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

13 June 2014

13 June 2014

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.

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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.


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Show comments
  • Roger Hudson

    There comes a time when decades of tinkering with a problem , in any field of life, means that the system is so twisted up together that trying to fix one bit (benefits) just tightens up something else, we are now at that point in British economic life : we have to fix everything at once, piecemeal won’t do. This means a complete revolution, from the banning of fractional reserve banking all the way through taxation to ‘common ‘markets and abolishing ‘consumerism’.

  • Bonkim

    What else do you expect from the Rowntree Foundation?

  • Conway

    Nor the restrictive planning policies which are pushing up housing costs.” What restrictive planning policies? The NPPF is a builder’s charter. What’s putting up prices is excess demand caused by importing large numbers of people.

  • george

    kind of obvious … you dont cure an addict by giving them more drugs!
    you certainly dont get me out of the pub by giving me more drink! :o)

  • Streben80

    I have thought for some time that UKIP could make alot of ground up by taking on the cost of living issues by making the cost cheaper rather than the establishment solution which is always more subsidy. When the government knocks a penny of petrol it doesnt really amount to much for anyone, it is just gesture politics but I wonder how much cheaper food would be if they taxed the supply chain less, especially transport of goods.

    • Conway

      If we left the EU the price of food would go down. The CAP made prices rocket when we joined.

  • Torybushhug

    As to the immigration comments above, do keep in mind those naïve LSE statistics on the contribution of immigration ignores the huge number of migrants on in work housing benefit. Go ask a letting agent in somewhere like Enfield and they will tell you most migrants are on HB. Ignore the lofty out of touch academics that for example have never sought to find out how the vast numbers of fast food staff are paid in cash, not to mention those in the hand car washes in every town in the land.

    • forgotten_man

      A lot of fast food staff actually fiddle the tills…with the full knowledge of the owners/managers because £10k “loss” is £10k against the tax bill whereas the same in wages would be £10k + another £10k in tax and NI to the government.

      It also means the workers are still deemed to be on “low wages” and can keep receiving benefits….

      I know at least one person who only got a mortgage after 10 years of doing this so it didn’t look to suspicious but could have paid outright.

      Another reason the housing in London is out of control, HB AND additional cash!

      So.
      Lets summarise.

      Lots of government money forcibly extracted from the productive population and then given away by the non productive sector who bear no responsibility for the money being given out to subsidise and inflate other non productive parts of the economy…

      What could possibly be be wrong with this picture?

      There again I didn’t get a PPe at the LSE…..

  • Cooper cap

    I am afraid “Joseph Rowntree Trust”says it all.

    • Whitestones

      As much use as a chocolate teapot.

  • http://english-pensioner.blogspot.co.uk/ english_pensioner

    All these reports assume that the poor act logically and put food, housing and warmth as their priorities. In many cases they clearly don’t, the alcohol, Sky Sports subscription, along with take-aways having priority. Hence the food banks.

    • The Masked Marvel

      Indeed. One also wonders how this report might account for all the money those on benefits spend on the shadow economy.

  • samhol

    I don’t believe these charities have the interests of the poorest at heart at all. You give people the means to become more self-sufficient and self-reliant through work and human industry, and the need for the strong-armed State dies.

    It’s time for the Right to become more zealous and counter the Left’s deliberate suffocation of the poorest. For that to happen, we need to show a Thatcherite appetite for breaking vested interests in the Public Sector, the Private Sector and the small ‘c’ conservatives who hold back the construction of affordable homes.

    • Alexsandr

      we would not have such a housing crisis if we had not had uncontrolled immigration. You cant discuss housing without discussing immigration. and other infrastructure like schools, roads, railways, health, justice etc stc.

      • Kitty MLB

        We don’ t actually have a housing crisis, but a excessive immigration crisis.What happens when we
        run out of land. Do we build into the sea?
        Labour never gave a thought to that, stuffed us together like sardines.

  • Alexsandr

    And we are surprised a lefty lot says more tax n spend. They should be ignored as irrelevant dinosaurs.

  • RavenRandom

    More free money… what a surprise. I imagine it’ll come from the Magical Money Tree. Why is so little time spent on making a bigger cake for all rather than robbing Peter or Peter’s grandchildren to pay Paul?

  • Last Man Standing

    And no mention in your article or the report on the widespread and negative effects of mass immigration on native British people, especially the low paid, those seeking employment and those requiring low cost housing.

    • telemachus

      Because the immigrants make their own way economically
      *
      And in the process make a major contribution to GDP

      • mandelson

        Does that include their elderly/uneducated/overweight extended families?

      • girondas

        “And in the process make a major contribution to GDP”

        It’s net GDP that matters and they don’t make a major contribution to that.
        The advantages of immigration accrue to employers, to the detriment of the existing working class. The Labour Party was founded to represent and support the working classes – pity you forgot that telemachus.

