Not so much a poverty problem but a benefits problem

The context

This is a true story. Some years ago a Polish builder working in the UK suffered an accident at work in which his right hand was severely injured. Although he is perfectly capable of working with his left hand, prospective employers took one look at his injury and determined that he was unfit for work. Deprived of his ability to make a living, the man quickly burned through his savings, and came to rely on the £72 per week provided by Employment and Support Allowance (ESA). Not surprisingly he was unable to continue to pay for his accommodation and was soon reduced to living in a shed.

Last week, our builder showed up at a job centre in a well-to-do part of southern England to try and get some help with his circumstances. After having told his story, the first question he was asked by the officer dealing with his case was whether he had any health issues. Assuming that the question referred to supplementary issues other than his hand, he replied that he suffered from anaemia. The officer was about to press the enter button on the keyboard to finalise the data entry when another official who was observing the interview reminded them that the man had a serious hand injury.

It was then explained to our builder that he was eligible for housing benefit. Wonderful – some help at last. Except that in the Kafkaesque system employed in the UK, the recipient first has to find a place to live and only then are they entitled to support. Due to the shortage of social housing, those seeking somewhere to live are forced to rely on the private rental sector. Assuming you can find someone willing to rent their property, the landlord will ask for a deposit of 2-3 months’ rent. If you are living in a shed and surviving on £72 per week, the chances of saving up around £1,000 for a deposit are slim to none. To recap, this is a skilled workman who paid his taxes whilst he was working and by an unfortunate sequence of circumstances found himself living in a shed, in the middle of winter in what prides itself as being a rich civilised country. Furthermore, he cannot claim his housing benefit because he has nowhere to live.

I must admit to being shocked by this story and it is an eye-opener to realise that people are living in such circumstances in a so-called rich economy in the 21^st century. It would be easy at this point to say that Jeremy Corbyn was right after all, and that the electorate has mistakenly given a mandate to a Conservative government which is putting increased pressure on the poor. But I am not sure that this is the whole story.

The problem 

On a long-term basis, the evidence suggests that there was a sharp rise in relative poverty, but it occurred in the second half of the 1980s, during the second and third term Thatcher governments (as measured on an income basis, see p18 of this House of Commons Briefing Paper). It has been exacerbated by a sharp rise in housing costs, which means that income after housing costs has not recovered to the same extent as before-housing cost income where relative poverty levels have fallen moderately since the 1990s. The Social Metrics Commission, an independent group of experts which is working to understand and measure poverty in the UK, reckons that the proportion of people living in poverty (which takes into account factors such as income and housing costs) has fallen slightly since the middle of the last decade (chart) with a larger decline for pensioners than for other groups. Overall numbers have gone up, of course, but more slowly than growth in the total population.

I do not wish to suggest that poverty is not a problem, because it clearly is for a lot of people. But a far bigger problem appears to be issues with the benefit system itself. In summer 2018 the National Audit Office released a damning report on the rollout of Universal Credit (UC). UC was introduced in 2012 and was intended to simplify the benefits system by combining six benefits into one and to raise work incentives by promoting a system of benefit-tapering as people moved into work rather than ending state support altogether. However, as the NAO pointed out, the system did not initially work as intended and underwent several changes – one of the biggest was the 2015 decision by George Osborne to reduce the UC budget, which limited its effectiveness. 

One of the biggest failings of the system compared to previous benefits was the decision to pay out in arrears. Claimants do not receive any payment until five weeks after their first claim whereas under the previous system they were eligible for payment straight away. The well-documented rise in food bank use appears to be highly correlated with the introduction of UC, with the Trussell Trust reporting a 67% increase in the distribution of food parcels over the past five years, as claimants simply do not have sufficient funds to buy food. 

A (partial) solution 

I have no political axe to grind, not being a member of any political party. But as an economist with an interest in social justice issues, the first thing I would recommend to the new Conservative government is to take action to resolve the flaws in the UC system. This would go a long way towards helping those voters in those areas who “loaned” their votes to the Tories in exchange for “getting Brexit done.” An obvious fix would be to reduce the waiting time before benefits are paid out. Another possibility would be to reduce the UC taper rate. At present, the taper rate is set at 63% which means that for every £1 earned above the Work Allowance, benefit is reduced by 63p. According to the HMRC tax ready-reckoner, each £100 increase in Working Tax Credit costs the Exchequer £260 million versus a cost of £605 million for each £100 rise in the personal tax allowance, so altering the taper rate is a cheaper way of helping the truly low paid.

