IEA Blog

A single claimant of Jobseeker’s Allowance or Income Support aged 18-24 receives £51.85 a week. This goes up to £65.45 for those aged 25 and over.

Tax credit and child benefit payments for a first child are significantly higher at £75 per week, while subsequent children will earn claimant households an additional £58 per week.

It would seem to be unfair that child-related benefits are paid at a higher rate than those for young adults. In particular, young adults may have to spend around a third of their income on utility bills, whereas families will enjoy the economies of scale resulting from shared living space, meals and transport etc. Moreover, it is inconsistent that the benefits system recognises economies of scale within families (hence the first child premiums) but not in its treatment of families vis-a-vis single households.

A fairer system would standardise first child payments at the young adults’ rate of £51.85 per week, with lower payments for additional children. This could be achieved in practice by halving the child element of child tax credits. The measure would have the additional advantages of improving work incentives and cutting billions from the annual £24 billion tax credits bill.

Swinging the axe on benefits and tax credits is no longer taboo after the coalition’s announcements that these spending areas will be scrutinised towards the end of this year. It looks as though “middle-class benefits” are a particular target.  

Whatever the result, the debate itself provides an opportunity to dispel a few popular myths. The British Social Attitude survey, for example, continues to tell the tale of a stingy Anglo-Saxon welfare model, providing only bare-bone protection. This is contrasted with the supposedly much more generous models of the Scandinavians and the Rhinelanders.

At least in terms of aggregate figures, this characterisation has long lost its validity (if it ever had much). The UK spends 25% of its GDP on social protection benefits – less than Sweden, France and Germany, roughly level with Denmark and Austria, and more than Finland, Norway and the Netherlands.

It is not surprising that people in the bottom quintile of the (equivalised) income distribution receive on average three quarters of their household income from government benefits. But government transfers also constitute 40% of the second lowest, and 16% of the middle quintile’s household incomes. Even for the second-richest quintile, a disappearance of all benefits would be equivalent to a pay cut of 7%. State transfers have become a widely used legal drug, which will make the cold turkey all the more unpopular.  

Friends of the big state know this very well. A publication by the Fabian Society recently made the case for an even less targeted, near-universal welfare state, to “garner middle-class buy-in”:

“while narrowly targeted policies will fail to draw on the strength of middle-class political pressure to defend welfare, policies with wider coverage actively recruit the sharp elbows of the middle class” (p. 85).

But if the authors are right, and if their logic also works the other way round, then there is a powerful antidote to transfer addiction: transparency. If the coalition is seriously interested in curtailing runaway transfer spending, it would first have to simplify the tax-and-benefit system. This could include replacing Child Benefit and middle-class Child Tax Credit with an extra tax-free allowance per child for the parent(s). It could also include replacing tax credits for those on modest pay with a negative income tax, mutually exclusive with the positive income tax.

In short, keep redistribution from Peter to Paul if Paul needs it. But stop redistribution from Peter’s left pocket into Peter’s right pocket. Send the bill directly to Peter instead, and see how keen he really is on a big state.