Friday, October 08, 2010

Universal Benefits

When a country is paying more in interest payments on government borrowing than it is on the Defence of the Realm, it really is time to consider how it should set out its stall. In many ways England is a victim of its own success. It is one of the most densely populated countries in the world - only small island states like Singapore exceed it in population density. Yet people still want to come here. True, the other countries of the United Kingdom - Wales, Scotland and Northern Ireland are less densely populated, but, the first two, at least, are very mountainous and not many immigrants want to set up shanty towns on Snowdon or Ben Nevis.

By victim of its own success, I mean that this was where the Industrial Revolution took place, which first drew people from the land into cities and when that began to wear out, the financial big-bang established London anew as a city with streets paved with gold. All those immigrants are not financial advisers, but they are there to service many who are. When you hear of banks paying 6 million dollars as an end of year bonus to some financial barrow-boy - yes, I know this is a headline-grabbing exception - you can see that his spending supports an awful lot of Polish plumbers, Indian chefs and eventually, Pakistani terrorists. Mrs Thatcher called it 'a trickle down economy'.

For the past twenty years I have always been able to earn more than I needed to live and my first responsibility was to support my own family. I bought a a small but new house in Oxford for my two children at University there to share. When they left my younger son spent some time painting it before they sold it. While up the ladder he could see into the garden of an identical house next-door where his neighbor, a girl of African-Caribbean extraction was entertaining a friend. The conversation went something like, Friend: << This is a fab house. How did you manage to get it?>>
Neighbor: << Simple. Just get yourself a kid and the benefit pays for it.>>

I am not making this up. Evidence is not the plural of anecdote, but there seems to be evidence that the welfare system is systematically abused in the UK by many who are workshy. What they are doing is not necessarily illegal, though every day I read an account of someone defrauding the benefit system, but the incentives are acting in such a way that someone would have to be saint to avoid the temptation.

Before anyone jumps in and says that taxpayers who avoid their responsibilities are a more important problem, I don't doubt it and would be willing to launch a diatribe against the way the tax system is ordered too.

This week at the Tory Party Conference, preliminary measures have been announced to begin to sort out the problem. In many ways this initiative could not have taken place without a coalition government. Undoubtedly, any attack on benefits would have been attacked from the Left and with only one party in favor. Even with a majority in Parliament, there would have been anger and resistance, even with strike action. Having the Liberal-Democrats on board, not only gives a Parliamentary majority, but carries with it a numerical majority of voters.

The first measure announced was aimed at the relatively rich. Child benefit would be withdrawn from higher rate tax payers. Child benefit was introduced after the war as a universal benefit for children. Originally it was paid to second and subsequent children up to the age of 15, but nowadays it is paid to all children while they are in full time education. The eldest child gets $1600 a year and subsequent children $1000 a year. The money is paid to the mother or other responsible adult if there is no mother.

It is to be withdrawn by 2015 to those paying higher rate income tax. That means to those earning more than $66,000 a year. This represents 15% of those receiving it and it will save the taxpayer $1.5 billion a year which can be used to pay off foreign debt, so that less interest needs to be paid, which will in turn save the taxpayer more money.

There was an immediate outcry. Not that the rich actually need the child benefit - it often goes into a savings account for the child to start a pension fund or to pay for school fees - but because there is a hidden dollop of unfairness. It comes from Mrs Thatcher again. She introduced separate taxation for husbands and wives. Previously a wife was regarded as a husband's possession and he was given a tax threshold that accounted for his having to support two individuals on one salary. This was lost when his wife was taxed separately. So we have the situation whereby there could be a family income of $130,000 with neither parent paying higher rate tax and the mother still drawing child benefit, while next door the mother stays at home to look after the children, does not work to earn money, yet the family income just crosses the threshold and child benefit is lost.

Unfairness is anathema to the British voter. They still remember that Diego Maradonna goal in the 1986 world cup. But is this a real issue? We know that for 50% of families with a stay-at-home mum, the family income exceeds $112,500 a year. Even if it is less, we find that many stay-at-home mums are able to do a small job for their husbands that reduces his taxable income and enables her use her tax allowance and to save more than the child benefit in tax that does not need to be paid. There is also a promise that sometime this parliament there will be a Bill introduced that allows all stay-at-home mums to receive this sort of redress (though not by the full amount).

The principle of Universal Benefits was a Liberal Party one, introduced by the Beveridge report of 1944. So the Tory's coalition partners have an emotional tie to them. It was very different in 1944 when the housing stock had been seriously depleted by bombing and poverty was extremely severe. Today poverty means you don't have a flat screen TV.. The other Universal Benefits (introduced only later) include a free TV licence for the over-75s, free bus passes for the over-60s (not actually used by higher rate tax-payers) and a winter fuel allowance for the over 60s so that no-one need die of hypothermia. There are suggestions that some of these are vulnerable to the chancellor's axe in the Autumn spending review. I shan't lose any sleep if I lose them. I have been eligible for a bus-pass for 7 years. I have used it 4 times. That's saved me $12.

I shall return to this topic, but now I must go and paint a doorpost.

1 comment:

Anonymous said...

I remember watching a 60 minutes-type of investigative television program interviewing young people in England who were on the dole (do they still call it that?). These young people were shown newspaper ads for jobs; the reporter asked them if they would apply for the job. They said 'no'. The reason? They were making enough on welfare to party, do drugs, and have an excellent time.

Back then, we looked down on places like England for their overly-liberal policies that drove the 'Empire' into ruin (this was pre-Thatcher). Of course, America is much bigger, so we had to outdo the old country, getting into an even bigger hole with massive government spending.