If the Conservative Party is serious about renewing its contract with the electorate, small fixes such as this could go much further than the big headline-grabbing proposals espoused by the main parties during their election campaigns. They will be cheaper too.

Austerity matters

I happened to dip into a TV programme the other day that looked at the life of a school over the course of an academic year (here for anyone able to view it). Aside from shining a light on the increasing pressure which teachers face in the wake of significant social change, what was particularly striking was the financial burden under which schools are constrained to operate. It really highlighted the extent to which eight years of fiscal squeeze are now cutting into the bone of public services now that the fat and muscle have been stripped away.

One of the teachers expressed particular concern at the extent to which pastoral care has been hard hit. Pupils were reported to have demonstrated rising levels of misbehaviour and anxiety, and there is increasing concern that schools simply do not have the resources to cope with the stresses that these issues pose to the smooth running of the school. Since I was at school, more years ago than I am prepared to admit, the pressure on students to pass exams has increased exponentially and not surprisingly a much greater support network is required to help them cope. If it is not there, the well-being of the students is not being supported in the way that it once was with adverse consequences for performance.

As an aside, it is notable the extent to which performance is very much at the heart of the education system today. One teacher openly admitted that his prospects for a pay rise depend on generating a certain level of performance from pupils in their exams. This in turn creates a series of perverse incentives whereby certain pupils may be steered away from particular subjects for fear that their exam performance drags down the school average. Indeed, there are many stories of schools which refuse to teach certain subjects for fear that they will drag down the overall performance. This is particularly the case for subjects where the marking is subjective. One example is the teaching of literature, where the marking system is so variable across geographical locations that schools cannot be sure of the outcome.

But it is the cost squeeze on the education system that is the biggest problem. Despite claims in the budget two weeks  ago that the age of austerity is over, the Department of Education’s capital outlays will fall by 20% over the next two years though this offset by a rise in current spending. According to analysis by the Institute for Fiscal Studies whilst total spending per child is 42% higher than it was 20 years ago, much of the increase has been spent on the most severe cases. Almost half of the £8.6bn children’s services budget in England is now spent on 73,000 children in the care system, leaving the rest to cover another 11.7 million. Spending per head on the most vulnerable children is more than 100 times that spent on the rest. Small wonder that teachers in “normal” schools feel hard done by.

It is not just the education system that is struggling to keep its head above water. A report three weeks ago from the House of Commons Home Affairs Committee highlighted the strains on the police force as a result of a persistent budgetary squeeze. For example, the time taken to charge an offence rose by 25% between March 2016 and March 2018. The Committee concluded that the current system that determines police funding is “not fit for purpose” and requires radical reform, including reduction in the reliance on Council Tax receipts (a local property-based tax) and must recognise “the true cost of policing.”

A recent series of reports by the Times journalists Rachel Sylvester and Alice Thomson (summarised here) highlights the extent of the rise in poverty over recent years which has raised the numbers of working poor. When even The Times is pointing out the extent to which people trapped in the welfare system are being left behind, you know there is a problem. As Sylvester points out “the education system has made matters worse because the focus on test results has fuelled a rise in exclusions as schools ease out pupils who might bring down their league table rankings.” And as is now being recognised, one of the biggest problems with the current system is that Universal Credit, which is being patchily rolled out across the country, only pays out in arrears whereas previously applicants were entitled to benefits immediately. Consequently, those with little to no savings who are entitled to benefit (a large proportion of them), find that their problems are not over once they are accepted for Universal Credit.

Even though the government has promised that “austerity is finally coming to an end” it will take a long time to undo much of the damage caused by eight years of slashing the public sector. For one thing, the economy is growing more slowly than in the past – partly due to secular factors, which I will deal with another time, but in recent years as a consequence of Brexit-related uncertainty. Consequently, the government cannot simply turn on the spending taps. As a society, we need a proper debate about the levels of taxation required to fund the level of public services we demand. But Brexit itself has absorbed so much of the government’s own time and energy for the last two years – and is likely to continue to do so for some time to come – that it has taken its eye off the ball on social policy.

