To avoid Osborne’s benefit trap Labour must change the debate

December 14, 2012 5:34 pm

From a political point of view George Osborne’s autumn statement was a success, in that a week since he stood up in the Commons, the biggest issue is not any mistakes he has made but Labour’s quandary on what to do about his proposal to rise benefits 1%. In a budget which has been covered far more for political calculations made by the Chancellor than economic ones, those on the lowest incomes find themselves in a position of being his political football. This does however offer Labour the opportunity to stand up for fairer policies which are better for vulnerable people and for the economy.

This move by the Conservatives is clearly rank opportunism. Conservatives are acting in government in a way more becoming of an opposition party – trying to create dividing lines through populist but bad policies – in taking on this Tory manoeuvre Labour can show ourselves to be a competent party of government, against a government far more interested in political games than in helping the poorest and building the economy.

It is entirely right that Ed Balls has recently indicated that Labour will oppose this measure. However the problem with the debate around benefits is that for too long we have let the Conservatives and the conservative press define the term and even now we need to be bolder in arguing that it is for the good of the economy that we are opposing this. To address the cost of benefits we need to help people find more work, not take money away from those who don’t have it. As recent polling suggests the public are open to these arguments for higher benefit levels.

An important step to becoming a credible governing party is to take on this argument and change the political narrative, discussing benefits as a way of helping people into work and stimulating our economy. An important first step to this is arguing that the 1% measure will hurt both the poor and the economy.

When adjusted for inflation the Conservative proposals mean a 5% cut in benefit levels for those who receive both in-work benefits and out-of-work benefits over the next four years. There has been a tendency by the Labour party to focus on the effect that this will have on people who are in work, but on benefits such as tax credits. This is for understandable reasons, but it reinforces prejudices about the ‘deserving’ and ‘undeserving, feckless’ poor in the media. Working in policy around unemployment and benefits, I have seen very little evidence for a statistically significant number of people unwilling to work. Fraud and error only account for around 1% of the benefit bill, while far more of those on out-of-work benefits are made up by people like Vince, a man I interviewed in 2009 who was incapacitated for 20 years having been hit by a lorry and who had worked hard to get to a position where he could go back to work all that time. Not ‘skivers and strivers’ but people who have been failed by the system and need our support.

To be successful in winning the welfare debate, Labour have to start answering those prejudices. To avoid Osborne’s opportunistic trap, we need to challenge the argument that those on out-of-work benefits can be persuaded to find work if only we force them into sufficient poverty.

The affect of a 5%  cut in benefits

The proposed changes will lead to out-of-work benefits falling further behind wages which will lead to more chaotic lives for those out of work and who lose their jobs. At the moment Jobseekers allowance stands at around 10% of average waged income. When the Thatcher government broke the link between wages and benefits in the 80s it stood at 20%. The new proposals mean this gap will widen at an even higher rate.

The result of benefits falling so far behind earnings is that losing your job creates the prospect of not being able to keep up other financial commitments that could, and often does, lead to people losing their homes and damaging families and relationships. Changes in housing benefits now mean that the government will no longer keep up your first 13 weeks of payments immediately after you lose your job making this a very real possibility for more people. Countless studies have found that one of the best ways of helping people into work is protecting the stability of their lives – which is exactly what current policies are failing do by forcing Jobseekers off a financial cliff and putting their rent at risk.

There are many who argue that Labour must show themselves to be a sensible party of government with a plan to cut the welfare budget. I believe that if we are to do that, we have to start arguing that taking money away from people does not reduce the cost of welfare as it pushes them further away from finding sustainable work, increasing the length of time they have to rely on benefit measures. If we “spend to save” by providing adequate support, we will have a lower total benefit bill and more people in work contributing taxes in the long run.

With the unemployment high and a real possibility of unemployment rising a further 200,000 in 2013 more of the population know people who are unemployed and see evidence in their own lives that the problem is not people being unwilling to find work, but the jobs not being there. It is Osborne’s policy of punishing the poorest and most financially vulnerable for his inability to create growth that is not offering serious solutions to our economic problems. In reality, there is a greater advantage, in terms of stimulating the economy, by giving those on low incomes more money as they spend a higher proportion of their income on necessities rather than saving it as the better-off do.

Labour should respond to Osborne with a policy of restoring the link between wages and benefits, a measure that passes a key test of appearing fair, and which will also allow Labour to start a much needed conversation about using social security as a means to support people into work rather than punishing people for being out-of-work.

