IEA Blog

There has been much discussion over the last week about the coalition government’s first 100 days. Some of this analysis has been useful (like that on this blog), whilst much of it has been rather odd. There has been a rush to judgement as if we can state with some certainty what the government is and isn’t going to do after only 14 weeks.

However, the task that the government has set itself – to reduce the size and role of the state – is a long-term task, and what makes it more difficult is that the key change is not merely a matter of economics and politics, but involves a significant cultural shift.

The biggest cultural change that the government needs to make is to eradicate the sense that people are due certain entitlements. Instead of assuming that they are entitled to benefits and services as of right, people need to come to terms with the fact that what they receive comes at the expense of others: welfare benefits can only be granted to some because others pay tax. Calling a benefit an entitlement ignores the fact that the money has to be earned by someone and then taken by government.

Matching the idea of entitlement is the problem of resentment. This is the sense that government does not work for us, does not care and might actually be operating against us. Some who feel this resentment do so because they feel they are paying taxes that are being squandered on others. But the highest level of resentment actually comes from those who benefit most from the entitlement-based system of welfare. It is those who benefit the most from welfare and the professionals who depend on these structures that feel most strongly that the state is against them.

I would argue that this latter form of resentment arises precisely because of the belief that welfare recipients, backed by welfare professionals, are entitled to certain goods and services as of right and without having to make any contribution themselves. What matters now is not what one does but the mere fact that one is. The job of the new government is to change this attitude and make it clear that benefits come with strings attached. This is a task that will take much longer than 100 days.

From the moment Frank Field raised doubts about the validity of relative poverty measures, the outrage industry has been up in arms against him.

The poverty enquiry which Field will conduct for the coalition has not even begun yet, but according to Donny Dorling of Sheffield University, Field’s venture shows that David Cameron “clearly does not want a redistribution of the money, the land, the work, the educational resources and the ‘opportunities’ that the rich have expropriated from the poor over the past three decades.”

I have written a number of posts criticising the concept of “relative poverty”. Let me, however, make a conditional defence of it. It is sometimes claimed that researchers focusing on this measure “confuse” inequality with poverty. They don’t. They subscribe to a specific set of highly restrictive assumptions, under which income inequality means social exclusion, and social exclusion means poverty. So under their assumptions, inequality is poverty, and there is nothing counterintuitive about the finding that Luxembourg has a higher poverty rate than Hungary, Slovakia, Slovenia and the Czech Republic.

The problem with relative rates is that when they are quoted outside of research circles, they are seldom, if ever, presented in this way – as a figure which makes sense under very specific assumptions, which you can accept or reject. What you usually get is a conflation of the rate produced by one poverty indicator with the interpretation belonging to a different one. Witness Dorling:

“…European Union researchers announced that 23% of children in the UK lived in a household in poverty, and that the UK ranked seventh worst out of 27 EU countries by the measure Field would like to abolish. Only in poorer countries, such as Romania and Bulgaria, are a higher proportion of children living in poverty.”

The latter sentence insinuates that the poverty rate should be inversely related to a country’s overall level of prosperity. This would be a perfectly valid claim for an indicator of material deprivation, but not for relative poverty, which has nothing to do with overall prosperity.

Dorling is not an exception. End Child Poverty informs us that “4 million children – one in three – are currently living in poverty in the UK [...]. This is a shocking figure given the wealth of our nation.” The UK branch of Oxfam claims that “The UK is the fifth richest country in the world. [...] Yet this has not benefited the poorest in society.”

This jumbling of poverty figures and interpretations is unfortunate, because child poverty does exist in the UK. But we would be better served with a contest in producing the most sensible policy recommendations, instead of a contest in producing the most catastrophic figures.

“The purpose of my life here is to improve the quality of life of the worst off in society.” Such ambitious rhetoric is not unusual for new incumbents at the Department for Work and Pensions. The difference with Iain Duncan Smith is that he means it, having advocated an overhaul of Britain’s rotten welfare system for years while being far away from the lure of power. If IDS is to deliver on his goals of tackling poverty, chronic welfare dependency and low intergenerational mobility, he will not just need zeal but also a good deal of stoicism, because he will make enemies.

The issues he raises featured high in the early years of the New Labour project as well, but today, not even staunch Labour supporters would claim that much of it has been delivered. Yet, between 1997 and 2007, external conditions could hardly have been more favourable for welfare reform. The labour market performed robustly and unemployment rates fell steadily. Tax revenue was rising, enabling the government to pick the low-hanging fruit: making low-paid work more attractive through tax credits, instead of applying sanctions to those who turned down suitable job offers. Also, the government was backed by a largely sympathetic community of anti-poverty campaigners.