I do not wish to sound like a broken record on either fiscal policy or Brexit but they happen to be two important policy areas where the government has failed to cover itself in glory. As I pointed out in my previous post government efforts a century ago to slash the public sector exacerbated many of the economy’s underlying weaknesses. Given this historical lesson, the increasing headwinds now facing the economy suggest that a little bit less austerity would go a long way.

UK fiscal policy: The Augustinian budget

The death of fiscal austerity has been proclaimed in the UK following Chancellor Hammond’s 2019 budget to parliament in which he managed to reduce the borrowing requirement whilst simultaneously increasing spending on the NHS, with a little bit set aside for defence, and some cuts in income taxes to boot. But there is a different way to look at it. The fact that the OBR raised its projection for tax revenues in the current fiscal year by £11.5bn (around 1.5%) proved to be the main source of the largesse, with additional help provided by lower funding needs in some key areas (interest outlays). Like a gambler who wins a modest amount on the lottery, Hammond has blown his good fortune in one fell swoop.

Admittedly, much of it has gone on good causes but as the OBR pointed out, “experience shows that a favourable revision in one forecast can be followed by an unfavourable one in the next.” The OBR continued by describing the package of measures as one which ”has the familiar Augustinian pattern of a near-term giveaway followed by a longer-term takeaway.” Indeed, the OBR adopted a very circumspect approach to the whole Budget process, pointing to “repeated failures [by the government] to observe the agreed timetable” which sounds like a lot of last minute horse-trading went on as the Chancellor tried to accommodate the prime minister’s desire to end the age of austerity.

All this comes at a time when growth continues to underperform relative to pre-Brexit projections, running at a rate close to 1.5% per year over the next five years when ordinarily we would expect something closer to 2% per annum. Then there is the looming spectre of Brexit itself. When asked by the OBR whether it wished to provide any additional information on post-Brexit policies, the government merely directed it to the White Paper published in July, which is widely believed to be a lame duck. However, the Chancellor did make it clear that if a no-deal Brexit results in March, the Spring Statement may have to be a full fiscal event as the government contemplates a bigger hole in the public finances.

Whilst Hammond was able to ease the purse strings somewhat, it is premature at this stage to sound the all-clear on austerity although the budget was definitely a step in the right direction. Key front line services such as the prison service are creaking at the seams and additional funding for the police is long overdue. Indeed, a key chart in the Economic and Fiscal Outlook (shown below) indicates that once we strip out the impact of additional health spending, real per capita spending across other departments implies a modest squeeze well into the 2020s.

Indeed, the damage being done by cuts in non-health spending are wide and pervasive. Local spending has borne a huge amount of the burden as central government seeks to reduce the grant to local authorities. Services which are provided locally have had to be cut and local government has had to find ways to fill the gap – not easy when its main source of revenue is council tax which can only be raised to a limited extent. It is austerity at this level that people tend to notice first and the measures announced this week do little to address such concerns. It will thus take considerably more fiscal boosts of the same magnitude as those announced in the October 2018 budget to begin to redress the balance.

I have made the point previously that the austerity initiated by George Osborne during his time as Chancellor was overly harsh and appeared to be driven by ideology as much as economics. Perhaps the Brexit vote was the first sign that the electorate was beginning to tire of the relentless assault on public services, and the 2017 election affirmed that Labour’s message that austerity was damaging the country was beginning to be heeded. Accordingly, we should view the Conservative Party’s message that austerity is over as an indication that it believes taking further steps down the austerity path will be electorally counterproductive. Having driven the deficit from 10% of GDP in 2009-10 to a projected 1.2% in 2018-19, enough appears to be enough – so long as Brexit does not torpedo the plans in five months’ time.

