You may not have guessed it from the news, but the well-off might be paying too much tax. If you were being naughty, that’s the spin you could put on a new Civitas report currently cutting a dash. The think tank – the Duke of Clarence to the Edward IV of the Institute of Economic Affairs – reported that more than half of UK households now receive more in government benefits than they contribute in tax – and that more than half of all income tax is paid by just the top 10 per cent of earners.
Readers might be feeling a slight sense of déjà vu. The ‘strivers vs skivers’ dynamic takes us back to the heady days of the mid-2010s. Iain Duncan Smith and George Osborne – before he devoted himself to pandering to Greek nationalists – were the Jekyll and Hyde of austerity and welfare reform. Tufton Street’s rallying cry goes up, and the tabloids answer: do we really want a Britain with an ever-growing number dependent on the state – and with fewer and fewer paying in?
One of the many tragedies of our post-Brexit tergiversations has been the neglect of welfare reform. Record employment and the introduction of universal credit introduction were two of the great successes of David Cameron’s time in office. Now, despite remarkable numbers of vacancies, few seem to care that 5.3 million people are claiming out-of-work benefits – although our Deputy Editor has suggested there may be rather more (well, less) to that figure than meets the eye.
Tackling a dependency culture and getting more people working is no bad thing – especially if we want to boost growth, cut spending, and reduce immigration. Universal credit itself has been undermined by the rolling back of various incentives during the pandemic. And, in itself, ending dependency tackles the social tragedy of households where nobody works. Civitas should be thanked for getting this into the headlines for a day or two.
Unfortunately, like a Chris Bryant tweet, one fears this hullaballoo is producing a little more heat than light. As the report itself acknowledges, the whole affair largely involves tarting up data first released by the Office for National Statistics months ago.
The number receiving more than they contributed leapt from 47.5 per cent in 2019-20 to 54.2 per cent in 2020-21 obviously reflects the increased reliance on the welfare state during the pandemic. Even then (and as the authors point out), since the Office for National Statistics counted furlough payments as income, that means these figures don’t account for the 18 months when private sector wages were effectively nationalised.
That 54.2 per cent is 36 million: rather a lot. But before one starts mutteringly darkly about freeloaders and scroungers, you must note that the ONS is not just counting ‘benefits’ as meaning handouts to the un – or under – employed, but as spending on education and healthcare. Those counted as dependent here thus means, in a country with a welfare state, everyone who isn’t paying a significant amount of tax.
Using these figures to illustrate a ‘culture of dependency’ thus misses the mark. Nuance is not the headline writer’s friend. Civitas did indicate that the figures include ‘benefits in kind’ as well as ‘benefits’ as popularly understood. The trouble is that unpicking that distinction makes us realise there are several overlapping conversations going on.
To start, we live in a social democracy. Thanks to, erm, Otto von Bismarck, the principle that voters contribute in tax to pay for welfare services designed to support a basic standard of living is a common one. It is accepted by the Conservatives, Labour and the overwhelming majority of voters who don’t read Ayn Rand.
So lumping in that spending on schools and hospitals with ‘benefits’ – boo, hiss, single mothers, etc – therefore distracts from the more important question of tackling actual instances of ingrained dependency: the aforementioned millions on out-of-work benefits, with the distinction one must draw between the genuinely inactive and those who can enter the workforce.
Those are the people on whom efforts should be targeted. The report highlights that the dependency ratio increases in response to major economic shocks, like the early-90s recession, the 2008 crisis, and the pandemic. Unsurprisingly, when more become unemployed, more become ensnared by the dependency trap.
But the ratio also increased during the New Labour boom years. Was this just the result of increased social spending? Or did a more generous welfare regime encourage more worklessness? Those are the questions we should investigate.
Moreover, there is also a topic that has particularly fascinated us at ConservativeHome recently: what drives the state’s expansion? Ever-expanding amounts are spent on an ever-growing number of entitlements. How can we reduce the demand for government, so we can get spending and taxes down?
As Stephen Daisley has written, the most expensive item of welfare spending is the triple-locked state pension. 87.6 per cent of pensioners receive more in benefits than they contribute in tax. We expect the working-age population to pay to support this, and then increase National Insurance to prevent wealthy old dears from having to sell their homes. We wonder why taxes are so high; that purported rise in the retirement age can’t come soon enough.
Yet the egalitarian principle is too strong. Heaven forbid we might factor in wealth for some. Case in point: the hoo-hah over Sajid Javid’s NHS payment proposals over the weekend. But spending is not going to come down until we tackle a few of these sacred cows. Unless Labour goes full ‘Rogernomics’ in office, that is a debate our party is going to have to have, especially if we want to pass substantial tax cuts that don’t send the markets into meltdown.
That the top 10 per cent of earners pay more than half of all income tax is unsurprising. Neither is the fact that 83 per cent of it is paid by the top 40 per cent. We have a progressive tax system where recent governments have strained to take ever-larger numbers out of income tax whilst maintaining a large welfare state. The problem is whether this is sustainable, with an expanding and aging population.
A growing state and appalling productivity mean that the tax burden is only going to become larger. The only way we can increase funding is to drag more into higher tax bands, without cutting spending or increasing growth. And so the real message of this report, even if its authors did not mean it, is that the 1947 Town and Country Planning Act must be destroyed.