Friday, January 13, 2006
Cost Of Fiscal Churn
Fiscal churning takes place where governments both tax households and pay them benefits at the same time: taking money out of one pocket, and putting it into the other pocket of the same people. In the late nineties, the OECD estimated such churning accounted for about 7% of household incomes in Australia, up to a staggering 34% in Sweden.
We have no official UK estimate, but we do know it takes place on a massive scale: even families on incomes of £55,000 are eligible for Child Tax Credit. My own estimate, based on ONS data, is that the UK's fiscal churn is of the order of 10% of household incomes, or some £70bn pa. This relates just to cash benefits: adding in health and education benefits would almost treble the figure.
Now, the administration of both tax collection and benefit payment is notoriously inefficient, so the scope for waste is considerable.
The Department of Work and Pensions alone spends £6bn pa on administrating benefit payments of £116bn. That's 5% gone on admin. On top of that there are overpayments and fraud, which they estimate account for about another 1%.
The tax authorities reckon to do better, with a cost of collection running at around 1%. Although there's also the £1bn pa written off as non-collectable by the Inland Revenue and a corresponding £2bn written off by Customs (hmm...I know a Sarf London gent with a baseball-bat who might be able to help there). Customs admits it loses yet another £3bn pa through fraud.
So totting it all up, the total cost of fiscal churn- admin, errors and fraud- is about 8% of the amount churned.
Which means it's costing us £5-6bn every year.
All to transfer money from one pocket to another.
Picture: Ostler Family History Net
Posted by Mike D at 3:06 pm