  • pjackson

    I don’t know why inflation increases are applied as an across the board %. If a basket of ‘essentials’ costs an extra (say 5%) ..£5, then everybody should get £5.00. How is it sensible someone on £500pw gets £25 ? It’s likely £250 of the £500 goes into savings…so they get a 5% interest rate on top ? Monetry increases and not % increases are the way forward…forget the %’ages…it just increases the monetry gap between the rich and the poorest…

  • peteyvv

    Reducing the first 13 week housing payment is equally as nasty as a 1% cap. Perhaps Labour should invite recipeints who will be directly effected by the cap into parliament on the day of the vote. Get Osborne to tell them to their face. They are not scroungers and deserve a voice.

  • JoeDM

    The fundamental question is: why should household income from State benefits rise faster than household income earned from employment?

    • Joshfg

      That is why I’m arguing it should be linked to wages. However the fact remains its fallen too far behind wages making it more difficult for people to find a job when they loose one.

    • http://www.facebook.com/profile.php?id=100001116515833 Michael Carey

      It’s a false dichotomy anyway, but the answer to your specific question is implicit in your question- *because* wages are falling, not despite it. We should be not be supporting a race to the bottom in terms of wages, and by cutting benefits for the unemployed and disabled that is what we would be doing.

      It is those forms of welfare that really just function as a subsidy for capital that we should be targeting. In-work benefits merely subsidize the reproduction of labour that capitalists need to generate profit. Housing benefit is just a subsidy for profiteering landlords. A genuine predistributive / One Nation / Responsible Capitalism / blah approach would mean desocializing these costs and making the profiteers foot the bill., in effect cutting in-work benefit and housing benefit but imposing rent controls, or building social housing through increased taxation of capital, and undoing the anti-union laws, for instance.

    • Serbitar

      As I pointed out on another thread you’ve got it all wrong, JoeDM. It’s naivety like yours that Osborne exploits to push through the nastiest of nasty policies.

      Benefit levels have nothing to do with rises or falls in earnings any more and haven’t for over thirty two years. The former linkage between benefits and wages was broken in 1980 by Margaret Thatcher and the Conservative Party and, sadly, the Labour Party never saw fit to restore it during their 13 years in office when wage increases mostly outstripped inflation. So over the last 30+ years out of work benefit levels have steadily fallen relative to wages, dropping from about one-fifth to one-tenth of average earnings. Therefore if fairness and social justice is what we’re talking about in relation to benefit uprating the question shouldn’t be “Should benefits rise faster than earnings?” but “Why have benefits been allowed to falls so far behind earnings?” and “Shouldn’t benefit levels be much higher?”

      Osborne loves to suck the unsuspecting in like this, twisting and distorting the facts.

      • http://www.facebook.com/profile.php?id=100001116515833 Michael Carey

        ‘Benefit levels have nothing to do with rises or falls in earnings any more and haven’t for over thirty two years.’

        Officially, sure, but economically benefit levels for the unemployed certainly have a determining influence on wages. ‘The wages of 1,000 workers of the same skill are determined not by the 950 in employment but by the 50 unemployed’.

        The Tory argument is perfect ideologically for them. Depress benefits for the reserve army of labour and those in work are at a bargaining disadvantage with their employers.

      • jaime taurosangastre candelas

        Serbitar,

        …”over the last 30+ years out of work benefit levels have steadily fallen relative to wages, dropping from about one-fifth to one-tenth of average earnings”>>>

        I do not have the data for 30 years back, and it is entirely possible that you are correct in your broad point, but it is not accurate to say 1/10th of average earnings. Even at the miserable £71 a week for JSA (which cannot be nearly enough), out of work benefits are still around 1/7th of average earnings. I have not included any other benefits beyond JSA in that.

        There is a pressing need for facts on this important debate. Both sides pick and choose, when a wider set of data is readily available and hardly secret. For example, since 2007, benefits rises have outstripped wage increases (18% increase against 10% increase), and even with the 1% cap, will not come back into parity of % increase until 2017. See http://www.ifs.org.uk/conferences/PTAB_SA.pdf

        (This is the same report that Ed M was waving around in the last PMQs, but what he omitted was any calculation of the increase in the tax threshold which is also included in the report, and which rather defeated the argument he was trying to make. Given that the increase in the tax threshold is a matter of record, it seems stupidly partisan to ignore it in calculating the real amount of money people have in their pockets)

        It would be far better to stop paying benefits at all to richer people, and to concentrate the savings on poorer people. No net change in the cost of benefits, but a substantially better quality of life for those out of work and the poorest in our society.

      • jaime taurosangastre candelas

        Serbitar,

        …”over the last 30+ years out of work benefit levels have steadily fallen relative to wages, dropping from about one-fifth to one-tenth of average earnings”>>>

        I do not have the data for 30 years back, and it is entirely possible that you are correct in your broad point, but it is not accurate to say 1/10th of average earnings. Even at the miserable £71 a week for JSA (which cannot be nearly enough), out of work benefits are still around 1/7th of average earnings. I have not included any other benefits beyond JSA in that.