        • telemachus

          It is GDP that gives us a measure of the wealth
          That wealth necessary to support an increasing ageing population
          Without them we all face penury at 80

          • girondas

            Gross GDP doesn’t matter telemachus
            Driving down the wages of working people does matter – to them if not to you.

            • telemachus

              So you support the move to a living rather than minimum wage then

              • Tony_E

                How do you propose to pay a ‘Living’ wage without either raising productivity, or increasing prices to the consumer (so therefore pushing the necessary level higher)?

                You need to look up those basic economics texts you keep banging on about…

              • Inverted Meniscus

                You can only do that you idiot if you increase productivity. Otherwise prices go up and wages have to follow in an inflationary spiral so beloved by Labour the party of lies, lying, liars and financial incompetence.

                • telemachus

                  You forget prosperity is rising exponentially in our intellectual economy

                • Inverted Meniscus

                  You know nothing of economics and so please stop wasting everybody else’s time with your dishonesty.

              • girondas

                Without the mass immigration of cheap labour driving down wage rates in this country we wouldn’t have to worry about “the move to a living wage” would we?

            • Conway

              It’s GDP per capita that’s the important figure. That has fallen.

          • Tony_E

            The only ratio that matters is that of GDP:Population.

            Immigration has made the country richer, by making nearly everyone in it poorer.

            Wealth is only gained by increases in productivity, usually brought about by withholding profit/benefit today to invest in process improvement in the future.

            • telemachus

              Wrong
              The non performing elderly population is increasing and needs the performing immigrants for support
              Please go on Amazon and buy yourself a simple textbook on economics

              • Cooper cap

                A bit simplistic. I don’t really buy the taking our jobs argument but your oldies would benefit more if the benefit claimants were the earners funding their pension instead of the east europeans

                • telemachus

                  Even the disabled have had their benefits withdrawn under the Coalition
                  e

              • girondas

                “Please go on Amazon and buy yourself a simple textbook on economics”

                Well, I am a modest chap – always willing to learn, so why don’t you recommend a respected text that explains to the rest of us how mass immigration benefits the working class of this country.

                You would do well to remember telemachus, that the real labour party opposed mass immigration and membership of the EU because it understood, as you evidently do not, that these would destroy the living standards of those people that the Labour party was elected to represent.

              • Hexhamgeezer

                Is that why you and chum Burnham want them removed?

              • Inverted Meniscus

                An ignorant oaf like you recommending an economic textbook to somebody who has just made a perfectly valid comment. You Fascist Labour supporters do to take ignorance to new levels.

          • Alexsandr

            its GDP per capita that matters. and you need to examine the incomes of the immigrants. if they are not earning enough to pay enough tax to cover their costs of state services then they offer no benefit. someone working in starbucks on minimum wage and sending a large part of their wages home dont really benefit the country

            • ButcombeMan

              You are both wasting your time arguing with him. He is a socialist. Like most of his kind he does not understand GDP per capita or efficiency.

              • telemachus

                And as a Socialist understand fairness
                But more importantly have thought deeply as to how to fund the pension time bomb aspect of welfare

          • girondas

            I have already told you – It is net GDP that matters. China has far greater gross GDP than the UK, but most chinese are very poor.

            We have plenty of unemployed and semi employed workers who cannot afford to raise their families on the wage rates currently on offer in the UK – wages rate that your party depressed, quite deliberately, by a policy of mass immigration.
            Immigrants grow old too and will face penury in there turn, unless we import yet more immigrants to support them – the numbers would need to grow expotentially.
            The modern Labour Party understands this perfectly well, but unfortunately the well-being of the working class of this country is no longer of any concern to those who currently control it.

            • telemachus

              You forget the dynamic of an economically dependent vs an economically active migrant group in calculating this

              • girondas

                So explain how it does my little snake oil salesman.

          • SandyShores

            Who will pay their pensions? Or in your world immigrants won’t be allowed a pension as their presence here is just cannon fodder to keep you in champagne.

        • Andy

          You should know by now that the Fascist Labour Party hates the white working class. Many of them dared to vote for Lady Thatcher and bought their council houses, so for these wicked crimes they must be punished, hence the policy of mass immigration. It’s worked a treat, from the Fascist perspective of course.

          • telemachus

            Oh Andy
            Fascists are tied into Big Business
            Sound like Labour?

            • Andy

              Look, we have already established, beyond all reasonable doubt, that you are a Fascist (like the Labour Party). You are Guilty as charged. Have you anything to say before just sentence is passed ?? *Reaches for Black Cap*

      • wycombewanderer
        • telemachus

          So a few South Yorkshire Ukip misfits have a direct line to the Mail
          Most of these folk work hard

          • girondas

            “So a few South Yorkshire Ukip misfits”
            So that’s how you chaps at party HQ refer to ex-labour voters is it?

            • Inverted Meniscus

              Yes because Labour is the party of lies, lying, liars, sanctimony and hypocrisy.

              • telemachus

                I thought that was the LibDems

                • ButcombeMan

                  Today of all days, with the consequences of Blair’s Iraq deception and illegal adventure, plain to see, you should keep quiet.

