Tuesday, 30 June 2015

Welfare 'dependency' - cart before the horse?

A new report published today by the right-wing think tank Centre for Policy Studies presents some interesting statistics on 'welfare dependency'.

In a new Economic Bulletin,  Adam Memon, Head of Economic Research reveals that 51.5% of households still receive more from the state than they pay in tax.
 
The report also shows that:
 

  • Net dependency of the middle fifth of households has fallen by 27% since 2010/11.
     
  • The poorest are still suffering from high taxes.
     
  • Deeper welfare reform is needed to reduce dependency and raise incomes.
     
  • Inequality is now lower than at any time under New Labour.
The report draws its statistics from the office for National Statistics.  You might think then that this is an 'objective' assessment.  But it requires a note of caution, not about the statistics themselves, but the assumptions. 

Adam Memon, the report author says:
 
“Welfare dependency is an economically destructive phenomenon which tears at Britain’s social fabric. It reduces the incentive to work and earn more whilst keeping people trapped in a cycle of low aspirations, low productivity and low pay. The welfare state must protect the vulnerable and encourage self-reliance but for too many households it has become a permanent trap.
 
Net dependency at 51.5% is still too high. Simply attempting to alleviate difficult economic conditions with welfare payments can only ever be a short term fix. Indeed, the case for making a further £12 billion of savings in the welfare budget rests not only on the need to reduce the budget deficit but also on the need to reform welfare to boost employment and encourage growth in real wages. The Government must press ahead with deeper welfare reform.”

The use of the word 'dependency' is in vogue.  We hear it from across the political spectrum. It conjures images of a malaise or an addiction, as if the poor are addicted by benefits. It makes the assumption also that such 'dependency' can be 'cured' by withholding the benefits - a kind of welfare cold turkey.  The poor will of course suffer withdrawal symptoms but in the end all will be well.  Their dependency will be cured. 

It also puts the cart before the horse.  What drives 'dependency' is low pay and poor prospects.  Of course welfare might push wages down, but the assumption, presented by the Prime Minister that miraculously wages would rise if the government cut welfare is economic nonsense.   If the government wants to reduce the need for benefits, then it should ensure that wages rise and there is a reduction in zero hour contracts.  Simply cutting benefits will drive more into poverty. 

The report emphasises another statistic so often ignored, or rarely stated.  The poorest pay proportionately more tax than do the rich. 

The report points out that the richest fifth of households paid £29,200 in tax over 2013/14 which equates to an average tax rate of 34.8% of their gross incomes. The poorest fifth of households paid £4,900 in taxes over the year. Whilst this is much less in absolute terms, at 37.8%, it is proportionately
even higher than paid by the richest households.

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