The new changes to British welfare policy

by on April 1, 2013 at 1:12 am in Economics, History, Law, Uncategorized | Permalink

The process starts today, as listed by the FT:

1 April – Spare room subsidy ends

1 April – Council tax benefit eligibility decided by local councils

8 April – New benefit rates come into effect. Most will be increased by a below-inflation 1 per cent

8 April – Personal Independence Payment replaces Disability Living Allowance in north England

15 April – Benefit cap, limiting sums a single household can receive to about £500 [TC: that is per week], begins in four London areas before national roll-out in July

29 April – Universal Credit pilot begins in one English town

Here is a CRS-like summary of the changes (pdf).  The Guardian breaks down some of the exact numbers.  If I understand their categories correctly, total benefit spending in nominal terms is going up by 1.9%, less than the rate of price inflation.  Supporters of reform argue that welfare benefits have been going up at a higher rate than have wages.  At the first link you will see that British public opinion was about 60% in favor of higher benefits in 1991 and was about 27% in favor of higher benefits as of 2011.

There is a concomitant movement afoot to cut benefits for immigrants.

I have been reading up on the Poor Law reforms of 1834 for a forthcoming MRU course, and the number of parallels to the current situation is striking.  (By the way, here is a good D.A. Baugh article (jstor) about welfare costs leading up to those reforms.)  For instance as British workers themselves struggled, support for toughening up the Poor Laws increased considerably.  The final 1834 changes, which restricted eligibility, limited grants, consolidated categories of aid, and emphasized “putting the poor back to work,” passed Parliament by a considerable margin.  There was also at that time, and now, a variety of popular overestimates for how much the benefits were squelching work effort (see Mark Blaug on the Poor Laws for instance).

This current reform is viewed by many critics as not being very generous.  It also can be said, however, that relative to current and recently lowered expectations of future wealth for the middle class, this is probably offering a higher percentage of redistribution than was the case a few years ago or for that matter during the pre-Thatcher British welfare state.

Brett April 1, 2013 at 1:47 am

I’m more interested in the NHS reforms, which could lead to some drastic “supply side” changes in the British universal health care system.

Tomasz Wegrzanowski April 1, 2013 at 2:03 am

It seems real, not nominal, so it’s way worse than that.

Alan April 1, 2013 at 3:02 am

Why should the government (our money, extorted by threatened or actual state-controlled violence) give them anything?

Hoover April 1, 2013 at 4:03 am

Possibly because the majority of taxpayers dislike seeing a lot of beggars on the street.

Note also that in the case of unemployment benefit, most recipients are likely to have paid in for a time, and are simply calling on the insurance scheme to uphold its end of the bargain.

prior_approval April 1, 2013 at 4:07 am

You’re purely home schooled, right?

Plamus April 1, 2013 at 6:36 am

You went to public school and were the jock who gave wedgies, right?

prior_approval April 1, 2013 at 10:08 am

My response was simply to this point – ‘Why should the government … give them anything?’

Assuming during his childhood he did not own property or have an income, and assuming he went to public school, his education was given to him. And yet, unless he was home schooled, he seems unconcerned about how his public education was given to him.

Plamus April 1, 2013 at 11:31 am

If that’s all you meant, I retract my comment and apologize – to me, it sounded like an insult that bundled stupidity and homeschooling into one neat zinger. I fail, however, to see how “purely home schooled” is a necessary (let alone sufficient) condition for being against the gov’t redistribution without being hypocritical. What if Alan got all his education in private institutions – is he then entitled to his opinion? His disdain does not appear to be against giving per se, but against the government’s giving. You know, the good old scheme where A and B agree that C must help D.

prior_approval April 1, 2013 at 3:01 pm

‘got all his education in private institutions’

I had already thought of that – basically, I would assume that such private institutions are granted tax breaks, which would mean that they are being ‘given’ something by the government, in exchange for educating children.

Andrew' April 1, 2013 at 7:53 am

Being homeschooled would not be even. That would be on average a net victim. Being even might be a good kid in public school who receives back what their net tax contribution is and does not cause too much trouble in school.

