How to control welfare spending: build houses and raise the minimum wage

There are more progressive ways to control spending than bashing the poor.

Minimum wage 2-JPEG

From the multiple generations that ‘languish on the dole‘ to the ‘something for nothing culture‘, the Tories have relentlessly pushed the image of a bloated benefits system overwhelmed by droves of lazy or downright fraudulent claimants who refuse to work.

Yet a simple breakdown of welfare spending highlights the problem of distinguishing between people in work and people ‘on benefits’. The working poor, pensioners, landlords and big business all benefit from the welfare state alongside the unemployed.

A breakdown also reveals progressive ways to control spending, such as house-building and raising the minimum wage, that are not based on an ideological, right-wing crusade against the state.

Welfare, including ‘social security benefits’ and tax credits, cost an estimated £209billion in the current financial year, according to the Office of Budget Responsibility. However the amount of attention various benefits receive bears little relation to their real cost:

1)      Jobseekers Allowance: £4.5billion

The amount spent on jobseekers allowance is dwarfed by other benefits. Just 2.2 per cent of overall welfare spending goes on JSA, the only major benefit devoted exclusively to the unemployed.

Rather than encouraging long-term dependency, JSA is far more commonly used briefly but repeatedly, especially now work is more insecure. The spread of zero hour contracts, agencies and temporary work encourages a ‘low pay/no pay cycle‘ in many sectors, forcing the taxpayer to pick up the costs of volatility through the benefits system.

The same people who support a more ‘flexible labour market’ usually criticise welfare spending too, but as jobs become even less stable this relatively inexpensive benefit will become even more important.

2)      Disability Living Allowance: £13.7billion

A welfare system that protects disabled people and insures everyone against future disability is an essential feature of a decent society.

Nevertheless, attitudes to disability benefits are hardening. Most disabled people have experienced aggression or name-calling, or an assumption that they do not work, and an overwhelming 84 per cent attribute this to media reporting of benefit cheats.

Disability fraud is a negligible burden on welfare spending. Roughly £60million is lost through DLA fraud according to DWP estimates, much less than the £300million of underpayments.

Though hard to measure accurately, benefit fraud is not a new issue and has probably fallen since Thatcher’s government parked substantial numbers of people on incapacity benefit to manipulate unemployment figures in the 1980s.

3)      Housing Benefit: £24billion

Instead of doing anything to make rents more affordable, housing benefit subsidises landlords and props up a broken system in one of the most costly and inefficient ways imaginable. Most people receiving housing benefit are out of work, but there is an increasing minority of people claiming who are in work yet still cannot afford to rent at private levels.

Britain faces a housing crisis: only families earning over £52,000 can now afford a two-bedroom house in London, according to Shelter. Besides a range of other benefits, a mass house-building program on the scale of the 1930s would substantially reduce the Housing Benefit bill in the long-term.

4)      Tax Credits: £28.9billion

Tax Credits were one of the most redistributive New Labour policies but implicitly subsidise firms that pay inadequate wages. Large and profitable businesses that refuse to pay fairly represent the real ‘culture of dependency’.

Raising the compulsory minimum wage to the living wage (£7.65 outside of London) could produce a net benefit to the Treasury of £2billion by reducing the cost of working tax credits and generating higher income tax receipts.

Firms should pay a living wage out of basic respect to the people on which their profits rely, but the contribution of a living wage to bringing down welfare spending makes the case for legislation even stronger.

5)      State Pensions: £83billion

State pensions dominate the welfare state even before other benefits such as Pension Credit and free TV licenses are factored in. There are no easy ways to bring down spending in an aging population that lives longer; it is unclear, for example, whether young immigrants can defuse our demographic time bomb.

Yet as a long-term issue without any newsworthy cases of abuse or groups to easily demonise, the cost of the pension bill receives far less attention than other less costly or even negligible features of the welfare state.

4 Responses to “How to control welfare spending: build houses and raise the minimum wage”

  1. LB

    It won’t work.

    Over the last 20 years well over 4,000 bn has been spent on welfare and fighting poverty.

    Look at the results.

    All you can say, is if only we spend more money, we would spend less.

    Doesn’t work that way, the evidence is there. It’s failed.

    ==========
    it is unclear, for example, whether young immigrants can defuse our demographic time bomb.

    ==========

    Depends. If they pay more than 16.5K a year in tax whilst here, they will help in the short term. Long term, they will want their pensions too.

    If they work in Starbucks on min wage, or are on welfare, the answer is no.

  2. JC

    There you go again. Just because state pensions are paid through DWP you class them as benefits. Most normal people do not do this. Pensions are not seen by the public as benefits, so you lose the argument immediately.

    As for housing benefit, most people are aware that when something is subsidised, the price goes up. Standard economics. We shouldn’t subsidise housing. However, you make no suggestion on how we can build more housing without these subsidies.

  3. Lee Hyde

    Pensions are benefits in the sense that contributory JSA are benefits. They’re both paid for through NICs and they’re both an obligation on the government as any insurance payouts are an obligation of an insurance company. The motive behind pushing this point home (by calling the state pensions a benefit) is to make it bloody clear to people like yourself that the benefits system as a whole belongs to us, not the government, and that an attack on one is an attack on all. Do you think the young stranded on JSA (albeit many on non-contributory JSA) won’t see pensions as a sizable target for cuts?

