In the same week as welfare reforms come into effect, spread all over the front pages of the newspapers is the archetypal ‘scrounging scumbag’. Of course, government ministers would not be crass enough link the murder of six children to the need to reduce welfare entitlements but they don’t need to. The usual suspects have done that for them. The message is clear; the welfare reforms are necessary to stop nasty people like Mick Philpott living it up with your money. It’s no wonder the welfare bill is out of control when we give handouts to people like that.
But how typical is Mick Philpott? And is welfare for the work-shy really the reason why the benefits bill keeps rising?
Apparently, the ever-increasing cost of social security has even government ministers baffled:
Several ministers have begun to openly question why the welfare bill is still rising, as unemployment has fallen by about 200,000 since the general election.
Now this is rather disappointing because ministers have highly paid advisors and civil servants to explain stuff to them. For example, the people who produce bulletins like this.
Here we can see what is pushing up the cost of social security. Pensions and tax credits are two of the biggest increases. One is for retired people, the other is mostly for people in work.
Thanks to the IFS Green Budget, we can see some of this in a bit more detail.
Over the past decade or so, there was an increase in the cost of benefits to the unemployed but most of the rise was due to tax credits and housing benefit. (Most of the recent rise in the cost of housing benefit was due to claims by those in work.) As the IFS explains:
Nearly two-thirds of this real-terms cash increase was driven by higher spending on tax credits, which were substantially more generous than the benefits they replaced. This encompassed increases in means-tested support for families with children in general, and particularly big increases in support for those in work. Spending on tax credits for those in paid work increased from under £3.3 billion in 1997–98 to more than £20 billion by 2010–11.
In fact, if you break down the total welfare expenditure, unemployment benefits don’t account for that much of it.
Source: A Survey of the UK Benefit System – IFS
The OBR predicts that the benefits bill will continue to rise even after the economy begins to recover. It’s not benefits for the unemployed that is driving this though. As the DWP/HMRC graph above shows, pensions continue to rise and the cost of tax credits stays stubbornly constant. This suggests that, even with a growing economy, there will still be a need to support the incomes of those in low wage employment from public funds.
So for all the talk of feckless scroungers pushing up the benefits bill, the figures indicate that payments to pensioners and those in work are behind much of the increase. Even if we could round up all the Mick Philpotts and force them to go back to work it would make very little difference. More worryingly, the forecast persistence of in-work benefits for the next five years suggests that, even when the economy does create new jobs for the unemployed, a lot of them will still be claiming benefit.
Whatever the Daily Mail and others might like us to think, the existence of a few people like Mick Philpott makes very little difference to the overall cost of benefits. The welfare bill is a bit like a volcano. A lot of smoke and fireworks comes from the little bits at the top but, underneath, slowly but surely pushing up the cost, is the rising magma of pensions and in-work benefits, the inevitable results of an ageing society and a low-wage economy.
Update:
Clarifications:
- This is not meant to imply that pensioners and in-work benefit claimants are scroungers. (Note to self: be more careful with post title choice.)
- Nor is it meant to imply that unemployed people are scroungers. Most have worked relatively recently. The Mick Philpotts of this world are a minority of a minority. A very small one.
Flip Chart Fairy Tales 
Only caution on this analysis is that it shows only cash outgoings from the state. If you count the implicit opportunity cost of social housing, the housing benefit bill would be much higher.
Rahul, you’ll have to help me out here. Do you mean if social housing were charged at market rates?
Yep exactly; the state owns an asset (in London quite a valuable asset) or allows groups of citizens (housing associations) to do so w/ whacking tax breaks.
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Lots of perceptions about us problematic pensioners now we’re drawing our money… not a lot of acknowlegement of the contributions we made when we – the baby boom – were in work in a full-employment economy and paying taxes at significantly higher rates than people today. It would I suppose be naive to ask ‘where did all that money go….?’
Bernard – this wasn’t meant to imply that pensioners are scroungers!
>‘where did all that money go….?’