Alan April 1, 2013 at 3:42 pm

Confession time. I frequent this blog for three reasons.

One is to help me to understand better how economic theory applies in the real world.

The second is because I enjoy the quirks and curiosities that are often linked here.

The third is to attempt to understand why, unlike other psychopathologies, libertarianism has so much influence in the USA. I occasionally poke the commenters here with my troll stick, to discover what kind of squeal they make.

JWatts April 1, 2013 at 5:13 pm

The third is to attempt to understand why, unlike other psychopathologies, libertarianism has so much influence in the USA.

Libertarianism is similar to the maladaptive behavior of Liberalism without the controlling aspects. ;)

Maurice de Sully April 1, 2013 at 7:31 pm

– The third is to attempt to understand why, unlike other psychopathologies, libertarianism has so much influence in the USA. –

Interesting query, except for the question begging part. I would presume its because our “progressives” and “conservatives” are such a sorry lot.

The Anti-Gnostic April 2, 2013 at 11:17 pm

I’m guessing most Europeans bitch about regulations, supplement their public medical care, pay around a third of their income in taxes and not a dime more than they have to (or less), worry about crime and living in the right part of town, and think their bureaucrats are overpaid fops. Other than the vacations, we’re probably less different than you’d like to believe. If they really do have it all figured out then let me know so I can emigrate.

Tom April 2, 2013 at 4:03 pm

So if you lose your job, or your business fails and you go bankrupt, you’d gladly starve yourself to death to save us all a few pounds on our tax bill, would you?

There’s lots of reasons to keep the benefit system free from abuse, but do you have a proposal that requires neither taxing nor borrowing, and would keep people on low incomes from starving to death if they’re out of work for a few months?

Frederic Mari April 1, 2013 at 3:05 am

It’s amazing how we all got poorer. I wonder what happened? Did we have a Malthusian shock of ‘too many mouths’? Did we experience a war destroying our economy? Did we have terrible earthquakes and shattering floods?

Not that I see.

What, I wonder, happened? Anyone with a suggestion?

http://theredbanker.blogspot.com/2013/03/inequality-and-growth-sequel.html

Hoover April 1, 2013 at 4:14 am

We haven’t got that much poorer. Product quality hasn’t diminished and food prices haven’t gone up to the point of unaffordability. It’s true that energy is now costing us a lot more; I explain that by pointing to government complacency and failure to act.

Our purchasing power has fallen by what… 15% in 5 years? I believe that’s caused mostly by printing money.

Meanwhile some things have fallen in price: I saw a toaster priced at £5 in Currys the other day (before you say it will break on the day you buy it, remember that it comes with a statutory guarantee of 2 years).

Frederic Mari April 1, 2013 at 7:32 am

Money printing did it? That’s your explanation?

To a point, I don’t disagree i.e. I do think that everyone saying monetary policy ought to be loosen up some more to finally “create some inflation” is, imho, using very sophisticated reasoning but still getting it wrong.

It’s not like I fear inflation, let alone hyperinflation, in the near future, it’s more that unorthodox monetary policy doesn’t seem to do much and what it does is probably bad.

OTOH, money printing isn’t what caused that mess and/or explain the 80s and 90s.

Andrew' April 1, 2013 at 7:55 am

People in repressed subsistence countries became the beneficiaries of mobile capital which moves first, followed at some point by maturing of their markets (we hope) and a re-balancing that fixes the distortions and dislocations. It’s a hypothesis, anyway.

Frederic Mari April 2, 2013 at 8:20 am

And it might eventually work out like that when Chinese workers get their fair share of the Chinese growth and thus transform into consumers on par (more or less) with the rest of us.

I think I’ve mentioned before that I would find it interesting to link trade openness with ‘competitiveness’ i.e. ‘labour cost adjusted for productivity’.