UK austerity: An American view

The New York Times’ UK correspondent, Peter Goodman, recently published a piece which took a close look at the impact of austerity on the UK. In common with the best journalism on this subject – the piece by Sarah O’Connor in the FT last year made a similar point – it highlighted the human costs of austerity. In Goodman’s words, “a wave of austerity has yielded a country that has grown accustomed to living with less, even as many measures of social well-being — crime rates, opioid addiction, infant mortality, childhood poverty and homelessness — point to a deteriorating quality of life.” He goes on to point out that “Britain is looking less like the rest of Europe and more like the United States, with a shrinking welfare state and spreading poverty.”

There have been big cuts in spending before, with the share of spending in GDP falling sharply in the late-1980s, but the economy was growing much more rapidly so we did not notice as much. Moreover, the recession of the early-1990s resulted in a significant turnaround in outlays which soon returned to mid-1980s levels as a share of GDP.  Back in 2010, the Conservative-led coalition government announced budget plans which were underpinned by “a commitment to fairness” and it would “seek to build over the long term a fair tax and benefit system that rewards work and promotes economic competitiveness … [with] … measures to encourage people to take personal responsibility for their actions by rewarding those who work hard work and save responsibly for the future.” Running through the government’s budget plan was the message that the state benefit system was damaging work incentives and that it was their intention to rectify this problem.

All the signs were there that policy was aimed squarely at the welfare bill. And as one of the charts in the June 2010 Budget publication made clear, the bottom 10% of households by net income were hit harder than any group other than the top 20% (see chart). But what exactly was the point of all the austerity? Even before he was appointed Chancellor, George Osborne penned an article in The Telegraph suggesting that the parlous state of public finances threatened to send the UK the way of Greece, and he returned to this theme on a number of subsequent occasions. This is, of course, nonsense. Greece borrows in a currency which it does not control and has a poor record of managing its public finances. The UK issues in its own currency and has never technically defaulted on its obligations since the Act of Union brought the UK into being in 1707.

I assume that the man appointed to manage the nation’s finances knew this and I am inclined to treat the Greek comparison as a cover story for a more ideological assault on the role of the state. Goodman suggests that “from its inception, austerity carried a whiff of moral righteousness, as if those who delivered it were sober-minded grown-ups. Belt tightening was sold as a shared undertaking, an unpleasant yet unavoidable reckoning with dangerous budget deficits.” He juxtaposes Osborne’s 2010 claim of “Prosperity for all” with the reality that “Eight years later, housing subsidies have been restricted, along with tax credits for poor families. The government has frozen unemployment and disability benefits even as costs of food and other necessities have climbed” and highlights that many of those seeking to transition to the new benefits system “have lost support for weeks or months while their cases have shifted to the new system.” If such a piece had been written by a local journalist, they would no doubt have been accused of having an axe to grind. The fact that it was written by an American with no skin in the game gives it a lot more punch.

This all comes at a time when the UK will increasingly have to face up to some unpleasant fiscal truths in the years ahead, especially when it comes to funding the NHS. Paul Johnson, director of the Institute for Fiscal Studies, has pointed out that over the last 60 years “health spending has more than doubled as a fraction of national income, but total spending has been flat. Cuts to defence, housing and debt interest made space for health and welfare. This is not going to be an option for the future.”

Maybe the cuts to the welfare bill, which successive governments have implemented over the last eight years, will give them a bit more leeway to deal with the problem. However, the fact remains that the government will need to open a debate about raising taxes to provide for some of these needs. It will be politically difficult: After almost a decade of cutting services, the government will be pilloried for asking for more money. But without it, still further cuts may be necessary.

I, Franz Kafka

For those of you looking for a feelgood film, the works of British filmmaker Ken Loach would not be high on anybody’s list. Loach is a renowned social commentator, whose political stance is avowedly socialist and who was described by the New York Times as having “the political outlook of a British Michael Moore.” Loach has been making films for more than 50 years and his 1966 television play Cathy Come Home was one of the most important British TV dramas of all time, offering a savage critique of the unemployment and homelessness problems facing those at the bottom end of the social strata. Such was its political impact that it prompted the foundation of Crisis, the charity for homeless people, in 1967.