All the money wasn’t enough to match the current pension expenditure. Yes, I know that it is not hypothecated, but the point stands. The assumptions made at the time were unsustainable, and the difference needs to be made up somehow.
It seems to me that the problem here is whether pensions based on false assumptions of full employment and short life expectancy, and therefore excessive in relation to contributions put aside, can continue to be justified in present circumstances, and how we deal with that legacy.
That is the question that Mr Cameron has not had the courage to ask.
So, to cut welfare spending in a realistic way, the state has to stop subsidising jobs (which is what “in work benefits” essentially are). This would either force wages up – making the UK uncompetitive and thus increasing unemployment (so increasing welfare spending) – or push prices down, leading to an economic slowdown which would increase unemployment (so increasing welfare spending).
Unless of course it does so by raising the tax threshold so that people keep more of their income and don’t need wage subsidies, though that of course reduces government income (although if spending is going down, that shouldn’t be as much of a problem),
Or allow migration of working age labour, though that seems to be rather unpopular at present.
Simon,
Putting wages up across the board has no affect on unemployment. But it does have an effect on profits, because it makes them go up – wages being a source of profits.
Henry Ford worked this out 90 years ago.
We’re in a dynamic floating rate exchange system – fixed exchange fixed quantity thinking doesn’t help.
labour demand law would state that an increase in price of labour would lead to a decrease in demand for labour, all other things being equal. I don’t think Henry would disagree. If demand and supply were fixed and cost of labour went up then sure, profits would decrease, but this presumes a company can’t hire and fire freely to some extent.
K marx worked out capitalism long before mr ford and eating into profits by putting up wages is one sure fire way to increase unemployment it’s about supply and demand and once you supply more than the demand workers are laid off and mr ford understood that part.
The answer to ‘where the money went’ is, of course, to pay for benefit and tax credit increases given to non- pensioners over the past 20 years when there were more working age people (proportionately) paying in and fewer pensioners taking out.
Surely employers are aware of how the in work benefits operate and will operate a wage policy accordingly ie no/low annual increases knowing that the state will make up the difference to the “living wage”. In which case an increase in the minimum wage will reduce this benefit up to the point that these jobs are uneconomical at an increased level? It would be very interesting to know which companies “benefit” from this subsidy and could be achieved by making the Employer claim the subsidy directly?
“It would be very interesting to know which companies “benefit” from this subsidy and could be achieved by making the Employer claim the subsidy directly?”
I have heard suggestions (alas, not from anybody any near the machinery of power) that employers that pay low wages requiring state benefit subsidy should be surcharged per employee or, on the flip side, those that pay wages that do not require such subsidy should be offered rebates/tax breaks. An interesting idea, no? Potentially similar in effect to increasing the minimum wage to a living wage, but implementing such as a surge charge would perhaps highlight the hidden cost of a low wage economy and give politicians and campaigners something to point to and say “If we scrap/reduce the low pay surcharge/employer NICs, you, the tax payer will end up footing the bill in higher welfare costs (i.e. the burden of tax will shift from capital to labour)”.
Whoops! My idle mind wrote surcharge as ‘surge charge’. Hehe, please forgive me world!
The private sector only values what it pays for.
If the state is paying for the labour then it should get the value of that labour for the public purpose.
And the private sector should have to compete with that to get labour. Any private sector entity complaining should be reminded that competition is a good thing.
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“Of course, government ministers would not be crass enough link the murder of six children to the need to reduce welfare entitlements…”
You reckless optimist, you. :-\
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Surely even the most economically illiterate can see that even from a big business owner perspective, higher wage level provides greater fuel for consumer spending, and therefore drives demand for your product!! If the workers are financially malnourished, sales will dip, profits are affected and the ever so wise management make further cuts to wages to protect shrinking profits – unknowingly (as only a moron would knowingly perpetuate!) providing the next downward stimulus to consumer demand (60% ish of Aggregate Demand!)
Capitalism forces wages down not up it’s a case of diminishing returns K Marx wrote a cracking couple of volumes that explains all this if you care to read them.
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