What price fairness?

As a football fan I have always had time for Marcus Rashford, the Manchester United and England striker. Ever since he made his playing debut five years ago the quality of his play marked him out as a special talent. Over the past year, however, his efforts to raise awareness of the issue of child poverty have elevated his profile beyond the realms of the footballing world. He belies the stereotype of overpaid young footballers and is a credit to his generation.

The school meals debate

In recent days Rashford has lent his support to the campaign against the meagre food parcels provided to low income families whose children would otherwise be receiving free school meals were the schools not closed due to Covid restrictions. The parcels supposedly contained five days’ worth of food valued at £30 but after a social media campaign which highlighted that the value of the parcels fell far short of this, the company providing them was forced to apologise and admit they had failed to meet expected standards. This incident raises a number of issues regarding deficiencies in the UK social welfare system which really ought to be high on the government’s to-do list, with some obvious short-term fixes required but a longer-term overhaul is also necessary.

In this particular case, it is notable that the government fell into line only after Rashford offered his high profile support. Having attempted to ignore Rashford’s intervention on this issue last summer, the government realised very quickly that public opinion would side with the footballer and this was not an issue in which it would prevail. It also shines a light once again on the links between the political system and companies which win government outsourcing contracts. Paul Walsh, the former chairman of Compass Group, which provided the food parcels, and who stepped down last month, donated to the Conservative Party in 2010 and publicly backed David Cameron for prime minister in 2015. Since 2016, Compass Group is reported to have won contracts worth almost £350m for school catering. The almost incestuous relationship between business and politics is not going unnoticed abroad, with the New York Times reporting last month on “Waste, Negligence and Cronyism: Inside Britain’s Pandemic Spending.” 

The bigger picture

But arguably a bigger problem is the threadbare state of the UK social safety net, even before its shortcomings were exposed by Covid. It is the weaknesses in the system and the consequences they have for people lower down the income scale that have prompted the likes of Rashford to get involved. The state of the welfare system is an issue that I have written about quite a lot over the years but when even the Financial Times points out the deficiencies in the system the government really ought to take note. Concerns over the alleged generosity of the UK welfare system have been a staple of the popular press for years. Indeed, one of the issues during the Brexit campaign was concern that the UK’s generous welfare benefits attracted a lot of economic migrants who threatened to overwhelm the system. I pointed out five years ago that claims made for the generosity of the UK system were untrue. UK in-work benefits are less generous than the EU average for families with children (around 3-4% lower). Moreover, only those entitled to make a claim can actually receive them and recipients must demonstrate a sufficient degree of attachment to the host country.

For those without children, unemployment benefits are parsimonious in the extreme. According to OECD data, a single person without children in the UK whose previous earnings were two-thirds of the average wage earns 17% of their in-work wage after one month of unemployment compared with an OECD average of 67%. Although this figure tapers away in many countries in a bid to discourage ongoing benefit claims, even after one year the OECD average benefit payment is 43% of previous wages (chart). Not only is the system particularly stingy but claimants for Universal Credit (UC) have to wait five weeks after their first claim before receiving any money, which is quite a problem for those living a hand-to-mouth existence. Just after the last election I did suggest that eliminating this lag would mitigate the worst of the problems and would go some way towards rewarding low income voters who had voted the Conservatives into office. We are still awaiting a permanent fix although the government has temporarily raised the UC payout by £20 per week. Whether it will be extended beyond March remains to be seen.

One of the reasons for the parsimony of the benefits system is that government policy is designed to persuade people that they are better off working rather than claiming benefits. This is not a bad policy in itself. However, there are a rising number of people who are struggling to keep their head above water even though they are in work. According to the Joseph Rowntree Foundation’s latest annual report on poverty in the UK, the proportion of workers who live in poverty has risen in recent years and stood at almost 13% in 2018/19.

As the economist Paul Johnson has pointed out, until fairly recently poverty was an out-of-work phenomenon. The traditional route out of poverty for most people was employment. However this part of the social contract has broken down as far too many people are in jobs that do not pay them enough to allow them to change their circumstances. The reasons for this are complex but they include factors such as the widespread adoption of so-called zero-hours contracts, particularly in low-paid sectors, in which the employer does not guarantee a minimum number of working hours. As a result, many people find themselves income constrained and suffering the uncertainty of not knowing from one day to the next what their income will be. The lockdowns introduced in a bid to curb Covid have made matters worse, since they have impacted most heavily on those low paid workers in sectors such as leisure and hospitality.

What to do?

As for where we go from here, it is too easy simply to say throw more money at the problem. But the JRF recommends that “at a minimum, we need the temporary £20 per week increase to Universal Credit and Working Tax Credit to be made permanent … We also need to shift public thinking so that a poverty-reducing social security system is seen as an essential public service and receives sustainable investment.” Another big problem for those at the low end of the income scale is the cost of housing. A huge rise in house prices over recent years has priced many low earners out of the market and forced them into the expensive private rental sector. The JRF calls for more investment in social housing “as part of a stimulus package, and to reverse the long-term trend of falling availability of social housing.”

The JRF’s demands argue for a greater role for government which would be a reversal of the broad direction of travel of the last 40 years. Perhaps the Covid crisis will indeed be the trigger for a rethink of the primacy of market over state. But recent indications that the government is more concerned to roll back much of the legislation enshrined in the EU “working time directive” rather than reform the welfare system does not fill me with a lot of hope. As Mark Carney noted in his Reith Lecture series last month, the drift “from a market economy to a market society” suggests that issues of distribution and fairness are often overlooked. What the Covid crisis has demonstrated is that we are not all in this together with low earners taking a bigger proportional hit. Economic fairness may well become one of the big social issues of the 2020s and the government would be wise to think about fixing some of the holes in the welfare safety net before it is too late.

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.

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.