In the meantime…

Silas Barta April 1, 2013 at 3:31 pm

It’s not complicated. A lot of people (not everyone) devoted resources into things that turned out, rather predictably to be worthless, like homes, home-flipping skills, mortgage-backed security hob-gobbery, and useless college and law degrees. The expected to have a higher future income. Oops, no one’s willing to buy what they’re selling, so the expectations were frustrated. And now they’re conning the government into dipping into the non-stupids’ pockets to pay for it.

Frederic Mari April 2, 2013 at 8:26 am

Funny how the non-stupid were all part of the 0.1% at the start… Useless college degrees? Never heard of the college wage premium? I mean, as wages get depressed so do college wages. But a premium remains.

And homes are worthless? That’s new. I think I’d actually like to buy one. And I would actually quite fancy a second one on top, in the Bahamas or Barbados or even the South of France. IF I had the money…

CC April 1, 2013 at 11:23 pm

AD shock. Read Scott Sumner’s blog.

Frederic Mari April 2, 2013 at 8:29 am

I do, though not super regularly. I quite like NGDP targeting as a simplification of Fed’s dual targets ( http://theredbanker.blogspot.com/2012/05/ngdp-targeting-i-like-it-but.html ) but do not believe that 5% inflation and 0% RGDP is going to be much better than 0% inflation and 0% RGDP.

And, of course, I agree. We went through an AD shock. That was the point of me being satirical.

Ed April 1, 2013 at 4:12 am

“It’s amazing how we all got poorer. I wonder what happened? Did we have a Malthusian shock of ‘too many mouths’?”

Yes: http://en.wikipedia.org/wiki/File:World-Population-1800-2100.svg

Or this chart: http://en.wikipedia.org/wiki/File:World_population_history.svg

Or look at the entire article: http://en.wikipedia.org/wiki/World_population

Anyway, after 1960 there was an international baby boom that dwarfed the more famous late 1940s American baby boom. World population increased from 2.5 billion to 6 billion in 40 years. Even stagnating Europe had a 21% increase, adding over 200 million people. Britain, in contrast to other European counties, has also been willing to take some of surplus population generated by what is now termed “the developing world”. There really is no historical precedent anywhere for this sort of increase in terems of size or rapidity.

Because of the green revolution, feeding all these people wasn’t a problem, the problem was getting them all jobs.

Actually the problem will probably self-correct because people adjusted to reduced prospects for real family income growth by having fewer children.

shrikanthk April 1, 2013 at 4:22 am

the problem was getting them all jobs.

Was it?
Per-capita income of the world has increased significantly notwithstanding the population increase from 2.5Bn to 6Bn

Frederic Mari April 1, 2013 at 7:37 am

That.

Thanks, shrikanthk.

Ed April 1, 2013 at 4:22 am

The consolidated benefit is a good idea on its own terms, and a baby step towards a guaranteed income.

I’m in some danger of sounding like a broken record, but a guaranteed income for adults, at one half the median after-tax income for a household of three, as a replacement for much of the welfare system (at least the income support/ family support portion) would address alot of these issues.

There would be none system gaming, since you get the top up to guarantee and nothing more. But fewer people would fall through the cracks (everyone would qualify). It would be much simpler and cheaper to administer. By setting the gaurantee at the minimum, the system would adjust automatically if the country got poorer or wages fell in real terms, sinnce the guarantee itself would automatically fall. If wages rose than the guarantee would also adjust. There would be no” loss of benefits” due to accumluating a higher income than the guarantee due to a job, since by definition the job would be paying more than could possibly be received from the gurantee, if the job paid less then you still get the guarantee. There would also be no incentive to increase your check by having children, since the check would remain the same, in fact the point of the system is that there would be no incentives of any sort.

However, there seems to be strong, probably mostly emotional, resistance against this idea from both the right and the left.

2.

Frederic Mari April 1, 2013 at 7:49 am

Possibly.

However, personally, I quite like the idea. I think an income guarantee is a baby step towards Noah Smith’s proposal (which I also like) of giving people a capital endowment at birth/when they turn 18.

