Saturday, July 18, 2009

Cutting The Burden Of Welfare

Some of the hardest cuts George will have to make will be in welfare.

The current social security bill is running at £165bn, with another £22bn going on Brown's complex array of tax credits. Added together, they will absorb 13% of our GDP this year - and that's on the optimistic Budget forecasts.

Worse, as the slump unfolds, the burden is going to get even heavier. And we simply can't afford it.

When cradle-to-grave welfare was introduced back in the New Jerusalem, benefits spending was about 4% of GDP. But since the 40s, successive governments of both colours have managed to increase the burden threefold - and contrary to popular belief, it even increased under Thatcher (albeit by just 0.2% of GDP).

Still, in 1997, Labour inherited a booming economy in which the burden was falling quite fast. It had already declined by 1.4% of GDP in the previous four years, and in the next two it went down by a further 0.4%, reaching a low of 10.8% of GDP in 1999-2000.

But as we know, instead of consolidating this promising fiscal position, Brown turned on the spending taps - including significant increases in a wide range of benefits.

For nearly a decade, he got away with it. A booming economy meant that the welfare burden remained only just above where it had been at the end of the 90s.

Unfortunately, reality finally intruded, and with a collapsing economy, Brown's earlier largesse means the burden will soon surpass the peak reached in the early 90s recession.

Of course, behind the scary long-term upward spending trend lies another scary upward trend: our longevity. We're all living too long. Much too long, and fully half our welfare spending goes on pensioners (£87bn this year).

So what's to be done?

One possibility is to shoot everyone over 70. But 59-year old Tyler is not entirely convinced by that option.

More realistically, we need to push up the state pension age to 70, and do it on a much faster timescale than the current leisurely move towards 68 by 2046.

But that will take time. Time the markets might not allow us.

No, George is going to have to wield the knife quickly and decisively, for immediate results.

Child Benefit (£12bn pa) is almost certainly for the chop (as proposed by Reform among others - see here), and many benefits could get frozen.

None of it will be easy. The screams will be loud, and the pain horribly real.

But one thing's for sure - given the size of the burden, welfare will have to take its share.

Inaction is not an option.

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