Whilst Loach’s work may not be a barrel of laughs, it does shine an important light on areas of British society that may otherwise be overlooked by a wider audience. His 2016 Palme d’Or winner I Daniel Blake carries on this grand tradition, offering a gritty take on the Kafkaesque workings of the UK benefit system. The story centres on the eponymous Daniel Blake who has suffered a heart attack and whose doctor determines that he is medically unfit to return to work. However, his benefit claim is denied because the Work Capability Assessment, to which all claimants are subject, deems that he is not sufficiently incapacitated. The reason for that is that the criteria that claimants must pass in order to make a benefit claim did not cover his condition (see here for a list of requirements). As result, our hero is eligible only for a particular category of benefit which requires him to prove that he is looking for work, despite having been told by his doctor that he is medically unfit.

The point of Loach’s film is to demonstrate that the system is not fit for purpose and is designed to put obstacles in the way of claimants to dissuade them from proceeding further, which reduces the numbers and eases the state’s financial burden. This is not simply a piece of social drama: I have heard it time and time again from people involved in dealing with benefit cases. According to the House of Commons Work and Pensions Committee (WPC) “290,000 claimants … – 6% of all those assessed – only received the correct award after challenging DWP’s (Department for Work and Pensions) initial decision.” The DWP’s own statistics show that between October 2013 and March 2017 roughly half of those people initially claiming some form of long-term invalidity benefit either had their benefit withdrawn or were required to claim one which requires them to look for work whilst in receipt. The WPC highlighted “a deficit of confidence in the assessment processes. Central to the lack of trust are concerns about the ability of the Department’s contractors to conduct accurate assessments.” All in all, the WPC’s report was a damning indictment of a system which claimants increasingly distrust.

Although the WPC did not touch on the subject, there are many insiders who claim that there is pressure to impose quotas on the numbers eligible for benefits. The system of benefit assessment is in any case initially carried out by people who are not necessarily qualified to make the appropriate medical judgements, and in 2016 a United Nations report criticised the UK system for being “focused on a functional evaluation of skills and capabilities, and puts aside personal circumstances and needs, and barriers faced by persons with disabilities to return to employment.” 

Even though only 6% of cases are overturned, this still represents 290,000 claimants who are being denied the support to which they are entitled. As the Institute for Fiscal Studies put it, “this is arguably suggestive of a system that is not working well.” In an excellent article in the Financial Times in November, Sarah O’Connor highlighted that “while national policy has been focused on pushing people from incapacity into the labour market, it is not clear that every local labour market is willing or able to absorb them.” To put it another way, in areas where jobs are scarce, getting people off the incapacity register may fulfil one set of government targets but it does nothing to resolve the underlying problems.

This is unfortunately all very bleak and depressing and further undermines the public’s trust in government in general and the benefits system in particular. Whilst reform of the system is not per se a bad idea, the experience of the past eight years is that the government has failed to manage the process of welfare reform. Universal Credit, which was designed to replace a multitude of different benefits in a bid to reduce outlays, was unveiled in 2013 but is still nowhere near completion having initially expected to have been completed within a four year cycle. Moreover, in a report released last month the OBR questioned whether the savings promised by this reform will even be realised.

Quite why the reform of the benefit system has proven to be such a shambles is no mystery: It is too complex and insufficient resources have been committed to make it work. Meanwhile the most vulnerable members of society are bearing the brunt of the adjustment. For those of us who spend our time looking at the big fiscal picture, it is quite an eye-opener to look below the surface at how the system actually works. Whilst such methods have (arguably) been successful in helping to bring down the public deficit, the more we look at the social costs the less justified some of the actions appear to be. With the government now focusing all its policy efforts on Brexit, it is difficult to see any light at the end of this tunnel.

Of course, the supreme irony is that a good number of those who appeared to be abandoned by this failed benefit system are likely to have been those who voted for Brexit on the basis that they had nothing to lose. If the leading lights in David Cameron’s government ever wonder why they lost the Brexit vote, they might reflect on their inability to deliver a benefit system which provides the support it promised.

Austerity: A local government perspective

Austerity has been very much in the UK public eye over recent weeks. It was a major topic during the election campaign but the tragic fire at Grenfell Tower, where the final death toll has not yet been confirmed, has thrown the issue into stark relief. Moreover, this is not just an austerity-related issue because it raises questions regarding inequality, the like of which we have not heard in the UK for many years.