As far as the first two points are concerned, it goes without saying that IDS will not be in a similarly favourable position. And if he follows up on his announcements to apply sanctions to people who do not take up work, he will soon find himself confronted with an angry campaigner community.

In his account of Wisconsin’s welfare reforms, Lawrence M. Mead describes the initial opposition to the work-first approach there: “most intellectuals [...] view work as a threat to poor families”. It would be unfair to claim that this was also true for the poverty advocacy community in the UK. But my impression is that they are more concerned with the dangers of low-paid work than with worklessness. They frequently emphasise that 59% of all children in poverty live in households were at least one adult works.

This figure tells us next to nothing. First of all, it includes children whose parents are self-employed (12%), which means that their income is volatile and not reflective of their living standards. Secondly, it defines anyone who works a few hours per week as ‘in work’ (16%). Measuring child poverty by the consumption-based Material Deprivation Index, the profile is a bit different: 76% of all children in MD-poverty live in households with no adult in full-time work; while 3% of them live in households with all adults in full-time work.

The 59% figure partly reflects the structure of Working Tax Credit, which is payable to parents who work at least 16 hours per week, and which is then withdrawn with earnings. WTC makes it relatively attractive to work at or just above this threshold, but is punitive to those who extend their weekly working hours from then on. Unsurprisingly, then, half of all lone parents (the key target group) in receipt of WTC get stuck at or just above the threshold.

IDS has criticised this trap-like nature of the present welfare system, and pointed out the absurdity of levying the highest effective marginal tax rates on the weakest groups in the labour market. Spot on. Yet, reducing those rates will cost money, and since this is hardly the time for spending increases, other parts of the benefit system will have to be made stingier. The poverty campaigner community will not like it, but work requirements, with effective sanctions for non-compliance, are the most suitable candidate. 

Even Margaret Thatcher didn’t manage to dismantle Britain’s disastrous welfare system. Judging by the policy plans of the Lib-Con coalition, there is little reason to be optimistic that today’s leaders will be any more successful. The timid proposals on welfare are little more than an expansion of existing failed programmes.

It is unsurprising that welfare reform has presented such a problem for successive governments. The six million working-age adults who now receive out-of-work benefits – plus millions more over-60s receiving generous pension credits – comprise a large voting bloc. Labour would have risked losing its core support had it attacked benefit dependency.

Within the new administration, the rebranded, centrist Conservative Party will be wary of implementing policies perceived (wrongly) as an attack on the poor, while any major changes could face strong opposition from the Liberal Democrats’ hard-socialist Left.

Nevertheless, the dire state of the public finances means the Government will have little choice but to make substantial cuts in welfare expenditure…

Read the full article in The Daily Telegraph.

Unemployment figures may still look bleak, but there is one occupational group which can be thoroughly relaxed about their future employment prospects. If Ending child poverty: mapping the route to 2020, a policy document accompanying the Budget, offers any glimpse of what the next decade may look like, then rosy times are ahead for social workers (broadly defined, for lack of a better term).

The document does not contain many specific policy proposals, but its overtone is: there is no social ill which cannot be cured if only the right programmes, projects, initiatives, pilots, strategies, support schemes, advice bureaus and partnerships take concerted action. This is a plea for a hyperactive, multi-level, multi-dimensional, multi-intervention approach.   

To be sure, the document contains well-argued passages. The authors point out that almost 18% of British children still live in jobless households, compared with 7% of Danish and 5% of Swedish children. They also note that just over half of the UK’s single mothers are in some form of paid employment, compared with more than 80% of Danish and Swedish single mothers. When they credit in-work support policies for having increased the employment rate of single mothers by 12 percentage points over the past decade, they are probably right.  

But whenever the authors identify the shortcomings of current policies, they immediately ask “How can the government do more to rectify this?”, which makes the paper a one-way street.

For example, they criticise the complexity of the current benefit system and the adverse effects this creates. And then comes the remedy: “local practitioners who work directly with families will soon be able to use a new Government produced guide to benefits and tax credits, which will allow staff to advise parents of what support is on offer, who is eligible for it and how they go about claiming.”

The authors also acknowledge that people on housing benefits can sometimes make themselves worse off by taking up work. They then go on to praise a local pilot project, which temporarily tops up people’s housing benefits to compensate for steep withdrawal rates.

If you enjoy hands-on, “more-action-is-required” rhetoric, then this paper is essential reading. 

