The UK economy is suffering from subsidies that extend the problems they’re meant to resolve, writes Alan Shipman.
Foremost among these: if you tax anything you get less of it, and if you subsidise anything you get more. Expanding something with a hand-out can be good, if it’s something the community hasn’t got enough of. For if there’s already too much, then subsidy just worsens the excess. So while supporters of welfare benefits see them as tackling poverty and social exclusion, critics say they amplify these evils. If you subsidise the poor, you just get more of them. Any top-up allows people to get by on unproductive jobs, or none at all. So giving them less can make them (as well as their community) better off, by forcing them into new or better work.
Some evidence of success for a strategy based on these principles emerged from the UK unemployment data released on 16 April. Unemployment rose, in part, because more previously “inactive” adults had chosen to seek work. Many of these are women with children who are far from inactive in their homes, but described as such by economists until they find paid employment outside it. The government says that over 800,000 people have abandoned their claims to out-of-work benefits as a result of stricter eligibility tests, and benefit changes that ensure they’re better off in work.
These changes would have been essential even without the recent financial crisis, according to Work and Pensions Secretary Iain Duncan Smith, because of an inexorable rise in the number of claimants and average size of claims. The state benefits bill has risen from less than £90bn in 1990 to over £150bn in 2012 and this at that year’s prices. It’s jumped to more than 10% of national output in the current recession. (See this article in The Economist).
However, this growth doesn’t automatically confirm the existence of a ‘benefits culture' prompting people into premature retirement. Some of it has been caused by an unexpected rise in longevity, which leaves many claiming benefits to cover depleted pension pots or rising care costs, so that state pensions comprise almost half of state ‘benefit’ spending. Some is due to house price increases since the early 1990s, causing a rise in accommodation costs which governments dare not reverse because any further price fall would make Middle England’s mortgage unrepayable. The biggest growth has been in benefits and tax breaks given to people in work, which now vastly exceed the £5bn paid in jobseeker’s allowance in 2011/12.
Corporate welfare
The awkwardness of these rising payments to the working poor (in means-tested benefits and tax credits) is that they can equally well be viewed as state aid for employers, enabling them to pay less than a living wage knowing that the state will make up the difference. This has not been prevented by the introduction of a minimum wage alongside tax credits, which governments dispense much more grudgingly than the numerous tax breaks allowing large employers to minimise their tax bills. The dramatic spread of low pay, while enabling employment to rise and jobseeker’s allowance costs to fall despite the absence of overall output growth, is also the reason that welfare costs will continue to rise after the Coalition’s reforms – as they did under previous governments, including Margaret Thatcher’s.
On the day that George Osborne’s assessed Mick Philpott’s child-killing exploits, a parliamentary committee accused three former HBOS executives of destroying the UK’s fourth-largest bank through avarice and incompetence. It was a reminder that when Britain subsidised incompetent bankers, it got more of them. In this case, government-backed deposit insurance and inevitability of state-financed bailout give large banks an implicit annual subsidy of £10bn, according to the Independent Commission on Banking. And whereas any subsidy to ‘dole queens’ (and kings) is a richer-to-poorer redistribution that goes back into circulation when recipients spend it, the bankers’ subsidy is a poorer-to-richer allocation that disappeared into their punctured balance-sheets, along with £1,200bn of taxpayers’ money to prevent a systemic collapse.
This trio of errant bankers, and Royal Bank of Scotland’s Fred Goodwin, are often used to portray the whole financial sector as reckless and parasitic. Mr Osborne's resort to the same sort of wrecking synecdoche when using the Mick Philpott case to cast aspersions on all benefit recipients, has tended to expand on all political sides. It’s a tendency that has been spreading, from public-sector reformers who cite Jimmy Savile as a sign of endemic decay in the BBC and NHS, to internal combustion enthusiasts who use one flat battery to reject a whole fleet of electric cars.
While policy changes may be aimed at stopping the irresponsible arrival of new children, they are also targeting a better deal for those already growing up. Mr Osborne’s 2013 Budget assigns £1bn to subsidise childcare for working families, and several billion to help the purchase of new or larger homes. Amid a predominantly ‘supply side’ recovery strategy, these measures stand out as delivering a demand-side boost. The first-quarter growth figures, showing the UK still on the brink of a triple-dip recession, highlight the importance of subsidising assets that the community wants more of. The Chancellor will now be hoping that spending more on nursery places and houses will encourage business to offer more of them, and not just inflate the price of those already there.
Alan Shipman 24 April 2013
Alan Shipman is a lecturer in Economics at the Open University. He is responsible for the modules You and your money:personal finance in context and Personal investment in an uncertain world, part of the foundation degree in Financial Services.
The views expressed in this post, as in all posts on Society Matters, are the views of the author, not The Open University.
Cartoon by Catherine Pain