Tuesday, May 25, 2010

Tackling The Welfare Problem

"My Government’s legislative programme will be based upon the principles of freedom, fairness and responsibility...
The tax and benefits system will be made fairer and simpler... People will be supported into work with sanctions for those who refuse available jobs and the timetable for increasing the State Pension Age will be reviewed."
Thus spake Her Majesty today.
As we mentioned a couple of days ago, the welfare bill is now running at £200bn pa, around 15% of GDP, and increasing rapidly. The chart above shows how it has soared over the last century since the Liberals began the huge expansion of welfare just before WW1.
And under successive governments since then, it's grown into a serious problem. The blunt truth is that we can no longer afford it, and Dave is quite rightly set on cuts.
But what cuts? And how can we cut without having people starve in the gutter?
Here's how that £200bn breaks down between the three key "client" groups (2008-09):
  • Old people - £90bn, mainly in the shape of the state pension.
  • Sickness and disability - £40bn, including the 2.5m people of working age who are on those notorious incapacity benefits.
  • Families and children - £30bn, plus another £20bn in the form of tax credits which also largely goes to them.

The remaining £20bn goes mainly on housing, spread between all three groups. Unemployment support comes in at just £5bn - the rest having been redefined as something else.

So what to cut? In truth, there are no easy answers, and there will inevitably be losers. But the current level of welfare benefits is targeted on 60% of median income, which is now around £23,000 pa*. By no stretch of the imagination is that starving in a gutter, and given our dire fiscal straights, a 60% target is no longer sustainable.

And all those old people are going to have to be even older before they can retire. Given their increasing tendency to have 100th birthdays, the state pension age is going to have to rise to 70 soonest. Because if Her Majesty can still work at 84 - and wear that huge crown - working to 70 without the crown ought to be a breeze for everyone else.

The poverty line redrawn at 50% of median income; state pension age raised to 70; and forced sterilisation for anyone who has children they can't afford to support. Well, no, OK, the last one was the Major's and might not make it through to the final programme.

Nobody would start from here, but Dave does sound like he might be ready to take some real decisions. Let's hope he gets on with it.

*Footnote - The government's poverty benchmark is median household net income on an equivalised basis. Que? That's median household income, adjusted for household size and composition (equivalised), net of income tax and National Insurance, and gross of social security receipts (for more detail see here). Gross of social security receipts? But surely that means the target is chasing its own tail, and the higher the government makes social security, the higher will be the poverty benchmark, and the higher will be social security payments to close the gap, and the greater will be the cost. Well, yes, that's right - it's one of the very many bonkers features built into our current system of poverty relief.

PS So what does the Imperial State Crown actually weigh? An incredible 32 ounces. All set with 2,868 diamonds, 273 pearls, 17 sapphires, 11 emeralds, and 5 rubies.

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