Now, I do have practical questions. How does it work when you are on the minimum guaranteed (in France, it’s called RMI http://en.wikipedia.org/wiki/Revenu_minimum_d'insertion ) and you have a job paying better but not much? Surely some people will prefer leisure + guaranteed income versus work + only slightly better income. Believe me, the right does wail on that like banshees. And I can’t say they’re wrong…

If the two adds up, it’s pretty neat but, as the income guarantee tappers off, you run the risk of arbitrage.

IMO, the only real solution is to have it for everyone. Then tax the sum of income + guarantee (if it crosses the threshold). It’s a bit cumbersome but, hopefully, the simplicity of the scheme and the lack of work/leisure arbitrage would be enough to compensate.

However, humane as that system might be, it doesn’t do all that much to solve unemployment. See France for a case in point.

Andrew' April 1, 2013 at 7:57 am

“giving people a capital endowment at birth/when they turn 18″ They already get to vote, which for most people far outweights their contribution to date.

Ending aging would eliminate most of these intergenerational problems!

Frederic Mari April 2, 2013 at 8:33 am

You cannot eat the right to vote. And, these days, they can buy it but you cannot sell it.

Brandon Berg April 1, 2013 at 8:19 am

giving people a capital endowment at birth/when they turn 18.

Why? They already have the extremely valuable privilege of citizenship in a first-world country. What reason is there to give them more, when a large majority of the world’s population doesn’t even have that?

How does it work when you are on the minimum guaranteed and you have a job paying better but not much?

While it’s never really a safe bet to postulate a finite limit on the folly of government, I really can’t imagine that any would be so stupid as to implement a top-up guaranteed income. This means that people who can’t find an income above the minimum have exactly zero incentive to work, and many have only a very small incentive to work, not worth the sacrifice of leisure. The sane way to implement a guaranteed income is to add a refundable tax credit for the amount of the guaranteed income and then tax all income at the same rate. So, for example, if the guaranteed income is $10,000/year and you don’t work, your tax is -$10,000 per year, and the government cuts you a check for $10,000. If you have a job that pays $10,000 per year, your tax, supposing a 25% rate, is $2500 – $10,000 = -$7500. If your job pays $20,000, your tax is $5000 – $10,000 = -$5,000. At $40,000/year in wages, you break even, and above that you have a positive tax liability. That way the marginal tax rate is constant, and everyone has an incentive to work.

Frederic Mari April 2, 2013 at 8:44 am

I would have no huge problem with making the scheme worldwide. It might, to a large degree, compensate for the issues of who “stole” what from whom and when.

http://www.nber.org/papers/w15508

“Combining the figures for individual countries reveals that net worth averaged US$44,024 per adult in PPP terms across the globe. Wealth of US$8,635 was needed to be in the top half of the global distribution, and US$518,364 to be in the top one per cent”.

I suspect most of us would not be happy to trade what we got for an endowment of US$ 45k (even if it is in 2009 USD). But, if robots growth keep going the way it is, maybe we’ll get to a point where we’d be happy for the trade?

Ed April 1, 2013 at 10:19 am

Yes, its for every adult, and you may be overthinking it. The guarantee is for $ x per year (haf the after-tax median household income for three). Get a job making less than $ x, you get topped up to $ x. Make more than $ x, no top up, but you are making more than $ x.

Yes, it is possible to not work at all and get $ x per year, people will do that, and for many that is the sticking point in the scheme. But the point is, if someone does that, about three quarters of everyone else by definition will be making more. For most people, being permanently stuck in the bottom quarter is bad enough to go out and work. The exceptions frankly are not the types that will put in alot of effort even if they have jobs. And if everyone decides they want to sit home and just pick up the guarantee, or a large enough percentage of the population does this, then median income will plummet as the economy collapses and the value of the guarantee will plummet too.

But I think the fact that there will be people free-riding, even if it will be kind of crappy free riding and at least out in the open, is what will keep something like this from being adopted. But you have this problem with every transfer payment.

GiT April 1, 2013 at 4:48 pm

I really don’t see how a top-up is in any-way preferable to something that doesn’t have the silly effect on incentives created by topping income up to a maximum.