Shadow Chancellor George Osborne leads the chorus of tut-tutting at means-tested child tax credits going to “better-off” families and seems to believe that we would save enough to bail out the national debt were they restricted to “needies”.

Needy “clients” will typically be on a plethora of “targeted” benefits – to pay their rent, council tax, etc., and will get a whole range of free goods and services. By definition, anything “targeted” has to be withdrawn if and when people are deemed non-needy. Do this suddenly and there is the loss of a hundred or more per cent of any extra income above the cut off point for entitlement. The only way to cope is by phasing out gradually – and the more that is “targeted” the more that has to be withdrawn and the further the taper has to extend up the income scale. The effect is still minimal over crucial reaches of the income distribution, with claimants facing severe losses.

If credits stop suddenly at lower income levels many more people will see nothing or have a negative income if they try to improve their fortunes. David Cameron promises to let people keep a large slice of their out-of-work benefits when they get a job; necessitating a further big phase out at a higher point. Another way to avoid tapers extending to “better off” levels is to drastically reduce the value of means-tested credits and benefits or – stop targeting needies. 

There is an immediate appeal to “targeting the needy” – not just because of conspicuous compassion, but the suggestion of a cheap and precise way to address a problem. Bang, bull’s eye, solved! Dynamic consequences, what are they?

Sadly, there is not a finite supply of needies, even really, truly needies, but a multitude of hopefuls on the margins clamouring to be let in; altering their circumstances, dumping their assets, and staking their claim to be “needier than thou”. Tax credits were first given to working families, then non-working families and now childless workers.

Putting qualifying conditions on one benefit causes migration on to another. Once the youngest child reaches 16, a hefty and increasing slice of the burgeoning lone parent population goes straight on to long-term sick benefits – the interim measure until the state pension can be accessed. There are the benefits to get off benefits; accumulating one on top of another as seemingly convenient ways to counteract the disincentives of the one that went before. Not worthwhile to work? Make up the wages of the low paid, even for a few hours work. Pay a bonus for putting a toe in the labour market, maybe £20, £40 extra a week. Sticking at the maximum benefit for the minimum hours?  Have an extra benefit to extend your hours. Got children? We will pay to care for them - more than your labour is worth.   

About 30% of spending by government is now on a maze of around 40 benefits and tax credits, their administration and policing. If it is so cheap and useful, why is the vast accumulating expense of targeting needies drowning us in debt, even though it has done little other than further social dislocation? Where in the world has means testing been other than counter-productive? Countries that have – as Britain used to – universal tax allowances for dependents, a minimal safety net and enforcement of responsibility for family members, also have lower rates of poverty, inequality, household fragmentation and welfare expenditure.

Patricia Morgan is the author of The War Between the State and the Family.

Reform have today launched a report calling for the end of middle class benefits to stave off increases in tax. Before querying that proposal, let me say first that I am glad that they have waded into the debate and I don’t want to sound as if I am hanging on to my entitlements hoping (as I believe Ronald Reagan said) “that I can carry on feeding the crocodile hoping it will eat me last.”

However, I do have a problem with the proposals if they are implemented alone. The underlying assumption seems to be that the tax burden will increase ON THE MIDDLE CLASS without Reform’s proposals. I suppose if that is the counterfactual, I would prefer the cut in benefits. However, having had 12 years of dramatically expanding means-tested welfare provision and provision for those not working and relatively badly off, there is a danger that taking away universal benefits (or raising taxes on the middle class) will simply reduce further the net returns to working, to education and so on. 

We cannot deal with the current recession by simply piling further burdens on the middle class. The first extension of Reform’s programme would be to abolish free TV licenses, free bus and tube travel and the winter fuel allowance for all pensioners…

The Conservatives are proposing to clamp down on incapacity benefit claimants in order to deal with the large numbers they say should be in work. This is a laudable aim, of course, but it is highly unlikely that their initiative will work. This is at least the third initiative of its type. A previous programme of getting people off incapacity benefit and into work was undertaken by the last Conservative government and this government, to its credit, has announced initiatives in this regard too.  

The question the Conservatives refuse to examine is whether it is possible for a government bureaucracy to manage such a system without large amounts of fraud and questionable claims. Nobody with any authority has any financial incentive to police the system properly – neither the claimant, the doctor nor the benefit office…The problems that exist within the system cannot be resolved by goodwill and the hounding of claimants.    

