The Welfare State: Fact and Fiction

Looking at exceptional cases is clearly a terrible way to make policy. Yet the debate about welfare spending often focuses on the most extreme and unrepresentative examples, with the shameful, divisive exploitation of the Philpot case by the media and Tory politicians just the most recent example. So what is the ‘normal’ case? Where does the £205billion annual welfare budget really go? And how can welfare spending be reduced?

The amount spent on out-of-work benefit is surprisingly small, despite the attention it receives; only £5billion per year (2% of the welfare budget) is spent on Job Seekers’ Allowance. This amount will fall even further when the economy recovers. The average time spent on JSA, even in today’s weak job market, is thirteen weeks. There are of course exceptions, but most people use JSA exactly as it is intended: a stop-gap measure in between jobs, vital in today’s precarious, ‘flexible’ labour market where temporary work, agencies and zero-hour contracts are becoming the norm.

JSA is the only benefit exclusively for unemployed people. Excluding pensions, practically all other benefits are also available to working people who fulfil certain criteria. The welfare system is a confusing and constantly changing labyrinth, but a few costly benefits stand out.

The largest amount besides pensions is spent on Personal Tax Credits, costing the taxpayer £29billion per year and mostly spent on topping up the wages of millions of people. It is striking that working people are the main beneficiaries of the welfare state, not the unemployed.

Besides tax credits, the next largest amount (£22.39billion, 11% of the welfare budget) is spent on Housing Benefit and rent rebates. Claimants include people working at or close to the minimum wage who cannot afford the costs of rent.

The other commonly mentioned benefit is Disability Living Allowance (£12.57billion) – again, aimed at both employed and unemployed people. Just 0.7% of this figure is estimated to be fraud, far less than the amount lost through administrative mistakes.

There are two straightforward policies to bring down the two most costly benefits: Housing Benefit and Tax Credits

First, Britain has an affordable housing crisis. The private rented sector is the new normal, no longer used just by young professionals and students. At the moment, the private rented system is dependent on state subsidies for low-paid workers. A large-scale house-building program would in the long-term bring down the welfare bill and reduce the vast Housing Benefit budget, notwithstanding more immediate benefits to the construction sector and wider economy.

Second, perverse incentives sometimes emerge because real wages are too low, not because benefits are too high. Taxpayers should not have to step in with tax credits and benefits to ensure that people working full-time are paid a wage high enough to get by- this often just amounts to the indirect subsidisation of corporate profits. Raising the minimum wage to at least the ‘living wage’ of £7.45 is not just an issue of fairness; it is a sensible and effective way to bring down welfare spending immediately. This measure alone would save the Treasury £2billion, as well as offering a much-needed boost to overall demand. These benefits are dwarfed, however, by the £72.2billion spent on pensions, just over a third of the entire welfare budget. Whilst there are large cuts elsewhere, pension budgets have been protected. The purpose of universal pensioner benefits needs to be seriously considered.

Free bus travel seems like a benign gesture to help old people get around. It is popular, especially amongst reliable older voters, and any politician would scrap it at their peril. Yet it is really just another grubby example of the state propping up the profits of the private sector.

The privatization of buses was – like trains, electricity and other ‘natural monopoly’ public services – a disaster, resulting in chronic underinvestment and higher prices, without the promised savings. There was still a need for significant state subsidies to keep bus services running; half of ‘private’ bus companies’ income today consists of subsidies. The political masterstroke of concessions and then ‘free bus travel for over 60s’ was created to keep the system going, a £1billion annual transfer to private bus companies which would collapse without this and other state subsidies. Profits are privatized and the costs socialized.

The long-term sustainability of the growing pension budget – dwarfing other welfare spending – must be tackled and there are no easy solutions. Means-testing to save the £100 per person spent each year on concessionary bus passes, including wealthy pensioners, would be a good start.

Welfare spending may well be unsustainable in the long-term, but the real issues to be tackled should be exploitative rents in the private sector, benefits for wealthy pensioners, and profitable businesses with business models dependent on taxpayers subsidizing their worker’s salaries. It is time to stop targeting the most vulnerable in our society to solve problems caused by the wealthiest.