Dr Patrick Nolan is Chief Economist of Reform.
In his recent Conservative Party conference speech George Osborne
suggested that a Conservative Government would make some steps towards ending middle
class welfare. But then, in the next breath, ruled out making changes to three
of the benefits that are most poorly targeted. George Osborne proposed to means-test child trust funds and to abolish
tax credits for people on an annual income of over £50,000. These changes would
only save £0.7 billion per year. He then went on to pledge to keep winter fuel
payments, free TV licenses and child benefit for middle class families. This
pledge would cost £10 billion per year. It is simply not credible for politicians
to argue that they are tackling the public finance deficit while they protect most
of the benefits for the better off. Other leading politicians have gone further. Vince
Cable discussed ideas such as means testing the child benefit, reducing the
child tax credit for higher income earners and scrapping the child trust fund
in a pamphlet written for Reform. David
Blunkett discussed taxing the child benefit at the recent Labour Party
Conference.
As Reform
outline in a report released today, The
end of entitlement, government spending in the UK has grown out of control –
with government spending approaching 50 per cent of GDP, up from 37 per cent in
1997. The growing welfare bill is a major reason for this growth in government,
with more being spent on welfare than anything else, and the bill for social
protection almost doubling (in real terms) between 2009 and 1989. The cost of middle class welfare in the UK is now at least £31 billion
per year. This estimate represents nearly a quarter of benefit expenditure
identified in Office for National Statistics surveys. This is a conservative
estimate. If politicians were to remove
benefits for people above the minimum income levels defined by the Joseph
Rowntree Foundation, the figure would be a higher £44 billion per year. The benefit most skewed towards the middle class is maternity pay, where
eight pounds of every ten spent in benefits goes to mothers above middle
income. For child benefit, four in ten
pounds spent in benefits goes to mothers above middle income. For the basic state pension and tax credits,
one in four pounds spent in benefits goes to people above middle income. The winter
fuel allowance, retirement pensions, child and working tax credits and housing
benefit are also poorly targeted. This spending on middle income welfare represents poor value for money.
Since 2000 more families have been brought into the welfare net, with
programmes being expanded to buy votes rather than address real need. As a
result the UK has one of the most expensive welfare systems in the world and,
highlighting that more money doesn’t mean better policy, performs as one of the
worst, as shown by the UK’s rates of child poverty, family breakdown and youth
crime and drunkenness. These poor outcomes are perhaps not surprising, as expanding middle
class welfare means less money is available to address areas of real need. The
flaws in arguments like those of Jim
Knight, Work and Pensions Minister, is that government budgets are not
unlimited, and providing welfare to attract votes encourages a culture where
welfare is seen as there for abuse, not to address real need. As David
Cameron has said, the age of austerity means we must focus on the real
priorities, which should include a greater focus on addressing the millions of
people in this country still living in poverty. The expanding middle class welfare net also creates a burden on the
economy. The middle classes are being bribed with their own tax money. These benefits come at a cost of higher
taxes. £31 billion is equivalent to an
extra 8p on the basic rate of income tax. Higher taxes are very harmful for the
economy and hold back income growth, meaning families are held back from
achieving their desired standards of living without having to go cap-in-hand to
the government. The choice for the middle classes is to give up benefits or face higher
taxes. Making cuts to middle class
welfare should be part of a wider reform which can replace “something for
nothing” benefits with “something for something” responsible welfare. As Andrew
Haldenby, Director of Reform, has said, the” middle classes need to read
the small print of the welfare state.
They may think that benefits and subsidised higher education are a good
deal. In fact they cost an extra 8p on
the basic rate of income tax.” The UK needs to end the welfare money-go-round
and let families keep more of their income.