    So no, the author doesn’t automatically lose the argument because he doesn’t share your view of how the state pension should framed. If for no other reason than the simple fact that a certain generation looks set to extract more from the system than they’ve put in (so if unemployed millennial are scroungers, so are under-subscribed baby boomers).

    We’ve build social housing through comparatively more cost effective ‘subsidy’ before (and much of this happened to coincide with the so called ‘golden age’ of capitalism between 1946 and the early 1970s). It’s called council housing, and it’s funded by comparatively cheap government debt (as is housing benefit) and far more cost effective not-for-profit administration by local housing associations and local councils. Subsidizing the direct construction on social housing at least leaves a capital asset on the states (or local governments) balance sheet, whereas subsidizing private landlords (including many clueless buy-to-let landlords who’ve worked themselves into a corner) does not. In fact, in this respect, Housing benefit is 100% subsidy (in economic terms) whilst direct build represents only investment spending, the subsidy (in the form of the so called ‘lost opportunity costs’ of charging a sane, affordable rent rather than an insane, out of kilter market rent) coming over the course of the next few decades (and greatly reducing the higher subsidy that housing benefit represents) as that debt is paid off (or in reality, flipped, as national debts always are). Put it this way, if you were a large organisation with buckets of cash and a massive low cost credit line, which would you think is cheaper in the long run? Building houses and renting them out yourself, or paying some other fool to take out much more expensive loans to buy or build houses and rent them out? Housing benefit is the PFI of the housing market!

    Oh, and if housing raises beyond the reach of the ordinary working (wo)man or mops up too much of their income (thus starving more productive sectors of the economy of that spending power), we damned well should subsidise housing. Simply not to the benefit of the rent seeking housing market parasites who’ve lead us into this situation (HB subsidises landlords, banks, mortgage brokers and yet does sweet FA to improve the disposable income of tenants or improve the lot of first time buyers).

  4. Lee Hyde

    “All you can say, is if only we spend more money, we would spend less.

    Doesn’t work that way, the evidence is there. It’s failed.”

    What on Earth are you talking about! As far as I can tell, the author has proffered two strategies to tackle the DWP’s budget woes, only one of which includes any spending (and even that would be debt funded in all likelihood).

    It’s patently clear that enforcing a national minimum wage equal to a living wage would reduce the welfare bill. It’s also patently clear that constructing new social housing via direct spending (i.e. local authority owned council housing) would be a great boon in both the sort and long term. In the short term such a programme of house building create jobs in the construction sector and (in the longer term) in housing administration and maintenance, provide a boon to ancillary sectors (e.g. builders merchants, architects, civil engineers…) and put more money into the economy (better to have an army of in-work builders with disposable income than an army of out of work or underemployed builders with no-little income).

    In the long term, the presence of a sizable social housing sector with favourable terms of secure tenure and an affordable rent will provide a backstop to the private rented sector which has proven itself incapable of providing affordable housing with decent conditions or terms of tenure. Aside from being a clear moral right, this will either spur the private rental sector to up its game (and lower its prices) or, frankly, get out of the kitchen and leave the occupier-owner market as the only competitor to not-for-profit social housing (I won’t lose any sleep if this happens). It will also lower the housing benefit bill by lowering the proportion of those in private rented accommodation (which in any event will likely remain more expensive than council or housing association housing) and lowering the average rents of those claiming housing benefit (whether or not they are private, council or housing association tenants) and so the housing benefit bill in aggregate.

    Of course, this is all debt funded, but don’t delude yourself into thinking that housing benefit isn’t already debt funded. In fact housing benefit (when paid to private landlords) is doubly debt funded, in the sense that the state has to borrow (at relatively low rates) to fund the welfare bill AND the private landlord often has to borrow to find their purchase of property (at considerably higher rates). I’d rather pay to subsidise lower rents which are subject to only one layer of debt servicing rather than to subsidise higher private rents subject to two layers of debt servicing. It simply makes financial sense, and will save the country and our society far more in the long run than carrying on with this maddening ‘the market always knows best’ crap, as it’s clear to anyone with eyes and ears; the housing market is broken to the core, there are too many vested interests pumping it up and milking the resulting debtors (through increasing debt servitude of mortgage holders) and the welfare system (through housing benefit and grants) to the detriment of those for whom the welfare system was founded (a clue: not banks or landlords).

    There are plenty of other strategies which would make for a far more rational and sustainable welfare state, many of them require investment, but (as the word investment implies) will pay off in lower cost burdens; all of the require a government willing to throw of the conventional ‘wisdom’ of the past 30-40 years (namely blind neo-liberal doctrine) which has more than proved itself tired and outmoded. Alas, I don’t trust any of the current lot to have the wisdom or courage to perform such an about turn (as Thatcher did after the 1970s oil shocks) or to identify a mutually beneficial future trajectory (which Thatcher and Regan most certainly did not; too many lost out). I certainly don’t trust the Tories or Liberal Democrats who’ve proved themselves all too mired in those said same received wisdoms, and Labour appears to be hedging itself a little too much for me to believe that they’ll actually do anything other than apply a sticking plaster (and UKIP, aside from having no chance in hell of achieving the least measure of domestic power, are stark raving bonkers! They’d steer us straight into the typhoon if given half a chance). So, unless I’m very much mistaken we’ll have to suffer at least one more finance borne disaster (or maybe it’ll be something more interesting? I hope so) before the free-market fanatics are ousted once and for all and the bloody state, OUR BLOODY STATE, can grow some balls and actually start governing for the good of us all.

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