Peter Whiteford April 1, 2013 at 1:43 pm

Despite the name the RMI in France is not a guaranteed income. It is an income-tested social assistance payment.

Frederic Mari April 2, 2013 at 8:53 am

True but it’s starting to look like splitting hair. It doesn’t take all that much to qualify for it if you’re above 25 and without any other source of income. I mean, how would a guaranteed income be radically different?

In any way, I think Brandon Berg’s reaction below explains why it won’t be politically popular anytime soon.

There was a sci-fi book by Norman Spinrad ( Child of Fortune, iirc. http://www.amazon.com/Norman-Spinrad/e/B000AP7LSO ) whereby people without resources could always go to a sort of public dormitory, with public showers and with food that was at once perfectly balanced and nutritious but tasted like papier-mache. Needless to say, no one was eager to eat more of it than strictly necessary. The whole thing was, of course (this being sci-fi) clean, wholesome and pretty much danger-free.

Still, the point would be – Rather than giving people the bare amount of money needed to survive, why not try (again) to provide the bare necessities themselves? I am pretty sure a public dormitory, even with nothing but nice and fit people (sci-fi, I am telling you) would not be my cup of tea and I’d plenty incentivised to move my arse to get my own place…

Brandon Berg April 1, 2013 at 8:00 am

I’m in some danger of sounding like a broken record, but a guaranteed income for adults, at one half the median after-tax income for a household of three

So a childless couple, or just a pair of roommates, can simply not work, and be guaranteed the median income for a family of three? That’s nuts. A guaranteed income must not be comfortable. Giving up 40 hours of free time per week has huge disutility, and many people just won’t do it if they can receive a comfortable living just for converting oxygen to carbon dioxide. To discourage loafing, it must not be an attractive alternative to working. Rather, it should provide the bare minimum for survival, requiring supplementation with earned income to reach a comfortable standard of living.

But hey, I’m just being emotional.

Andrew' April 1, 2013 at 9:58 am

What is the philosophical justification for a guaranteed income? That corporations are using finite resources? So the solution is to incentivize some consumers to sit around? Odd.

Ed April 1, 2013 at 10:24 am

You want to give people incentives to sit around now. The crops won’t rot if you don’t get everyone out working in the fields.

But the crops might die from the pollution caused by trying to give seven billion people to drive to their make-work jobs because you don’t want anyone sitting around.

Mike April 1, 2013 at 6:51 pm

Their carbon dioxide emissions are likely to be helpful to the crops!

NPW April 1, 2013 at 12:00 pm

Why wouldn’t inflation rise in response? If everyone started with X, how would you keep the costs of goods/services from increasing to match? More governmental controls?

Would we keep the minimum wage? Wouldn’t the functional minimum wage become a cent above the guaranteed income?

If you want me to pay for poets and pimps at the point of a gun without complaint, I need a legal document that says I’ll never hear another sob story about how I need to give them more of my money. I need some evidence that this is more than just rebaselining their sense of entitlement.

I believe in a safety net. I don’t believe in handouts as a way of life. I don’t have a solution that meets both requirements, and I don’t think this is either.

JWatts April 1, 2013 at 5:45 pm

Why wouldn’t inflation rise in response? If everyone started with X, how would you keep the costs of goods/services from increasing to match? More governmental controls?

I’m not sure this would necessarily be the case. As long as the individuals were free to spend their money as they saw fit, the marketplace would remain competitive.

Of course, when recipients spent their government money on guns, Harley’s, drugs, video games and hookers, suddenly there would be an outcry to place controls on its use. So like you, I’d rather spend my own money on the aforementioned necessities. :)

Andrew' April 1, 2013 at 8:01 am

What if instead of standing belligerently in the path of progress, the government facilitated a system whereby teachers and students could expand elastically during recessions?

Mulp April 1, 2013 at 1:25 pm

Aren’t you the one who’s always saying uncertainty is bad for business?

If you don’t like exacerbating recessions, a particularly terrible idea would be to implement a government spending policy that was procyclical.

Mulp April 1, 2013 at 1:25 pm

Mulp apologizes for misreading your comment.

