Ben Chu: Welfare figures that just don’t add up

George Osborne lamented that “too many young people… have fallen into a culture of welfare dependency" (Photo: Getty)

6 October 2014

Three, they say, is the magic number. And three strong fiscal propositions emerged from last week’s Conservative Party conference.

First, that job-dodging scroungers have pushed up the working age welfare bill into the stratosphere.

Second, that an army of modest earners have been sucked into the higher income tax rate bracket. Third, that there will need to be £25 billion of further spending cuts in the next Parliament.

But three, in this case, is very far from magic. Don’t take any of those propositions at face value. Consider the working age benefit argument.

George Osborne lamented in his conference speech that “too many young people… have fallen into a culture of welfare dependency and a life on the dole”, and said it was intolerable the working age welfare benefit bill has reached £100 billion. But Jobseekers’ Allowance, the dole, accounts for less than 5% of that £100 billion. The big contributors to the working age welfare bill are housing benefit (£17 billion), tax credits (£29 billion) and child benefit (£11 billion).

What drives housing benefit is rising private-sector rents, linked to the spiralling value of housing, which in turn is a consequence of the fact Britain is not building sufficient numbers of new homes each year.

Tax credits are rising because an increasing number of people in work are eligible for the earnings subsidies to raise their income to an acceptable level. Regardless of whether one thinks too much is spent on child benefit, it is not a subsidy channelled solely to the jobless.

The working age welfare bill has certainly increased. It’s up from 4.5% of GDP in 1997 to about 5.7% today. But it has grown as a share of national income primarily because of our grossly dysfunctional housing market and a surge in the number of people working in relatively low-paid jobs. The idea the bill has been pushed up by a proliferation of lazy work dodgers is nonsense.

If the Chancellor were serious about curbing the working age welfare bill, he would be addressing those specific drivers of spending by allowing councils to build council houses again and pressuring firms to invest more of their profits in training for the workforce, which would enable their pay to rise.

But, instead, he reached for a headline-grabbing — and fiscally irrelevant — initiative to reduce the maximum amount a family can claim on benefits to £23,000. This is a policy in search of a fiscal justification.

What about the income tax burden? David Cameron complained in his speech that teachers and police officers are being sucked into the 40% tax rate, which he said “was only supposed to be paid by the most well-off people in our country”. How can teachers and police officers be rich? The answer is: by earning considerably more than the national average.

Look at the income distribution figures published each year by the tax office. These show that those with incomes above £41,900 a year, the threshold where the 40p tax becomes payable, are in the top 25% of earners.

The median pre-tax income in Britain is just £22,200. Four-fifths of the country’s 30 million taxpayers pay at the 20% basic rate.

Those who would benefit from the Conservative pledge to lift the threshold for the 40p rate to £50,000 would, in all likelihood, be in the top 15% of the country’s earners. They may not feel well off but, by any objective analysis, they are.

Incidentally, the biggest beneficiaries of Cameron’s other pledge to increase the tax-free personal allowance for income tax from £10,500 to £12,500 would not be those families with the lowest incomes, as he implied, but those families in the middle of the income distribution because the latter tend to contain two earners.

Last, but not least, consider the £25 billion of spending cuts. The figure has been touted by Osborne and Cameron as a “Treasury figure”.

But you won’t find it in any of the published Budget documents. After much probing, I managed to extract the methodology for calculating the number. And it turns out that officials make some questionable statistical assumptions, which have the effect of underplaying the size of the cuts that have been pencilled in. The Institute for Fiscal Studies calculates that the consolidation necessary to generate a budget surplus in 2018-19 is, in fact, £38 billion.

Osborne said that continuing the squeeze on Whitehall departmental spending over the first two years of the next Parliament would deliver £13 billion of savings.

But that’s merely the gap between the Treasury and the IFS estimate of the total cuts needed. So take Conservative demands for other parties to explain how they would fill the £25 billion gap with a large dash of scepticism. Their own figure is very flaky.

Yet more infuriating than such hypocritical rhetoric is the fact that these calculations are a red herring. To use the Conservative or even the IFS number implies there is some kind of howling economic imperative to balance the Government’s books by 2018-19.

There isn’t. The Government can still borrow for the long term at near record low interest rates. The fiscal consolidation can be completed over a longer period without the world coming to an end.

It would certainly be prudent for the next government, whoever forms it, to plan on making some major spending reductions. But tax rises can — and should — make a contribution to closing the deficit too. Slashing the provision of public services drastically to meet an arbitrary near-term date would be idiotic. The Conservatives claim, as is their wont, that “there is no alternative”. But, as usual, there is.

The next election is rushing to meet us. The economy, living standards and the size of the state look set to be key battlegrounds. How depressing that those battlefields are already blanketed by a thick fog of misinformation.

Ben Chu: Welfare figures that just don’t add up

Read More