Thoughts About the Welfare State

by Neil Reynolds:

"How brutally will the British coalition government cut spending in the year ahead? People are worried – very worried. Around the world, they apparently expect the worst. The Roman Catholic Archbishop of Westminster says the cuts make the poorest people suffer the most. The Socialist Party of England and Wales condemns them as “vicious.” (“The entire public sector is being hacked.”) The Labour Party agrees: The poor will be “hit the hardest.” In an editorial, The New York Times describes the cuts as “draconian” – especially punitive, the newspaper says, for the poor. U.S. President Barack Obama says that they could set off another global recession.

This is strange – very strange. A casual perusal of Britain’s “emergency budget” shows that the Conservative-Liberal coalition has, in fact, increased spending for the poor. It has largely protected the welfare state and in some cases (child tax credits, for example) has expanded it. It has exempted public sector workers earning less than $32,500 a year from the two-year pay freeze; these exempt workers get raises of $380 a year. It has lifted the basic personal tax exemption by $1,550, releasing more than 880,000 low-income earners from paying any income tax whatsoever. It has increased the basic state pension by a minimum of 2.5 per cent. And so on.

Britain’s “brutal budget” does require some public sector sacrifice. Senior civil servants will be permitted to fly first class “only in exceptional circumstances.” Cabinet ministers will have use of chauffeurs “only in exceptional circumstances.” It’s going to be rough.

The budget does begin to address the country’s profligate resort to deficits for the past decade. But its impact shouldn’t be exaggerated. Britain’s deficits are now equal to 10 per cent of GDP. Five years from now, they will be equal to 2.3 per cent of GDP. This is the right direction, but the distance travelled isn’t all that heroic.

By and large, brutal budget cuts do not actually exist. In his analysis of the budget (frequently referenced as the toughest since the Second World War), British economist Philip Booth explains that people have confused cuts in projected spending with cuts in actual spending. It is true that the budget included cuts of $170-billion over the next five years. But these cuts are mostly based upon hypothetical spending increases as projected in the defeated Labour government’s five-year plan.

Mr. Booth is an economist at the Institute of Economic Affairs, a London-based markets-oriented think tank. He says that, for all practical purposes, there are no cuts in spending this year and few cuts in coming years. He says the budget imposes restraint, not reduction. This restraint, he says, limits spending increases to the rate of inflation. This is vicious? This is draconian?

There will be “cuts” – but to middle-class, household budgets. The tax increases will be real and they will be painful enough. One of them is the infamous bank tax, successfully resisted by Canada at the Group of 20 summit; the levy will reduce the British deficit by an easy $12.4-billion in the next four years. Predictably, however, this revenue – though publicly advanced as an innovative fund to make banks pay for future bank crises – will go straight into general revenue and will not provide a pence worth of crisis insurance. In the meantime, Mr. Booth says, the British will experience “unprecedented levels of peacetime government spending.” The government’s share of the country’s earned income will peak at “54 pence in every pound” – 54 per cent. Without a reversal of direction, the British budget papers calculate, this government share of incomes could hit 70 per cent in the next few years.

Mr. Booth has argued in the past that Britain’s decrepit welfare state has already made it too easy for people to live without working. From this perspective, the budget’s increased financing for welfare programs will make this problem worse. He argued the point earlier this month in an essay published by The Catholic Herald.

“The model of eliminating poverty by increasing government spending has been tested to destruction,” Mr. Booth wrote. “[Britain’s] welfare bills are huge – over 30 per cent of households receive more than 50 per cent of their income from the state, not allowing for benefits in kind such as housing, health and education.”

“Three essentials for economic fulfilment are work, saving and families,” he wrote. “Our welfare system crucifies all three. ... [Britain now has] the largest proportion of children in Europe brought up in workless households.” By again increasing welfare spending, Mr. Booth observes, the country will increase to record levels the number of people who gain no economic benefit from working – a good way to hardwire an increase in Britain’s welfare culture. You get more of what you subsidize. Thus the critics may be perversely right after all: The budget could indeed hit the poor the hardest."

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