Andrew' April 1, 2013 at 2:32 pm

I’m the guy who says uncertainty can be mathematically shown to reduce the probability of correct predictions of the future. Sometimes that is bad for business. I would assume that is especially the case at times when there are high degrees of uncertainty throughout the economy. I’ve pointed out that it seems to me that aggregate demand shortfall might be boiled down to just economic uncertainty. The policy I’m envisioning is like the ultimate shovel-ready project. As Scott Sumner might say, if they utterly committed to it they might never have to do it.

JWatts April 1, 2013 at 10:41 am

‘The Welfare Reform Act 2012 is the most substantial legislative change in the British welfare system since the 1940s. It replaces a large number of different types of benefits with a single benefit, called Universal Credit, with the aim of making the system fairer, easier to enforce, and one that encourages people to work. It will be implemented in stages over the next five years. It is anticipated that it will significantly reduce the amount of money that the government is required to spend on social benefits.

Hmm, that’s a bold claim. Is this an April Fool’s joke? Or is Britain actually reducing the size of government? This looks vaguely like something Newt Gingrich would write perhaps in collaboration with President Clinton.

Bender Bending Rodriguez April 1, 2013 at 5:04 pm

http://news.uk.msn.com/uk/nearly-900000-drop-benefit-claims

A massive 878,300 chose not to be checked for their fitness to work under tests brought in when the benefit was replaced by Employment Support Allowance in 2008.

Among them were people on benefits because of blisters, acne, and strains and sprains.

This story doesn’t have it, but I recall seeing a different story over the weekend that a similar number were checked and were cleared for work.

Hoover April 1, 2013 at 6:13 pm

Britain is reducing the size of the government workforce, so hopefully less governing is happening.

Around 400,000 jobs have already gone in central and local government. It’s believed (by the Institute for Fiscal Studies) that departmental spending will have fallen by around 20% by the end of 2017.

Radical things are happening in Britain, though this is not yet fully recognised. As radical as Thatcher’s things. Large parts of the workforce are reskilling, the welfare state is being cut back, the private sector is expanding rapidly. No, I do not work for the ministry of propaganda.

Bill April 1, 2013 at 10:50 am

United States Welfare Reform should focus on

Eliminating tenure.

Brave New World out there.

You can be a part of it, too.

maguro April 1, 2013 at 11:37 am

What the hell does tenure have to do with any of this?

Bill April 1, 2013 at 1:30 pm

What does a life long benefit have to do with anything?

Bill April 1, 2013 at 3:11 pm

Maguro, Not to surprise you, I focus on tenure because I find it interesting that economists, when they conduct “economic quizes” of the public, and their understanding of economics, ask about minimum wages, ignoring inefficiencies of lifetime guaranteed jobs. When an IMF economist advices a country to liberalize their labor policy, ie, cease job protection for existing workers, the economist doesn’t mention tenure. When an economist talks about charter schools, and the ability of the school superintendent to fire poorly performing teachers, only to be obstructed by a union, that tenured economist does not challenge their own work rules that protects him. And, when an economist comments on British welfare reform, which reduces a benefit for a disabled person, I have to ask: what about tenure? Where does that rank? Isn’t that a benefit too? You would probably see much more improvement in increasing productivity from limiting tenure as you would from reducing benefits so as to move a disabled person from his current position to another. Until libertarian economists pick up the cause of challenging tenure I will consider them part of the United Autoworkers of Education.

maguro April 1, 2013 at 7:26 pm

Ah, so get rid of tenure and all these social welfare programs somehow become affordable? Sure.

James Plunkett April 2, 2013 at 5:09 am

Tyler – on your point about work incentives it’s important to note that working households are also hit hard by the welfare squeeze because of the UK’s system of in-work tax credits.

Our work shows, for example, that 60% of the impact of the new 1% welfare uprating (by far the largest new saving the government is making) falls on working households.

Other changes also hit low paid working people – for example, the council tax benefit localisation and cut affects 700,000 low paid people, particularly part-timers.

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