There is certainly mounting anger at the circumstances in which this awful disaster took place. The Royal Borough of Kensington and Chelsea (RBKC) is, after all, one of the richest parts of London which in turn is significantly richer than the rest of the country. The argument runs that the poor people in North Kensington – the part of the borough perceived to be less salubrious – were ignored in a way that their richer counterparts elsewhere in the borough were not. There is, in some quarters, an attempt to pin blame on the Conservative Party for their stewardship of the economy which promoted the cost cutting culture which allowed the tragedy to take place. Without wishing to delve too deeply into the politics of this extremely sensitive issue, it is certainly worth looking more closely at the issue of local government financing to shine some light on the difficulties of running a local authority in the current hostile fiscal climate.

In fiscal year 2010-11, central government funded 76% of local authority (LA) spending. Since then the value of the transfer has fallen by 32% and the share of local spending funded from Westminster has fallen to 57% (chart). By way of compensation, local authorities are now allowed to retain a higher proportion (50%) of what they collect locally in the form of business rates (a levy on local businesses). Nonetheless, total LA spending has fallen by almost 10% over the last six years. Across the country as a whole, the budget for 2016-17 imposed the largest cash reduction on education services compared to 2015-16 (£765 million) whilst the biggest proportional reduction fell on highways and transport services (-10.6%).

Matters are not going to get any easier in the years ahead: By 2020, the government has committed to phase out its transfer to local government, which will be compensated by the fact that local authorities will be able to keep 100% of business rates revenue. As it currently stands, only 12.3% of revenue is derived from business rates. Even assuming this doubles by 2020, this will in no way be enough to compensate for the elimination of the central government grants, which will still be required to fund 45% of local spending unless there is a correspondingly huge decline in total outlays. For this reason, the system which gives protection to those authorities with lower levels of business rate income looks likely to be heavily utilised. Nonetheless, given this difficult backdrop, it is hardly surprising that local government spending is being slashed.

Although it is the smallest of London’s 32 boroughs, RBKC’s gross outlays in 2016-17 amounted to £680 million. On a net basis, the borough’s net spending undershot its budget by around 4% (£8.2million) in fiscal 2016-17, and the accounts show that in each of the last two fiscal years, the borough has recorded a surplus on the Housing Revenue Account (£12.2 million in 2016-17 and £19.6 million in the previous year). On the basis of these numbers, this appears to be a LA which has put the squeeze on. For comparative purposes, I looked at the accounts of the City of Newcastle partly because they are similar in scale to those of RBKC, and also because the leader of Newcastle council, Nick Forbes, was one of the first to advocate cutting frontline services in the wake of the London-imposed fiscal squeeze. Interestingly, the Newcastle HRA showed an even bigger surplus in 2015-16 than RBKC of over £26 million.

Undoubtedly, local authorities will say that these surpluses are ring-fenced and will be used in future for housing related activity. So they should: local councils are, after all, non-profit organisations. But in the wake of the Grenfell Tower fire, there are those who question why the likes of Newcastle are making a net return of 22% on their local housing activities. However, life is not so simple. The reason why councils run an HRA surplus is that their finances are subject to a whole host of other regulations imposed on them by central government and part of the surplus reflects precautionary saving. They have far less autonomy than is believed even in cases like this where they nominally control the budget.

However, there is a much wider issue at stake here. Whilst we spend a lot of time fretting about general public finances in the UK, we devote relatively little time to looking at local finance issues. But we should, because it is primarily at the local level that we consume public services. We see austerity all around us at the local level: A library closure here, a request to buy extra school textbooks there. It all adds up to a very stretched system.

There is no doubt that over the last 30 years, local authorities have been subject to a considerable amount of central government influence which has allowed them to deflect blame for much of their actions onto Westminster. Indeed, it is only recently that they have been given any autonomy to hold onto the revenue they generate locally. Whilst it is true that decisions taken in London have forced local authorities to squeeze local spending, as they gain an increased degree of control over local revenue generation they will be able to break free of some of these constraints.  In return, they will have to be held increasingly accountable for their actions. It will no longer be enough to say that the frequency of household refuse collections has been reduced to fortnightly thanks to central government decisions. More importantly, the prevention of disasters such as those occurring in West London will increasingly be viewed as the responsibility of local, rather than central government.