Just as Iain Duncan-Smith jumped for joy when he heard during the budget speech that the minimum wage, now aka the living wage, is to be increased, so also I jumped for joy to hear that child tax credits were being cut back. Until, that is, I realised Osborne was going to do it in one go rather than phase it in so that no-one would be worse off overnight. He could have done that by applying the cuts only to new-borns. However his actions did make me wonder if he had seen copies of an exchange of letters I had had with IDS, via my MP Cheryl Gillan, a couple of years ago when I asked for details of the breeding rates for families claiming benefits compared to those not doing so.
In that exchange IDS drew my attention to some DWP statistics released in response to an FOI request. They are available on the DWP website here. They show that for all families on benefits 23% have three or more children. Separately in his covering letter he stated that on average for all families only 14% have three or more children. If you then pro-rate the figures you can calculate that for all families not on benefits only 11.5% have three or more children. In other words families on benefits are breeding at double the rate of families not on benefits. However he had not analysed the numbers in this way and had therefore missed their significance and message. I wrote back to say so.
High breeding rates, particularly amongst the poor, are as much a burden to this country as high immigration rates, and it is not difficult to see why this has occurred. Child poverty is an emotive subject, and weak politicians are always prone to buying a few votes by increasing child benefits, allowances or tax credits, allowing the provision to become bloated and disproportionate. Further, the definition of child poverty adopted by New Labour, which was set as a percentage of average family incomes, included a built in escalator as standards of living rose. Paradoxically the recession has reversed this process, so that apparently fewer children are now in poverty by this measure as a result, which is absurd. I noted that George Osborne could not resist saying that child poverty had fallen in recent years – without saying how he was measuring that!
The government’s separately announced intention to review the basis on which child poverty is measured is welcome, but we must be careful what we are looking at. Clearly some parents are simply creaming off some of these benefits for themselves, leaving their children no better off, else why would we get these results? Parents are primarily responsible for their children, and the state should only intervene where there is clear evidence of deprivation or danger. A much more targeted, evidence-based and non-financial approach is required. Indeed, the emergence of food banks is an admirable example of the ‘big society’ in action, and their use should be encouraged for families who insist on having more children while they are claiming benefits.
Osborne has now acted to remove this perverse incentive, though in my opinion, as mentioned above, he should have withdrawn the benefits only for children not yet born. He could also have attenuated the benefits for each subsequent child after the first to reflect the fact that it is cheaper to live in a large family than a small one, and he could have offset the cost to working families by increasing the earnings disregards for Universal Credit clawback. Indeed welfare payments are a key component of consumer demand which should be maintained during a recession to help reduce unemployment. His actions may well cause unemployment to rise, as well as create a political backlash, and thereby cause the deficit actually to increase. Only after unemployment has fallen, which in itself will help to reduce welfare costs, should structural reductions be undertaken, and a focus on children not yet born would be consistent with this. In addition he has not acted to make work pay, despite the rhetoric to the contrary, and he is also completely at sea on housing.
Making work pay is all about sticks and carrots. You need both, but with the carrots being generally available and the sticks only being used where there is wilful non-cooperation. This government seems to think that it is simply about starving people into work. It is not. There will always be some unemployment. There has to be or else the economy will seize up and inflation go through the roof. So what are those unemployed people to live on? I am a strong supporter of the welfare system and believe it to be as much an icon of our civilized way of life as the NHS. However if the structure of it is not right then the incentive effects are perverse. As far as making work pay is concerned this means a big increase in the earnings disregards before clawback is calculated. That way you can say to people that the first £75 per week, say, that they earn will not be subject to any deductions at all. To someone on benefits that is worth getting out of bed for, even if they are only making a few pounds in a part-time or low-paid job. Whereas Osborne has done precisely the opposite and reduced the disregards. Even the Institute for Fiscal Studies was flummoxed by that one, and said so.
And then came this. “Mr Deputy Speaker, we are also going to end the ratchet of ever higher housing benefit chasing up ever higher rents in the social housing sector. These rents have increased by a staggering 20% since 2010. So rents paid in the social housing sector will not be frozen, but reduced by 1% a year for the next four years.” My mouth fell open. As an intervention into the workings of the free market this was every bit as economically illiterate as Ed Miliband’s frozen energy prices! He knows perfectly well why rents have gone through the roof. It is due to a combination of unlimited immigration and failure to build the new homes required. Supply and demand. Reducing rents by intervention is only going to reduce the supply still further.
