David Willetts: A Conservative case for welfare spending as well as tax cuts to help working people

5 Jul

Lord Willetts is President of the Resolution Foundation. He is a former Minister for Universities and Science.

It is a key promise of modern market economies that they boost living standards – both for us during our working lives and also for our children who we hope will be better off than us. British capitalism is failing to deliver on this promise. Unless we can raise our game, both our economic model and our politics will face deep challenges.

New research just out from Resolution Foundation shows that the typical non-pensioner income grew by 12 per cent between 2004 and 2019 compared to the previous average of 40 per cent every 15 years since 1961. This shocking decline in economic growth per head and household incomes is a problem which afflicts other countries as well post the crash.

But we have it worse – and one of the most depressing ways in which our situation feels like a return to the 1970s is that dismal sense of relative economic decline. Now typical incomes are higher in France (10 per cent) Germany (19 per cent) and even Ireland (six per cent).

There is one clear overwhelming way of tackling this: increase GDP per head – which means increasing productivity. But although we may endorse that in theory, it is much harder to do in practice. Look at attitudes to reform of planning restrictions. Moreover, a long term growth agenda is not quite the whole story. The working of our labour market and our tax and benefits system matter too.

First, the good news. We continue to enjoy the benefits of a flexible labour market with a relatively high employment rate. One of the protections for household incomes has been the continuing increase in the number of women working. We are now at 75 per cent employment overall. America used to be the model of a high employment flexible economy but it is down to 70 per cent. We can do even better – getting to 80 per cent would be a good target. That means more to get older workers staying in work. And more help into work for people on disability benefits too.

The increase in the minimum wage has also helped. The sceptics – and I was one – were wrong to fear it would cost jobs. But we made another point too: that it could not on its own boost household income and reduce inequality because some low paid workers are in high income households. And there are low income households without an earner at all. Whereas in the past Labour over-claimed for the benefits of the minimum wage, now it is some Conservatives who love the idea that it can raise incomes without having to do anything about benefits. But that is to expect too much of the minimum wage.

It is also hard to tax cut our way to higher household incomes for people on low and middle incomes. One reason is that we have taken so many people out of income tax already – and now national insurance. As a result, average direct rates on low paid employees fell from 13 per cent in 2010 to four per cent in 2019.

They are now rising, but are still very low on any historical measure. I personally have always thought raising income tax allowances is over-rated. It is very expensive, as it is an increase in the tax allowance for everyone, and if the gains are recovered from higher earners it means a messy and very high marginal rate for then.

Moreover, if possible voters should have a real interest in how the Government is spending their money and paying income tax can boost that. (This was of course the old argument for the Poll Tax – so no wonder it has fallen out of favour.)

If there are limits to what can be done for living standards via regulating wages or cutting direct taxes, then benefits have a role to play. There are specific pressure points which need to be addressed. Incomes after housing costs are very low by European standards because rents are so high. And rents are so high because the price of houses is so high. That in turn is because of planning controls and quantitative easing. There could be better targeted help with the cost of childcare.

And, yes, getting rid of the triple lock is one of the ways to pay for this. The total effect of benefit policy changes on the incomes of working-age adults and children since 2010 has been an average loss of £375 per year compared with a boost to pensioner incomes of £510 per year. Shifting the balance of the welfare state like that is very hard to justify.

Is there a Tory case for a fair, balanced welfare state? I think there is.

The classic argument for the welfare state is that the Government is the biggest bearer of risk we have got: it bears the risks we face from sickness, retirement, or unemployment. It is the case made by Bismarck and Beveridge – neither of them socialists. Tories hoped that commercial insurance and friendly societies between them could discharge this role, but there are limits to what they can do – even the US ended up with Medicare and Social Security.

It is not an argument about equality. It is about insurance.

If we don’t have a social security system which protects us from some of these risks, we end up with expensive ad hoc measures in crises. A massive furlough package has now been succeeded by another massive package to help with the cost of energy. They were both bold moves by the Chancellor, but one reason he had to act so boldly was that the tools available in our existing welfare state were so limited.

There is a political argument too. A long term secret of Conservative success is the appeal to people in the middle realistically aspiring to some of the incomes and security enjoyed by the very affluent. There is a real danger if people in the middle instead see their circumstances and their families’ more like the sadly precarious lives of poor people. Then a very different Coalition starts taking shape and one which is much more threatening to Conservatives.

Of course in the long run it is growth and productivity that matters. But there are things we can do now as well to rebalance our welfare state to make it make it more fair and more effective.

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