What is needed is wholesale privatisation of the benefit for those who are fit and healthy when they leave full-time education. Frank Field has pointed out how small profit-making organisations and mutuals used to manage such insurance benefits very well. They developed mechanisms to assess claims which ensured that there were very few “dodgy” claims. Furthermore – and experience of microfinance projects confirms this – private organisations and mutual associations have the strongest possible incentive to ease people back into appropriate employment.    

In 1999 a Royal Commission on long-term care for the elderly reported. There is an excellent minority report but the majority report is staunchly left wing, statist and strongly prejudiced against private health care. However, even this Royal Commission had to admit that the best practice in long-term care for the elderly was in the private sector. This is largely because the minimisation of claims (and the disabilities that lead to claims) is in the joint best interest of the insurer and recipient of the benefit.    

So let’s privatise all disability insurance. Or better still, make it optional and just allow people to provide for life’s contingencies in their own way.

In A History of Modern Britain, Andrew Marr describes post-war Britain as a grim place in material terms. In 1950, only 4% of the adult population owned a television, and only 3% went on holidays abroad. Marr also notes: “Sponging with lukewarm water had replaced regular baths for millions of people. To put it bluntly, many British people in the forties would, by our sensitive standards, have smelt a little.”

By the early 1960s, the picture had changed a good deal. At that time, the leading poverty researcher Peter Townsend noted that “[t]he belief that poverty has been virtually eliminated in Britain is commonly held.”

But by the 1990s, poverty was again all over the place, or at least all over the news, political speeches, and NGO campaigns. A leading source speaks of “levels of poverty and inequality unprecedented in post-war history.”

How you view the evolution of poverty in Britain depends on how you measure it. The most frequently quoted measure of relative income poverty was stable over the 1960s and 1970s, suddenly exploded in the 1980s, and has remained on a high level since then. Real incomes at the 10th and 15th percentiles of the income distribution, in contrast, have increased continuously, apart from times of general economic contraction. Today, they stand at twice their level of the early 1960s.

But in fact neither measure tells the whole story. “Incomes” and “living standards” can be very different. If, for example, David Beckham decided to take a year off, he would appear in the poverty statistics, because in that year his income would be zero. In contrast, if your house burned down and your car was stolen, you would be no closer to the poverty line, because your income would be unchanged. Granted, these two examples are not particularly meaningful. But the correlation between income and spending has become fuzzier over time, making income a worse predictor of living standards than it used to be.

With most available measures riddled with shortcomings, we lack an exact picture of poverty. Nevertheless, it is safe to say that while material hardship in Britain has decreased much less than it could have over the last sixty years, it has decreased much more more than conventional measures suggest.

Today, even the least well-off spend sizeable portions of their budgets on items related to recreation, culture, restaurants and hotels, with clothing and footwear occupying only a small part. However, the income share which households at the 10th income percentile devote to housing costs has increased from 20% in the late 1970s to almost 30% today.

The crude, income-based aggregate measures which inform anti-poverty policies today encourage strategies based on transfer payments, notwithstanding their demonstrable side effects. A more detailed look at what people actually lack and why suggests we should rather tackle the root causes that make particular items, such as housing, unnecessarily expensive, and at the same time transform the benefit trap into a trampoline.  

Gordon Brown recently signalled a shift in public policy away from performance targets and towards entitlements. He argued we should place access to health, education, housing and welfare on the basis of entitlements, on the premise that this was what citizens should expect from the public services.

But this is a very dangerous idea, in that the the notion of entitlements acts to separate completely the funding of welfare from its consumption. To say we are entitled to something places a clear moral imperative on some agent to provide it for us. It also implies that we need provide no further justification for our access to the service, and that we should have these services regardless of the consequences to others.

Brown’s idea of entitlement simply assumes that the services – and the money to pay for them – is always there, and that if extra funding is needed then it should, and can, be found. But where, and from whom, does the money for these services come from? And why is it acceptable that the people paying have no say in what others may receive?

The problem of basing welfare on entitlements is that it assumes that people who are not party to private decisions  – about having children, taking a job, taking drugs, not eating healthily – should eventually be held to account for sorting out the resulting problems. This might be justified by some on the basis of social solidarity and altruism, in that we should feel the need to help others less fortunate than ourselves. However, what is readily apparent is that the sense of solidarity only runs one way – from taxpayer to welfare recipient. There is no conditionality to ensure that welfare recipients’ entitlements are linked to any sort of behaviour. The result of this is the very opposite of solidarity: if we have entitlements we need not think of the needs of others (after all they have entitlements too!). Perversely, therefore, Brown’s attempt to broaden the role of the state as a provider of welfare merely has the effect of making us more selfish.