X

Create an account to continue reading.

Registered readers have access to our blogs and a limited number of magazine articles
For unlimited access to The Spectator, subscribe below

Registered readers have access to our blogs and a limited number of magazine articles

Sign in to continue

Already have an account?

What's my subscriber number?

Subscribe now from £1 a week

Online

Unlimited access to The Spectator including the full archive from 1828

Print

Weekly delivery of the magazine

App

Phone & tablet edition of the magazine

Spectator Club

Subscriber-only offers, events and discounts
 
View subscription offers

Already a subscriber?

or

Subscribe now for unlimited access

ALL FROM JUST £1 A WEEK

View subscription offers

Thank you for creating your account – To update your details click here to manage your account

Thank you for creating your account – To update your details click here to manage your account

Thank you for creating an account – Your subscriber number was not recognised though. To link your subscription visit the My Account page

Thank you for creating your account – To update your details click here to manage your account

X

Login

Don't have an account? Sign up
X

Subscription expired

Your subscription has expired. Please go to My Account to renew it or view subscription offers.

X

Forgot Password

Please check your email

If the email address you entered is associated with a web account on our system, you will receive an email from us with instructions for resetting your password.

If you don't receive this email, please check your junk mail folder.

X

It's time to subscribe.

You've read all your free Spectator magazine articles for this month.

Subscribe now for unlimited access – from just £1 a week

You've read all your free Spectator magazine articles for this month.

Subscribe now for unlimited access

Online

Unlimited access to The Spectator including the full archive from 1828

Print

Weekly delivery of the magazine

App

Phone & tablet edition of the magazine

Spectator Club

Subscriber-only offers, events and discounts
X

Sign up

What's my subscriber number? Already have an account?

Thank you for creating your account – To update your details click here to manage your account

Thank you for creating your account – To update your details click here to manage your account

Thank you for creating an account – Your subscriber number was not recognised though. To link your subscription visit the My Account page

Thank you for creating your account – To update your details click here to manage your account

X

Your subscriber number is the 8 digit number printed above your name on the address sheet sent with your magazine each week. If you receive it, you’ll also find your subscriber number at the top of our weekly highlights email.

Entering your subscriber number will enable full access to all magazine articles on the site.

If you cannot find your subscriber number then please contact us on customerhelp@subscriptions.spectator.co.uk or call 0330 333 0050. If you’ve only just subscribed, you may not yet have been issued with a subscriber number. In this case you can use the temporary web ID number, included in your email order confirmation.

You can create an account in the meantime and link your subscription at a later time. Simply visit the My Account page, enter your subscriber number in the relevant field and click 'submit changes'.

If you have any difficulties creating an account or logging in please take a look at our FAQs page.

Coffee House

A pound of state benefits has less impact than a pound from independent earnings

13 June 2014

10:08 AM

13 June 2014

10:08 AM

The Joseph Rowntree Foundation (JRF)  published a paper on Wednesday comparing a range of policies to help low paid workers. Perhaps unsurprisingly, they conclude that increasing benefits is the best option.

Like so much analysis on poverty, the report suffers from policy myopia in two respects. First, it looks only at cash benefits and direct taxes, ignoring the policy choices which set the constraints of the problem. Secondly, wider implications of the options are ignored.

Cost of living

The report uses a basket of goods which determines a ‘minimum income standard’. But no attention is paid to policies which increase the cost of goods in that basket, save for childcare. And the only ‘solution’ offered is to increase subsidies. No mention of any structural reform to make childcare more affordable to counter the recent rising regulatory costs.

Similarly, no mention of policies that demand consumers buy energy from expensive sources. Nor the restrictive planning policies which are pushing up housing costs. And the EU’s Common Agricultural Policy which prohibits consumers from buying cheap food from farmers across the world, ramping up food prices, was also absent. While the report did consider (and dismiss) the case for cutting VAT, it offered no analysis for ‘sin taxes’, stating that only modest quantities of alcohol and fuel are deemed necessary for a minimum standard of living, and no tobacco at all. Maybe, but the evidence shows that sin taxes are the most regressive of all in terms of actual expenditure.

[Alt-Text]


Higher earnings

Another area almost completely ignored by the report is policies which depress wage levels: taxes, employment law and tax credits.
Economists don’t agree about much but an almost complete consensus exists on the contention that employer’s National Insurance contributions are ultimately paid for by employees in the form of lower wages. So the dual income low paid couple in the appendix’s table who earn £670 a week between them would earn £50 more without ’employer’s’ National Insurance. This compares to the £19.84 shortfall of their disposable income from the JRF’s minimum income standard.

Costly employment and pension regulations also feed through to lower wages. And because tax credits reduce the value of a pay increase to the employee, they reduce the incentive for employees to increase their earnings, leading to lower wages. As with employment law measures, tax credits have their upside. But their effects on wage levels cannot be ignored.

Wider objectives

Perhaps the deepest flaw is the report’s narrowness. The only benefit of an increase in the personal allowance registered by the report is the effect it has on people earning under their minimum income standard. But the implicit assumption that reducing the tax burden on anyone else has no benefit is patently absurd. A similar flaw distorts comments on the relative merits of raising National Insurance thresholds compared to Income Tax:

‘The main difference is that, whereas about 2 million additional people between the present tax and national insurance thresholds would gain, pensioners would not since they do not pay contributions.’

Yes, but what about the injustice of higher taxes on poor people just because they are under 65, the additional hardship for those unlucky enough to have to pay it, or to the simplification benefits of reform?

Another neglected area is the extent to which the policies support independence. A pound of state benefits does not have the same impact as a pound from independent earnings. As far as possible, a given level of disposable income should be achieved with the highest proportion of independent earnings. This could also reduce the extent of the monitoring and compliance regime required to transfer cash from taxpayers to benefit claimants – in many cases the same people. Giving someone money with one hand while taking it away with the other doesn’t help. Much better to let people keep more of their own money in the first place.

A final blind-spot is the silence about the wider economic impact of the policy options being discussed. A substantial body of evidence demonstrates that higher levels of government spending and taxation are associated with markedly slower economic growth. It’s a pity that none of these factors were considered. With such a narrow remit that ignores so many of the implications of the policy options in question, the JRF’s report sadly doesn’t add much to the debate.

Give something clever this Christmas – a year’s subscription to The Spectator for just £75. And we’ll give you a free bottle of champagne. Click here.


Show comments
Close