. This means that thousands of people face a miserable Christmas as the first payments will be made (or not) the week before the holidays.To put people in the position where they can’t afford to pay their rent, heat their homes or put food on the table at the coldest time of the year is cruel.
Vince addressed the issue of a Universal Basic Income. He is sceptical although he can see the attractions. This is something I really want to believe in as so many people that I normally agree with are big fans of the idea. My worry is that it might entrench other forms of inequality as it doesn’t take into account needs of sick and disabled people and couldn’t be set at a high enough level to properly get everyone out of poverty. If someone can show me how that can be done, then I’d be really open to it.
Anyway, here is Vince’s speech in full:
Thank you for inviting me to speak to the Foundation. I last did so in York three years ago when I was in the Cabinet at the end of the Coalition. York had particular significance for me since my father’s family came from Layerthorpe where Seebohm Rowntree did his original path braking survey work on poverty – and that side of the family worked for Rowntree’s (my mother’s were on the other side of the city working for Terry’s – my mother on the production line, packing chocolates). And it was Seebohm Rowntree’s work – first published in 1901 – which provided ammunition for the wave of liberal welfare reform in the 1906 government: the state pension and national insurance for health and unemployment benefit. And that in turn was part of the radical liberal tradition which led to Beveridge and Keynes and which my party identifies with today.
The Problem
Today’s controversies over Universal Credit have focussed attention on growing poverty in working families (by contrast, there is still pensioner poverty but it has been largely eliminated by the welfare system; and there is still poverty amongst the unemployed, but their numbers have greatly shrunk). The medium wage in real teams is currently still lower than in 2008: 3% lower according to the IFS. The fall has been greater for younger workers: 5% for those in their 20s; 7% for those in their 30s.There is much, politically charged, debate around this dire set of numbers, the worst for any decade since the Napoleonic era. No doubt government policy deserves some of the blame but the minimum wage, now rebranded the living wage, which government does control for the benefit for low paid workers, has been rising in real terms since 2014, and is now above 2008 levels (which means that differentials with average pay have been squeezed).
Essentially, the financial crisis and the damage wrought by the near-collapse of financial institutions has led to a period of very low productivity growth, leading to low wages; while technological and structural changes in the labour market have led to a growth in insecure employment with weak labour bargaining strength. There is some suggestion also of a rising share of profit, relative to wages, in corporate income.
What matters for living standards is how far low wage income is supplemented by in work benefits offset by taxation. Low paid as well as other workers have benefitted from rising tax thresholds but have been hit by curbs on in-work benefits and the further cuts to Universal Credit which occurred in the 2015 Conservative Summer Budget
Joseph Rowntree and other bodies using the same methodology calculate that there are currently 2.8m children and 2.6m working parents in poverty (defined in relative terms – that is less than 60% of the medium income). It is expected that 1 million more will be in poverty by 2020 on the same definition. The IFS calculate that the benefits freeze alone will result in an annual income reduction averaging £450 for 10 million households, while the Resolution Foundation estimate that cuts to Universal Credit will see working families with children losing £1,300 on average.
There is a separate argument about inequality which of course is not the same as poverty. There is a popular perception that inequality is also worsening. In one sense this is true. The rise of the global superrich, including British residents, fuels this narrative. But on the standard measure of income inequality, the Gini coefficient, there is little evidence of widening inequality since 2008 (the current figures of around 0.34 (or 0.38 after housing costs) have been stable, or fallen slightly, after the big jump from 0.25 in the 1980s with the Thatcher Government. The UK figure is higher than in most of Western Europe though lower than in the USA (much hinges on what is included in the measure). Sweden has, seemingly, one of the highest pre-tax/benefit level of income inequality but one of the lowest levels of post-tax/benefit inequality in Europe). There is also wealth inequality in the distribution of assets – which appears to have worsened.
The Remedies
There is an immediate question of how to address the clear evidence of poverty, and growing poverty, in working families; but there are bigger and deeper questions of how to design a new kind of benefit system, with ideas like universal basic income, and also questions around determinants of pay and job security.The problems with Universal Credit have been well described by Frank Field, the Chair of the Work and Pensions Select Committee in ‘Wonderland visions of welfare reforms collapse on contact with real life’.
The problems stem from conflicting objectives: providing minimum family income; providing incentives to work; simplification; and saving money. Simplification, saving money and work incentives have taken precedence over the first, crucial, priority. Practical problems have been ignored creating real hardship, payment delays in the switchover, penalties for the self-employed; use of a single bank account for divided families; barriers to work from lack of childcare; monthly payments for those on weekly or casual wages; technical complexities in establishing online payment; and the use of Universal Credit to facilitate debt collection. Frank Field concludes that over and above any extra resources there have to be robust safeguards to prevent incomes falling; and much more flexibility.
