Reaction to the ONS announcement that 52 percent of households receive more in benefits than they pay in tax was predictable, though not quite as hysterical as it has been in previous years. This piece in the Daily Mail was quite balanced. A quote from Douglas Carswell, in an otherwise pretty measured Telegraph article, made me smile.
We have not lived within our means for a generation. The ever-expanding redistributive state is pressure down ever more heavily on a diminishing productive base. The financial crisis ought to have alerted the political elite that this model is just not sustainable. We have not made the fundamental changes to the architecture of the state that needs to be made.
So if an MP in the largest governing party isn’t a member of the political elite, who the hell is?
It was left to the Daily Express to wail about the “welfare bonanza” and quote Conservative MP Andrew Rosindell:
Previous governments focussed too much on handing out benefits. This government has been, and is right, to reduce the size of Britain’s welfare bill.
Really? When did it do that then?
As ever, though, once you dig into the figures, the picture becomes a little more complex. First off, the benefits referred to includes the value of benefits in kind such as subsidised education, transport and, of course, the NHS. All of us are beneficiaries of public services. The ONS reckons that the wealthiest 20 percent get more from the NHS than the poorest.
We can see the combined effects of these benefits in kind, together with cash transfers and taxation, on this ONS chart.
Much of the benefit poorer households get, then, is in the form of the benefits from public services we all enjoy, not of direct cash handouts. If you want to describe the whole lot as ‘welfare’ then we’re all on welfare.
The 52 percent figure also includes retired households. Once you take out retired people, the number of households receiving more in benefits than they pay in tax is around 38 percent.
Source: ONS reference tables
That said, even the figure for non-retired households is a lot higher than it was in the 1970s. You would expect the percentage to go up during recessions, which it did, but there has also been a significant rise over the last three decades or so and a steady increase since 2000. This is consistent with what we know about the labour market. The number of working poor started to rise before the recession as did the number of self-employed people. Sometime around the middle of the decade, earnings began to fall, massively so for the self-employed.
Despite 3 percent growth over the last year, tax receipts have been disappointing. Wages are still stagnant and the increased amount of cash in the economy suggests that some of the self-employed are not declaring all their revenue.
The benefit dependency that government politicians talk about is increasingly an in-work benefit dependency. People may be coming off Job Seekers’ Allowance but they are going onto tax credits. Many of these workers also pay less tax now because thresholds have been raised. Taking the low paid out of tax and subsidising their pay is done for the best of reasons but it isn’t helping to increase the tax take or reduce the benefits bill. The result, as Frances said, is that the fiscal deficit is falling at a glacial pace.
This is all rather worrying, says the FT’s Chris Giles:
Tax revenues have consistently fallen short of expectations in this recovery – unlike public spending, which has been close to the chancellor’s targets set in the June 2010 ‘emergency’ Budget. For the 2013/14 financial year, this year’s Budget estimated public sector net revenues of £607.7bn, more than 8% (or £54bn) lower than the £661.9bn expected back in 2010.
Of course, most of this shortfall was caused by the economic weakness of 2011/12. Economic stagnation is a necessary, but not sufficient, explanation.
In 2010, the Office for Budget Responsibility expected the tax system to be able to collect 38.7% of national income in tax revenues. In fact, this year’s Budget documents show revenues accounting for only 37%. It means that 1.7% of gross domestic product – almost £30bn a year – has gone missing. That is a lot of money.
The trends are no better, even in the most recent year of rapid economic recovery. Taking real growth and inflation into account, the size of the economy grew 4.7% in 2013/14, but revenues rose only 3.5%. Normally, revenues grow faster than nominal GDP.
Weakness in revenue growth matters because if it continues, the shortfall will eventually be recovered through painful tax rate increases or further public spending cuts, meaning the grind of ever-harsher austerity will continue for longer.
The growing economy was supposed to have increased the tax take and reduced the welfare bill by a lot more. The longer it takes to do either, the more the government has to borrow.
Then there’s this:
If you talk to Treasury officials about the missing tax revenues, you get one of two responses. In public, there are many explanations for weak revenue: more low-paid jobs have been created that are not so tax-rich because the government has increased the income tax personal allowance; housing transactions remain weak, leading to shortfalls in stamp duties; oil revenues have taken a hammering from the slump in North Sea production; and financial companies are still offsetting past losses against current profits, hampering the growth of corporate tax revenues.
In private, there is greater concern that the structure of the economy and the UK tax system no longer easily generate tax revenues.
The IFS said something similar in its Green Budget:
One way in which the current recovery has been different from previous recoveries is that in recent years there has been remarkably strong growth in employment given the relatively weak growth in the UK economy. This mix of relatively strong employment growth and weaker average earnings growth has implications for growth in tax revenues – particularly from income tax and NICs. The main determinant of growth in these revenues is the growth in total employment income in the UK economy, which is the product of employment and average earnings growth. However, because of the progressivity of these taxes – in particular of income tax – growth in average earnings creates a larger boost to tax receipts than equivalent growth in employment. This means that the distribution of total employment income, as well as its headline growth, matters for tax receipts.
So, in other words, a 1% increase in employment income that comes from a boost to average earnings would be expected to increase income tax and NICs receipts by about £1 billion more than a 1% increase in employment income that comes solely from an increase in employment.
Just increasing employment doesn’t help much. Average earnings growth is what boosts the tax take. Furthermore:
The increase in revenues over the next five years is forecast to come largely from income tax and capital taxes. The UK is increasingly reliant on a few very-high- income individuals for the former – for example, the top 1% of contributors (around 300,000 individuals) contributed 27.5% of income tax in 2011–12 – while capital tax receipts are particularly hard to forecast and are also disproportionately paid by a relatively small number of individuals.
HMRC data released in September 2013 estimated that the share of income tax contributions made by the top 1% of contributors (ranked by contribution size) would rise to 27.5% by 2011–12, compared with 21.3% in 1999–2000 and 11% in 1979.11 To put it another way, the income tax paid by 300,000 or so very high-income individuals accounts for 7.5% of all tax revenue. These individuals will of course also pay large amounts of VAT and, in all likelihood, pay a large fraction of total capital taxes.
Increases in average earnings boost the tax take but what we are seeing instead is rising incomes at the top and rising employment at the bottom. The hollowing out of the tax base reflects what is happening in the labour market.
Given that forecasts for increasing wages increases and falling benefit spend are also glacially slow, it’s difficult to forsee much improvement over the next few years.
Source: Resolution Foundation
On top of all this, the proportion of retired people is likely to increase too, putting additional pressure on the tax and benefits system.
As the UK comes out of recession, it’s starting to look as though there are some structural weaknesses in our economy. We will probably see ‘More than half UK households receive more in benefits than they pay in tax’ headlines for some time yet. To blame all this on a welfare bonanza or the ever-expanding state is to miss the point though. It’s much more serious than that.