                • telemachus

                  We are seeing playing out what we should have let happen in 2003-5
                  A Kurdish North
                  A Sunny “Middle”
                  And a Shia South
                  *
                  Britain and France should have done that after WW 1

                • girondas

                  Iraq.telemachus, Iraq
                  That was you.

                • telemachus

                  With the Tories cheering on

                • girondas

                  Because you mislead them, and the rest of us, with your lies.
                  We have already established that.

                • Inverted Meniscus

                  No it is Labour the party of dishonesty, failure, mediocrity, lies, lying and liars.

            • telemachus

              Anyone defecting to racist UKIP is a misfit

              • Andy

                Anyone defecting from the racist, Fascist Labour Party is a hero.

              • ButcombeMan

                Maybe a “bigot” ?
                (Copyright the “Great Leader and begetter of The “Big Brown Mess”)

                • telemachus

                  She was a bigot

                • Inverted Meniscus

                  Gordon Brown the most useless, cowardly, arrogant, incompetent piece of scum ever to enter British public life.

                • telemachus

                  And yet
                  He saved the World’s Banks

                • Inverted Meniscus

                  Constantly repeating the most ridiculous lie of the 21st century will not make it true. It remains a ridiculous lie. The only thing that amoral oaf did was to set up up a banking regulatory system that precipitated the first banking failures in 147 years. He also created a structural deficit of £168 billion and surrounded himself with a gang of disgusting, amoral scum.

                • Michael Bird

                  Gordon – thru the financial services act, created the problem, he is solely responsible for the world’s financial breakdown.

                • ButcombeMan

                  Mrs Duffy was plainly a “salt of the earth” hardworking Briton and a long time Labour supporter.

                  You ignore people like her at your peril .

                  In fact Milliband’s main (mainly personal to him) problem, is that he does not reach out to that group. It could well be the undoing of Labour.

                  And by the way, Yvette for once did well, on the Passport Office fiasco. Well trained by someone. I am scrupulously fair please note, unlike you.

                • Kitty MLB

                  Mrs Duffy was not a bigot she is the backbone
                  of England and represents those who Labour
                  abandoned. She has more integrity and patriotism then the whole of New Labour.
                  And before now Those core voters were trapped,
                  they would never vote Conservative, but
                  now they have a choice.

              • girondas

                No telemachus, just honest working class people seeking a political party to represent their interests. The Labour Party used to be that party – it isn’t anymore.

                • telemachus

                  Oh but it is
                  The Coalition represent the elite Home Counties set only
                  And the UKIP miscreants the racists among us only

                • Kitty MLB

                  No it doesn’t wasp!
                  Labour abandoned the working classes when
                  Blair said ‘ we are all middle class now’.
                  He was ashamed of them. Excessive immigration was always doing to have the worse effect on the working class Labour voter
                  they were taken for granted and abused.
                  They will never vote for my party but they
                  will vote UKiP. As Rachel Reeves as said.

              • Kitty MLB

                So all Labours core voters..The decent working
                classes, your voters are racist misfits, are they
                little wasp? Have you heard what Rachel Reeves
                has to say. She said Labour has nothing to offer
                its core voters.

              • Inverted Meniscus

                Delete UKIP insert Fascist Labour.

                • telemachus

                  The Fascists were a movement allied to Big Business
                  Does not sound too much like Labour

                • Inverted Meniscus

                  Labour is an authoritarian Fascist party bent on regulating ever last aspect of people’s lives. It is the party of lies, lying and liars.

                • Kitty MLB

                  They really refuse to accept that they have
                  abandoned the core Labour voter and that
                  voter will turn to UKIP . The utter arrogance
                  and born to rule mentality of New-Labour.

          • wycombewanderer

            Work hard stealing the bronze from war memorials you mean.

      • Hexhamgeezer

        A f@rt in pixel form…

  • Torybushhug

    Through my business over 20 years I’ve had almost daily dealings with those on benefits and what I find most depressing of all is the toxic effect on the children of those that suckle nannies bloated teet. In the main such kids follow their elders and betters example and default to benefits.
    If all around you are being rewarded for bad decisions, well, make bad decisions.
    There is nothing progressive about endemic welfare. It slowly dumbs down the community.

    • Andy

      My experience is exactly the same as yours. I am constantly dismayed at how the ‘benefits culture’, lead by the wealthy Socialists, destroys the lives of those these policies are supposed to help. It is now so ingrained it is depressing.

      • Tony_E

        I see the same too- my wife who is an employer, constantly complains that the applicants she sees lack the skills and motivation to climb the ladder in her business – but at the same time see themselves as worth more than than the wage offered.

        There is a disconnect from reality in many I think.

        • Conway

          It’s no surprise, really, when you consider child-centred teaching encourages them to think they are the centre of the universe. Ally to that an all shall have prizes mindset and an entitlement culture which has been drummed into them virtually from birth and you hardly have a recipe to produce a hard-working, self-reliant bunch of people.

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