Going after welfare cheats misses the bigger picture

So, like the New Labour government before it, the Coalition government wants to go after benefit cheats who scam the state out of taxpayer funded social security payments. This is hardly a great surprise given chancellor George Osborne’s recent proclamation that he wants to swipe £12 billion from the current welfare budget. The question is though, is going after those who cheat the benefits system missing the point? I argue yes.

According to the Department for Work and Pensions, welfare fraud costs the taxpayer some £1.2 billion per year, which sounds like a big number, and in many ways it is. Few would argue that its morally justifiable to claim benefits of whatever kind when you shouldn’t be, and that offenders shouldn’t be dealt with accordingly by the authorities. Whilst there’s a worthwhile debate to be had regarding why people fraudulently claim and what should be done with them, it’s interesting to consider how this £1.2 billion figure stacks up in comparison to other tax and benefit-related illegal behaviour.

Take tax evasion as one example (we’ll leave tax avoidance as this is technically legal, whatever you might think of the ethics of such behaviour). This wholly illegal measure cost the Treasury £5.1 billion in 2011/12 (the latest year for which data is available), more than 4 times the cost of benefit fraud. Now, although the Government have announced action on tackling tax evasion, it has hardly done so with the same fanfare as it has with its benefit fraud campaign. With this in mind, it’s worth remembering this great disparity in tax revenue lost to the taxpayer whenever the government, media or anyone else talks about issues relating to tax, benefits and welfare.

Indeed this is important because often in debates around this political hot potato, those who claim benefits are often portrayed negatively by politicians and the media, which in turn influences attitudes toward benefit claimants from the general public. Consider for instance figures that suggest the public believe that £24 out of every £100 spent on benefits is lost through fraud. What’s the actual figure? 70 pence. Given this huge difference, its perhaps not surprising the general public hold the attitudes they do around welfare claimants. In addition, even in the very best scenario (when the entire £1.2 billion fraud estimate is completely plugged, which it almost certainly never will be) claiming back costs relating to benefit fraud would only make a slight dent in George Osborne’s £12 billion figure.

As it happens, the Chancellor has indicated that he wants the cuts to primarily come from wealthy council house tenants and under 25’s claiming housing benefit. I’d be interested to hear more on Osborne’s reasoning for particularly targeting these benefits and not looking at other benefits such as those relating to pensions. It’s important we consider this segment of expenditure when it comes to the debate on welfare because it the state pension that is by far the largest proportion of the overall welfare budget at £74.22 billion per year. By comparison, housing benefit and disability allowance take up £16.94 billion and £12.57 billion per year respectively.

This is when things become difficult because despite spending on state pensions taking up a huge proportion of the welfare budget, I’m confident very few of us would call the state pension overly generous (it’s among the worst in the OECD). Indeed the key reason why the spend is so high is because of the high numbers of pensioners themselves and the fact they are living longer than ever before. We’re therefore left with something of a ‘sticky wicket’; expenditure on housing benefit and job seeker’s allowance takes up a relatively small part of the welfare budget, but cutting the state pension would arguably penalise some of the poorest pensioners, not to mention those who have worked all their lives paying National Insurance Contributions expecting to receive an adequate pension in their retirement. In any case, although the government have tentatively considered cutting other universal state benefits for wealthy pensioners, such as free bus passes and winter fuel payments, these benefits are both relatively modest (costing the taxpayer £1 billion and £2.15 billion respectively) I’d wager that the government would be reluctant to heavily reduce these benefits due to a.) pensioners being more likely to vote than any other age group, and b.) pensioners are more likely to vote Conservative.

At the end of the day, in order to ‘balance the books’ I’d consider doing three things. Firstly, I’d think about implementing a large affordable house building programme or radically reform planning laws so that supply would increase, meaning hopefully payouts to fund housing benefit would be less (due to rents decreasing, or at least not increasing as rapidly as they have been of late.) Secondly, I’d consider introducing rent controls, which again would stem the rise in housing benefit pay outs. Thirdly, I’d seriously look at the system of tax credits, which currently costs the taxpayer some £27.2 billion per year. The reason tax credit spending is so high is because of low, or what some call ‘poverty’ wages. That is, tax credits to subsidise low wages by effectively ‘topping them up’ so (in theory), households have an adequate income. I think this spend could be curbed by enforcing a higher minimum wage (which to be fair Osborne has recently announced) or better still a living wage (which he hasn’t announced.) In addition, financial recognition of family responsibility could be moved into the tax system (for example, by reintroducing child tax allowances.)  Doing both these things would both reduce the tax credit spend by removing more people from tax credits and as a result remove them from the frankly pitiful work incentives that exist for many families under tax credits.[1]

However, the measures suggested here are rather more long term in nature than might be desired for this Government. Yet in order to seriously tackle problems relating to public spending I believe long term solutions are needed. Thus whilst focusing on benefit fraud, housing benefit for the under 25’s and wealthy council house tenants might be popular with certain sections of the electorate, doing so ignores wider problems with our welfare system as it currently stands.

[1] If you’re a one-earner couple family or single parent family with two children for instance on a income of between £12,000 and £33,000 you only end up with 27 pence from every extra £1 earned.

One response to “Going after welfare cheats misses the bigger picture”

  1. […] This article is also published on the Institute of Opinion website […]