        There is a pressing need for facts on this important debate. Both sides pick and choose, when a wider set of data is readily available and hardly secret. For example, since 2007, benefits rises have outstripped wage increases (18% increase against 10% increase), and even with the 1% cap, will not come back into parity of % increase until 2017. See http://www.ifs.org.uk/conferences/PTAB_SA.pdf

        (This is the same report that Ed M was waving around in the last PMQs, but what he omitted was any calculation of the increase in the tax threshold which is also included in the report, and which rather defeated the argument he was trying to make. Given that the increase in the tax threshold is a matter of record, it seems stupidly partisan to ignore it in calculating the real amount of money people have in their pockets)

        It would be far better to stop paying benefits at all to richer people, and to distribute the savings to poorer people. No net change in the cost of benefits, but a substantially better quality of life for those out of work and the poorest in our society.

        • http://twitter.com/JoshFG Joshua Fenton-Glynn

          It’s as a percentage of average waged incomes, sorry if my blog didn’t make that clear enough.

          The problem with your last point about means testing more benefits is that it is more expensive to means test benefits. One of the primary problems with the UC introduction is the ‘digital by default’ proposal, that people will be forced to access benefits through the internet, it is those on the lowest incomes who are often least able to access such benefits, a combination of lack of internet access, stigma and literacy problems make this harder. The IFS has consistently found that the best and cheapest way to reduce poverty is through use of more universal benefits.

        • http://twitter.com/JoshFG Joshua Fenton-Glynn

          It’s as a percentage of average waged incomes, sorry if my blog didn’t make that clear enough.

          The problem with your last point about means testing more benefits is that it is more expensive to means test benefits. One of the primary problems with the UC introduction is the ‘digital by default’ proposal, that people will be forced to access benefits through the internet, it is those on the lowest incomes who are often least able to access such benefits, a combination of lack of internet access, stigma and literacy problems make this harder. The IFS has consistently found that the best and cheapest way to reduce poverty is through use of more universal benefits.

          • jaime taurosangastre candelas

            Joshua,

            here is a possible way forward. No doubt not perfect, but it is a start, and I do not think of great cost of implementation.

            (I deliberately do not consider pensions and non-cash benefits – those are paid for and an entitlement “in arrears” for payments made, or for children, truly universal)

            Benefits are set at certain levels already, and some are already means-tested by a declaration of income. Let us not change that, except if any means-tested benefits still pay out at over the current rate of higher tax, stop them.

            Those people in work have a tax code, and I believe that everyone in employment*** gets a P60 at the end of each year, which states the amount of income in the previous year. Perhaps, some people who work for 2 or more employers get multiple P60s, but it is not hard to add sources of income together.

            All applications for benefits are reviewed already, and “signed off” or not depending on whether benefits are applicable.

            So, the Government create a single “table” of tapering benefits with increasing income. It states that whatever is the set level of benefit for someone entitled, the level tapers downwards by (say) 10% for each 10% in additional income over a base level, up to a taper point of 0% at the higher rate of tax.

            So, if you pay higher rate of tax, it is simple. No cash benefits. If you receive income of 50% over the base rate (maybe £25,000), you receive 50% of the value of the benefits you are entitled to. You are not losing entitlement.

            It does not matter what the amount of benefit is, or for what purpose. Whatever is the set amount is tapered.

            One single sheet of paper sent to every Government department and office in the country. Ten “bands” of benefit taper, equating to ten bands of income between a floor and a ceiling. A 20 second human review of the last P60. No computers. And for those trying to falsify the system, the normal penalties that are already in place.

            As I say, not perfect, but also not expensive, and easy to apply. And think of the savings to reinvest in increasing the benefits of those in the lowest income groups who have no work, no P60, and do not exceed the minimum band of pay.

            *** and not much more difficult for self-employed people, who already fill out forms each year.

          • jaime taurosangastre candelas

            “…The IFS has consistently found that the best and cheapest way to reduce poverty is through use of more universal benefits.”

            Well that seems obvious. In order to increase the amount of money the poorest receive, we will pay everybody more. It also seems needlessly expensive (and as a colleague observes, “there is an austerity on”), and the sort of arithmetic practiced by stone-age people in the absence of any more intelligent insight into the world of numbers. It is a good thing that “Crash” Gordon and his faithful side-kick Ed Balls planted so many magic money trees in the garden of Number 11 Downing Street during their time in power, because otherwise we might have an affordability problem.

