Wednesday, March 02, 2005

Poor relief in 2005

The UK government spends over £150 billion annually on what it calls ‘social protection’. Some of this is payment of contributory state pension benefit, but the bulk comprises what we used to call poor relief.

15 per cent of GDP is a considerable burden on taxpayers. What do we get for it?

At first glance, the answer seems to be not much. The EU and the government define poverty as an income below 60 per cent of the median. And on that basis, the IFS says that 22 per cent of the population live in poverty- that is, they live in households with less than 60 per cent of median income, after all benefits, taxes and housing costs.

So we’re spending £150 billion, yet more than a fifth of us remain below the official poverty line. That really doesn’t sound like value for money.

In fact the situation is even worse than that. ONS figures ( the latest for 2002-03) show that before taking account of government taxes and benefits the median household income is some £19,000 (this is known as ‘original income’). 60 per cent of this median original income is £11,500, which we might define as the poverty line pre-government interference. And about 8.5 million households- 17 million people- have original incomes below this level.

Now on my calculations, to move all these people up to the poverty line as defined would cost between £50 and £60 billion. In other words, if government didn’t exist, we could eliminate poverty for well under half the cost of the government’s social protection programme, which itself leaves over 12 million in poverty.

What on earth is going on? We're spending a ton of money yet we haven't eliminated poverty.

Well, some of it is the usual crass inefficiency of government. More fundamentally, we’re suffering the old problem identified by the Poor Law Commissioners in 1834:

“Every penny bestowed [on poor relief], that tends to render the condition of the pauper more eligible than that of the independent labourer, is a bounty on indolence and vice.”

Maybe we wouldn’t put it quite like that today, but we take the general point. Welfare fosters dependency, incentivising able-bodied people to opt out of the labour market. And in key respects, the history of welfare over the last forty years has been a painful relearning of that insight. The poverty trap, which first came to prominence in the sixties, only arose because benefits were set too high in relation to the available wage. That’s when it’s no longer financially worthwhile to take a legit job, so the rational punter goes for indolence in front of daytime telly, coupled with sporadic vice in the black economy.

The no-shit Poor Law Commissioners solved the problem by restricting benefit to bread and gruel in the workhouse. But our namby-pamby post-war consensus rulers simply chucked more of our money at it. By extending the benefit scales they allowed people to earn money without losing too much of their benefit entitlement. The overall cost mounted dramatically as more and more people became eligible for benefit, even when they had incomes way above the poverty line.

Of course, recent governments have been forced to sort of accept this was a costly error. They've sought to cut straight unemployment benefit, so that once again the able-bodied of working age are incentivised to get off their butts and take a proper job. These days it’s called welfare to work, and it finds sharp expression in the virtual freeze on benefits for the childless ‘job-seeker’. According to the IFS, the top means tested unemployment benefit for single childless people over 25 has remained unchanged in real terms for nearly twenty years, despite the substantial general rise in real incomes.

Inevitably, many of the people who used to claim unemployment benefit, now claim incapacity benefit instead. But at least there's now an understanding that this is a problem, rather an unalloyed mark of a civilised society.

Elsewhere, poverty trap amelioration continues to drive up spending. One of Blair’s touchstone pledges is to abolish child poverty, which means targeting welfare payments on parents. However, because parents are almost all of working age, the higher the payments, the worse the poverty trap.

Labour’s solution is the complex system of child and working family tax credits, stretched a long way up the income distribution in order to dampen the loss of benefits as earned income increases. They call it ‘progressive universalism’, another gem of doublespeak. The reality is that households with incomes up to £50,000 and over are now receiving a benefit ostensively targeted on relieving child poverty.

Similar problems apply with the government’s approach to relieving pensioner poverty. The Minimum Income Guarantee gave significant relief to the poorest pensioners. And quite right too. But then it was pointed out to Gordo that it was a disincentive to private saving for retirement. His response was the pension credit, another complex sliding scale designed to ameliorate another poverty trap.

Under New Labour, more and more of the population have been wound into the burgeoning system of official income determination and fiscal churn.

The scary thing is that they’re not finished. Tony’s pledge to eliminate child poverty- while an admirable motherhood aspiration- is going to involve another vast extension to official interference in the market’s determination of incomes. And there’s more to come on pensions.

So what should we do?

I speak from some experience here, having grown up on a (subsidised) council estate, and copped various state handouts, including free school meals. Perhaps because of this I do not agree with those free market bloggers who reckon we should abolish welfare altogether and leave it all to the private sector- ie charity. But I certainly think we could cut back considerably on current spending without going back to the workhouse.

My starting point is to note that the old grinding financial poverty of popular imagination was long ago consigned to history. By and large, state benefits are already sufficient to buy food, shelter, and clothing, even tellies, videos, and washing machines. The issue with many of the poor is not lack of funds, but lack of ability to manage their own lives. Bigger hand-outs are not going to help.

The implication is that the official EU-inspired 60 per cent poverty line should be revisited. We used to have an informal understanding that 50 per cent was the target level, and we should revert to that. That change would immediately reduce the ‘poor’ from 22 per cent of the population to 14. Which would substantially reduce the extent of the poverty trap issue, and allow us to target benefits much more specifically on those at the bottom who need it most.

I calculate that the cost of bringing everyone up to 50 per cent of the median 'original' income (as described above) would be £30-35 billion. We'd still have to factor in something for poverty trap amelioration, so let's call the total £50 billion. Add in the full £50 billion currently spent on state pensions (some of which is actually non-contributory poverty relief), and you get a total bill for social protection of £100 billion. Saving a full £50 billion off the current bill.

For those that think cutting the poverty line to 50 per cent sounds harsh- nasty even- I’d say it’s realistic. In the absence of a magic wand we need to focus on what’s likely to be practically achievable, not what we might like to see in a perfect world. And remember the state would continue to fund healthcare and education for the poor on top of their cash benefits.

It's also important to remember that while poverty can only be sensibly defined relative to the incomes of the surrounding community, the community that matters most is the local one. Certainly on our housing estate, not having a car, or taking foreign holidays, or going out for meals didn’t feel like any deprivation at all. Exactly the same applied to everyone in the road, and what was going on in the leafy ghettos of the middle class might just as well have been happening in another country.

I’m strongly in favour of paying taxes to support the poor. But we need to strike a difficult balance between heart and head. New Labour has big ambitions, but as usual its policies are hugely expensive and inefficient.


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