And if that wasn’t bad enough he then went on to say “I’m confident that Housing Associations and other landlords in the social sector will be able to play their part and deliver the efficiency savings needed.” If that isn’t ostrich behaviour I don’t know what is. As Finance Director of one of London’s largest housing associations back in the 1980’s I can tell you exactly what is going to happen. Small and relatively inexpensive maintenance jobs will be botched or ignored. The property will then deteriorate further until it becomes an expensive major repair. The tenants will be decanted because the property is no longer habitable, but the property will remain empty, deteriorating at an accelerated rate, because the funds aren’t available to do anything about it. Finally it will be sold off at auction at a fraction of its original value. Brilliant!
So what I would have liked to have seen is the savings from fully phasing out the tax credits system, which is an unnecessary duplication, some £30bn a year, split and used three ways: to reduce the deficit in due course, to increase the disregards, and to increase the provision for housing benefit.
Given the massive shortage of social housing I also propose the introduction of a flat-rate cash allowance of perhaps £100 pw for people who qualify for housing benefit but cannot claim it because there is no social housing available. This would give them the opportunity to escape the dependency culture and make their own arrangements pro-tem – lodgings, hostels, tents, caravans, whatever – on an either/or basis with universal credits.
More thought should be given to the transition from benefits to tax. They are of course two completely different systems, not least in that benefits are family based whereas tax is not. That cannot easily be changed, but at least for single adults if the UC living allowance is set at a quarter of the personal tax allowance, the same amount for the disregard, and the clawback rate at 33.3%, then the top of the clawback taper would exactly coincide with the personal tax allowance, giving a completely smooth transition from 33.3% to 20% deductions. So for example for a personal tax allowance of £15,600pa, ie £300pw, you would get a living allowance and disregard both of £75, which is broadly the same as the current JSA allowance. This would optimize incentives to find work and progress up the income ladder whilst at the same time providing reasonable income support, sufficient for healthy survival, for the completely unemployed and underemployed.
Two further problems are apparent – the disproportionate rate of tax paid by the poorest (mainly through VAT), and the difficulty of ensuring adequate and progressive provision for the self-employed.
Increasing the personal tax allowance to £15,600 would represent an increase of £4,600, which would be very expensive. However it could be brought in with a corresponding increase in the basic rate of tax to 25%. This is not as drastic as it may sound. The break-even point is £34,000 on these assumptions – anyone earning less than this would be better off. One could then introduce an intermediate rate of 35% starting at £45,000 (currently 40% starts at £43,000 – you would be paying an extra £450 in tax at that point), and a top rate of 45% from say £75,000 (currently £150,000), eliminating the 40% rate altogether and creating a much more progressive burden.
In recent years increasing numbers have become self-employed, either by choice or as a result of welfare sanctions, yet we have no idea whether they are working the number of hours that want or earning a decent living. My solution is a self-assessed living allowance, the same as JSA at £75 per week for a single person, but automatically payable for two months (£324 per month) if claimed by someone registered as self-employed. At the end of the first month an online return of hours worked and income earned would have to be submitted to release the allowance for the third month, and so on. Further the benefit would automatically be adjusted on the basis of the income reported so that it can be reduced as appropriate on a cumulative basis throughout the year. At the year-end a final assessment would take place and any adjustment paid. There returns would then give us the information we need to determine accurately the actual level of underemployment for the purposes of fiscal policy. It would also allow small business owners to manage their drawings so as not to put their cash-flow at risk.
In summary therefore I recommend the following 6 point plan:
- Phase out the tax credit system, thereby saving over £30bn a year; working tax credits immediately (see below for replacement) and child tax credits phased out over 18 years by not registering any additional children.
- Attenuate the Universal Credit child allowances by 10% for each additional child after the first.
- Increase the UC earnings disregard to £75 per earner and reduce the clawback rate to 33.33%.
- Increase the personal tax allowance to £15,600, and the basic rate to 25%
- Introduce a homeless allowance for anyone qualifying for housing benefit but who cannot claim it.
- Introduce an online self-assessed living allowance for the self-employed.