But in scrapping the whole project in relation to UC there is a danger of throwing out the baby with the bathwater. The fact that UC is becoming loathed and is being implemented incompetently and harshly does not invalidate the reasoning behind it. I strongly repudiate the Labour Party’s suggestion that Universal Credit should be scrapped without being clear what the replacement is: a classic case of soundbites taking precedence over thought-through policies (at the risk of being too partisan, the problem is that Messrs Corbyn and McDonnell are giving spending priority to subsidising well paid university graduates over people in poverty, which may be politically smart but isn’t socially progressive).
It makes a lot of sense to combine benefits to get rid of the complexity and perverse incentives, in particular the disincentive to work under current arrangements. The OECD has acknowledged the force of these arguments. Unfortunately, UC is being undermined by the problems I have summarised above, by the sanctions and testing regime built around it; by faulty IT; by unjustifiably long waiting times; and, above all, the way in which the Treasury has used its introduction to cut large sums, perhaps £5bn, from the benefits system.
There are three specific changes my party are arguing for in financial terms over and above the reforms in the way UC operates:
:
· A reversal of the cuts to the work allowance worth around £3bn a year, which JRF analysis suggests would boost the budgets of 9.6 million parents and children, 4.9 million of them in working poverty, and take 300,000 people out of poverty· Improvements to Universal Credit for the 800,000 self-employed who will eventually claim the benefit: by extending the period before the “minimum income floor” cap kicks in from 12 to 24 months; and averaging income over several months so that people are not penalised for fluctuating incomes (all at a cost of around £400m)
· Ending the benefits freeze a year early so that benefits are inflation proofed again (at an estimated annual cost of £1.6bn in 2019/20)
The overall cost is around £5bn and we have suggested how this can be funded by returning the corporation tax rate to 20% and by taxing wealth more fairly (by making pension tax relief more progressive, and taxing unearned gifts and capital gains more like income). There is a wide range of revenue possibilities if there were the political will to address the problem of funding UC properly. The Government must pause the roll-out of Universal Credit and urgently review both its design flaws and lack of funding.
Dissatisfaction with the operation of UC is fuelling the demand for alternatives like Universal Basic Income. But these suffer from precisely the same problem: that their acceptability is likely to depend on the availability of funding. In practice, with a Treasury constantly seeking savings, the Universal Basic Income is more likely to resemble the model of minimalist support set out by Milton Friedman and Amy Rand than the more generous vision of super UBI by utopian reformers on the progressive Left.
The idea of a universal guaranteed income could at least, in principle, simplify the welfare system with less means testing (at the cost of ignoring tricky problems like housing benefit); could promote non-monetary employment (like caring for dependent relatives and children); and makes it easier for workers to reject low paid employment (at the expense of weakening the incentive to work). The real problem is the financial constraints: limited amounts of finance are being used to subsidise the less needy, meaning less for the genuinely needy. Like all simple solutions to complex problems, universal income is attractive as an idea but quickly runs into a host of practical problems.
Reforming the welfare system, however done, begs the question of how to raise the economy’s productive potential and hence wages, and how to ensure that growing numbers have access to the education and training required to maximise opportunities for remunerative, relatively secure, employment. I have set up a Commission on Lifelong Learning to advise how education and training can best be supported and financed so that people escape low pay over their careers; and overall economic performance and rising pay, underpinned by a strong minimum wage, is what will lift the working poor out of poverty. But there will still remain vulnerable people hit by hard times, disability or caring responsibilities, which is why we need a robust safety net fit for the 21st century. There won’t be an end to the poverty debate any time soon.
* Caron Lindsay is Editor of Liberal Democrat Voice and blogs at Caron's Musings
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11 Comments
Caron,
” If someone can show me how that can be done, then I’d be really open to it.”
Ted Gwartney , MAI, has served as Professor of Real Estate Appraisal at Baruch College, NY. Among his public offices, he was Assessment Commissioner in British Columbia, Assessor in Southfield (Michigan) and Hartford, Bridgeport and Greenwich (Connecticut). In the private sector, he worked as Commercial Appraiser at Bank of America and City National Bank in Los Angeles. He was responsible for valuing the land of British Colombia, prior to the introduction of land value tax, and of several US cities. The land areaa of British Colimbia is four times the size of the UK.
He is visiting the UK and will be addressing a meeting of the All Party Parliamentary Group on Land Value Capture which Vince Chairs.
