IEA Blog

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.

How to pursue a redistributionist agenda when public support for it is low? Change public attitudes by restructuring the welfare regime, says a new book titled The Solidarity Society by the Fabian Society.

A key thesis of the book is: the more the welfare state attempts to target spending on the poorest, the less it will ultimately redistribute to them.

The reason is that different welfare regimes provide different political incentives. When transfer payments or social services are targeted, it is apparent that some people pay for them while other people receive them. Society is divided into two distinct camps: givers and takers, “us” and “them”. This limits people’s willingness to contribute, and ultimately politicians’ scope for increasing welfare budgets. It also fosters a negative view of the recipients.

But when payments or services are widely or even universally available, these matters are reversed. There are no obvious paymasters and recipients; almost everybody views themselves as a beneficiary, and is therefore more likely to support further expansions of the programme. This is why increasing spending on the NHS (universal) or child benefit is usually popular with voters, while increasing spending on social housing (targeted) is not.

The authors’ message is not simply “spend, spend, spend!”. They want to move away from targeting and towards a welfare regime that aligns the political interests of the middle classes with those of the poor. If the former pay and the latter receive, then the former will usually be inclined towards constraining welfare spending. But if everybody is on the receiving end, all political incentives will point towards ever-expanding welfare budgets.

I have hitherto believed that the one thing the Fabians shared with the IEA was a profound belief in the power of ideas. This book is about something more mundane than that. Ultimately, the authors call for extending and restructuring “welfare churning” in such a way that it becomes utterly impossible to tell who is a net contributor and who is a net payer. Net-payers should be deluded into believing that they really benefit from the big state, and applaud at every further expansion.

Britain has a long-standing, rich tradition of voluntary solidarity and philanthropy. Is the creation of fiscal illusions really the best way to revive it?