Cutting benefits is not the way to bring down borrowingby Harvey Cole / June 17, 2013 / Leave a comment
Philip Collins’s article (£) on welfare seems to be written by someone who steadily ignores a herd of elephants rampaging through the room while contemplating how he might deal with a small mouse hole in the corner. The idea that reliance on past contributions set the level of current and future welfare payments is an illusion rather than a panacea. What use is it to anyone taking a first job, only to find it closed down within a few weeks by the multinational owner with little or no rights to compensation?
When I take out an insurance policy to cover damage to my car, the loss of valuable articles to burglars or premature death, benefits are not limited to the premiums I have paid to date. Frank Field (£) is of course right to see the solution to the welfare conundrum in a soundly based insurance system—though this is not simple to set up.
Benefits such as jobseeker’s allowance and disability pay should indeed be related to previous income, with contributions also linked to it—that is an essential element of insurance. It is most unfortunate that the Labour party seems on the verge of joining those unable to appreciate that benefits based simply on the total of premiums paid fail to meet the first principles of insurance.
Strangely, neither Collins nor Field mentions a trend that has been distorting the whole economy and the pattern of work within it. Of the 11m households receiving various benefits, almost half—over 5m—include at least one member who has a job. That they are drawing benefits—means-tested or not—is clear evidence of inadequate pay. Since 2003, real wages have stagnated and the proportion of personal incomes taken by profits and dividends has risen by 5 percentage points at the expense of pay.
This has created a lunatic merry-go-round, with the state making up pay packets to more than adequate levels, raising tax on employers to do so and setting up expensive administration systems to pay the money out and to try to minimise error and fraud. Eliminating this subsidy to employers would cost about £60bn a year, but government expenditure would drop by the same amount. Also,…