        • Serbitar

          Check out the following link for further hyperlinks to articles:

          http://touchstoneblog.org.uk/2012/09/linking-benefits-to-earnings-two-possibilites/

          • jaime taurosangastre candelas

            You may be loathe to see such an outcome, but it may be necessary on the grounds of national affordability. And indeed, if the “tapering down” of universal benefits is “kicking in” at or around levels of the national average wage and above, then the needy are not affected.

            As far as the means testing is concerned, it is not so difficult if the Government can stop automatically thinking of a big computer system to solve any problem.

          • Serbitar

            Social security is a complicated business. The cost of the UKs welfare system, despite increasing in real terms over time, is actually not escalating in an unsustainable fashion, provided the economy recovers at some point in the future and grows ( > 2% ).

            Rather than considering the raw cost of social security, simplistically, in a monetary fashion a fairer measure would be to scrutinise welfare spending as a proportion of the nation’s gross domestic product. When looked at from that perspective you discover that as a percentage of GDP welfare spending in 1997 was 7.76% while in 2010, despite the historically deep recession and much higher unemployment, it fell to 7.26% – lower than in any year 1979 to 1997. Surprisingly, up until the financial crash, welfare spending as a percentage of GDP had for a long while been falling, year on year, consistently.

            Social security and welfare is as messy as the lives of the people it should be supporting and helping. Nothing about it is plain or simple.

            Some interesting data here:

            http://www.ukpublicspending.co.uk/downchart_ukgs.php?year=1950_2011&state=UK&view=1&expand=&units=p&fy=2010&chart=40-total&bar=1&stack=1&size=m&color=c&title=Welfare%20Chart

          • jaime taurosangastre candelas

            It is complicated, and made more so by different departments at different times having responsibility for paying different elements. The figures you quote above seem to be from PESA outturns for the DWP, and include pensions. If you strip out pensions, the figures are slightly different, and show a long term trend in payment of non-pension benefits. Overall, the ONS calculate that non-pension welfare spending has grown at an annualised 4.5% since 1950, in comparison with GDP at 3.2% over the same period (see “The Blue Book” from ONS each year, but see also Table 4.1 on page 16 in the following: http://www.ifs.org.uk/bns/bn43.pdf).

            Your figures also do not include tax credits, which are visible in the HMRC figures and not in those of the DWP. To many people, tax credits may reasonably be seen as a form of benefits. I am unsure about EMA – I confess I do not know which department funded those, whether DWP to Education and therefore included, or Treasury to Education, and therefore excluded.

            But those are to “an extent” details. To address your main point in your first paragraph, you need to define “sustainable”, over what period, and in what context. As the annualised rate of increase in benefits is 4.5 while GDP has grown by 3.2%, for the last 62 years, you would hope to see compensating diminution in other areas of spending to make this sustainable*****. I do not see such a diminution. And to forecast into the future, with an increasing percentage of economically inactive people, it does not seem that there is likely to be a reduction in benefits demand in the future, so the only sustainability can be found through future tax rises, or cutting back on the total of benefits paid.

            **** To give a sense, £100 invested in 1950 at a compound 3.2% would in 2012 yield £727.48, whereas the same £100 in 1950 invested at a compound 4.5% would yield £1600.76 in 2012.

            {EDIT: some further calculations. In 1951, Government spending was about 30% of GDP, and among that roughly 5% of GDP was spent on welfare (including pensions). So if the % rate increases above were constant, and applied into the future, and assuming a value of 100 in 1951 for GDP, the original 5% on welfare in 1951 would grow to 30% of GDP in just over 150 years by about 2104, or now within the lifetime of children born this year. As there is a Western consensus on “about” 50% of all GDP being spent by the Government, that is suggesting that 60% of all Government spending will go onto welfare. This is not something we can ignore}

    • robertcp

      Joe, the answer is that it has not for most of the last 30 years.

      Josh, I agreed with nearly all of your article but Labour’s policy should be that benefits will rise in line with prices. Raising benefits in line with wages is right in principle but will probably not be affordable or popular.

      • http://twitter.com/JoshFG Joshua Fenton-Glynn

        In the long run we will save money as we will get more people back in work and prevent more becoming long term unemployed. It’s one of the reasons I believe that the IDS principle of “spend to save” worked, it was just a shame he wasn’t actually going to do it.

        • robertcp

          Josh, your argument convinces me but some voters might be more sceptical. It happens to be a fact that no Labour government has ever cut unemployment, for example, it was far higher in 2010 than in 1997.

          • http://twitter.com/JoshFG Joshua Fenton-Glynn

            Although that’s true it has more to do with massive financial problems visited upon us in 2007, if you look at the data http://www.bbc.co.uk/news/10604117 during most of our time in power benefits were certainly lower.

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