When he was retained by the BC government, they wanted to improve the property tax and capture a greater proportion of revenue from land and natural resources. Assessments had been frozen for 30 years (like the Council Tax).
An all-party committee of the Legislature conducted a comprehensive study of assessment and taxation. Gwartney recommended a province-wide Assessment Authority that was independent of the taxing function. Annual reassessment of land and improvements separately would be made at market value to achieve equity in real property taxation.
The objective was to Capture Land Rent (a plentiful Source of Public Revenue)
reduce taxes on buildings, workers, homeowners, producers And nerchants.
Enhance The Wealth Of All People.
His assessment of UK GDP is that 25% of national income is generated from land rents i.e. approx £500 billion.
A Land Value Tax based on land rental values equates to arounf £7,000 per person based on a population of 70 million or aroud £15k per household. Using LVT as the basis for state pension and welfare provision based on a Universal basic income can take into account needs of sick and disabled people and couldn be set at a high enough level to properly get everyone out of poverty.
Any system, whether it is UC or UBI will suffer if the treasury is motivated by “Milton Friedman and Amy Rand” style savings.
The long term risk is that robotic technology will replace jobs and so we have to think seriously about UBI despite the huge problems it faces, for example by variations in UK property prices.
We need some radical thinking on this matter as there are no easy answers. The IT problem in relation to UC would suggest it would be better to scrap the project and start again. There is nothing worse in IT than trying to progress a large and flawed project by fixing the problems that simply add even more complexity to the software.
“Amy Rand”?
Witness Debenhams and others trying to force down rents using the alternative of closure. Commercial landlords have the alternative of finding another tenant.
Ian Duncan Smith in his 2016 resignation letter made it clear that using Universal Credit to cut the benefits bill would undermine the whole sysem.
“I have for some time and rather reluctantly come to believe that the latest changes to benefits to the disabled and the context in which they’ve been made are a compromise too far. While they are defensible in narrow terms, given the continuing deficit, they are not defensible in the way they were placed within a Budget that benefits higher earning taxpayers. They should have instead been part of a wider process to engage others in finding the best way to better focus resources on those most in need.
I am unable to watch passively whilst certain policies are enacted in order to meet the fiscal self imposed restraints that I believe are more and more perceived as distinctly political rather than in the national economic interest.
Too often my team and I have been pressured in the immediate run up to a budget or fiscal event to deliver yet more reductions to the working age benefit bill. There has been too much emphasis on money saving exercises and not enough awareness from the Treasury, in particular, that the government’s vision of a new welfare-to-work system could not be repeatedly salami-sliced.”
As Vince’s speech spells out much of the issues could be resolved with a reversal of the cuts to the work allowance worth around £3bn a year; improvements to Universal Credit for the 800,000 self-employed (at a cost of around £400m); and ending the benefits freeze a year early so that benefits are inflation proofed again (at an estimated annual cost of £1.6bn in 2019/20). This would require around £5bn to be funded by returning the corporation tax rate to 20% and by taxing wealth more fairly (by making pension tax relief more progressive, and taxing unearned gifts and capital gains more like income). There is a wide range of revenue possibilities if there were the political will to address the problem of funding UC properly.
@ Joseph Bourke You’re optimism does you credit – one only hopes your Lasnd Scheme is less compliocated that Universal Credit.
Yes, money is important – BUT – it’s more than that. It’s the sanctions, the application by computer for people with learning difficulties and/or can’t fund a computer, it’s the single family payment which penalises women subject to violence, it’s the pip cars disappearing ……… it’s a mess……. and the Lib Dems are guilty of failing to scrutinise it…
For the believers… it makes Frankie’s Fairies credible…. even in Southport.
Thank you Carol for publishing the whole speech. At the end of his speech he mentions that pay should be “underpinned by a strong minimum wage”. He doesn’t state what our policy is. I expect because we don’t have one. I hope he can be persuaded that we should be supporting having regional living wages to replace the national one set at 70% of each region’s medium income. It would have to be implemented gradually as the national living wage is being done from 2015 to 2020.
To get most working age people out of poverty the rates of Universal Credit need to be increased to amounts that the Rowntree Foundation state a single person and a couple need to live on. For a single person the increase needs to be just over £70 a week and for a couple just over £132 a week. I expect this is too radical. The least we could have is a policy to restore the rates to their real April 2010 value, then increase them in line with inflation plus £1 a week for a single person and £2 for a couple each year.
One thing which would be easy to have as party policy would be to make the child rate of Universal Credit the same as the Jobseekers rate for each child – an increase of £2.96 a week for children born before 6th April 2017 and £13.44 a week for those born on or after 6th April 2017.
The problem that UBI has is that many of its evangelists are unrealistically ambitious for it. It can’t replace needs based benefits like Housing Benefit. What it can do is replace income tax and NI allowances and reduce benefits by a similar amount. It would mean that at least part of your income would be safe when your employment status changes. It would also remove the clash between UC and NI / Income Tax which sees some quite poor people paying an effective 75% tax rate.
@Joe Bourke
UK household disposable income (i.e. after deduction of direct taxes like income tax, and Council Tax) is £28,400 for 2018 (ONS figures). If you are proposing to increase taxation by a further £15k per household, that is above 50% of disposable income. I appreciate that people will get some of this back through UBI and State Pension, but this is a major change in the level of taxation that needs more than a back-of-the-envelope calculation to justify it. In particular, who will be the winners and losers out of this and how large will their gains and losses be? I remember that when the CIT were doing their modelling, single people and couples without children, even those near the bottom of the income distribution, often lost out heavily and that this required quite significant modification to the simple UBI approach to overcome.
Laurence,
yes, to develop a workable universal basic income scheme requires detailed workings.There will of course always be winners and losers but the underlying rationale for a rebalancing of tax collection between income and wealth is to two fold. Firstly, to increase the productive capacity of the economy be relieving the deadweight of taxes on labour and productive capital; and secondly to address inequality which in itself can contribute to developing the productive capacity of the economy.
The merging of tax and NI, as you mention in the budget thread would likely be a first step followed by the elimination of tax and ni allowances and replacement with a tax credit/negative income tax. The additional funding required for the initial introduction of a UBI of this nature would be sourced from a partial Land Value tax on higher value properties after allowances for regional variations in property values,rather than a full rate LVT.
The late James Mirrlees, an economist who set out to address social injustice, found that the top marginal income tax rate should be only about 20 percent; and moreover, it should be about the same 20 percent for everyone. Mirrlees’s work justified what is now known as a “flat tax,” more appropriately called a “flat tax rate.”
Mirrlees wrote, “I must confess that I had expected the rigorous analysis of income taxation in the utilitarian manner to provide arguments for high tax rates. It has not done so.”
To achieve what many say they want to achieve – a fairer society for all does require a certain attention to detail. The deadweight effect of taxation is most pronounced at the margin, particularly where there is a steep jump in marginal rates as there currently is when income goes from 20% to 40%.
Mirrlees work also proved that the only tax that carry’s no deadweight tax is Land Value tax and that additional taxes should be levied on consumption not production. The optimum system of taxation (carrying the least deadweight costs) is one based on a foundation of Land Value tax that addresses equity and inequality, a flat rate income tax and consumption taxes llke VAT, alcohol, tobacco and fuel duties.
The integration of tax and benefits via a negative income tax system completes the circle allowing for the replacement of welfare benefits and/or state pensions with a UBI.
Let’s look at all this another way. We adopted, with great fanfare, a policy of driving up income tax allowances and indeed put that into practice during the coalition.
The downside of that policy, mentioned by only a few at the time, was that it didn’t tackle the problems of low income and poverty, because it didn’t drive up the incomes of those who didn’t pay income tax anyway. Additionally, it broke the link between tax and the provision of services.
Hindsight is always a perfect science and at a personal level the reduction in my income tax payments has been very welcome. Nevertheless, what we should be doing is substantially increasing the incomes of those who are near or below the poverty line and those who rely on benefits or pensions. If we could achieve that objective then a whole raft of benefits could be abolished, because they would no longer be needed. If, for example, pensioners had a decent income, then they wouldn’t need free TV licences, bus passes, winter fuel allowances to name but three. If people had a basic income at a decent level, then they wouldn’t need housing benefits, council tax benefits, and wouldn’t need to rely on food banks, picking up surplus food from supermarkets and would not need large income tax allowances either.
It really is a no brainer and if you consider the costs of means tested benefits and the misery that cuts to universal credit and the whole sanctions regime have brought about, then a basic income or negative income tax scheme would be a massive improvement.
Let’s face it, the real opposition to UBI has nothing to do with complexity or cost. It’s all about a change of culture that would recognise human dignity and that a decent basic income is the right of all, regardless of employment status. It would mean an end to scapegoating the poor and unemployed as feckless and treating everyone fairly and ending poverty.
I feel very strongly that our party should be proceeding along the lines of a basic income for all. Working out the details is what experts get paid for. UBI policy group anyone?