Mark Wadsworth

This is a spare 'blog in case my main 'blog at isn't working

Category Archives: Welfare reform

Bizarre photograph in The Metro

What were they trying to hide on the left hand side?

More two-sided economics :-)

There was a further pleasant surprise in today’s Evening Standard:

From the Red Corner: Schools in central London could be left with “ghost classrooms” with no pupils because of a crackdown on housing benefit. Shadow work and pensions minister, Karen Buck [a woman who actually looks like her own caricature], warned [sic] schools in Westminster and other inner London boroughs could face funding crises if pupil numbers slump. Westminster council admits that its primary schools could lose 1,540 pupils or nearly 260 per school year.

Yadda, yadda, blah, shroud, wave etc.

Housing Benefit is one of the most horrendous benefits, being a subsidy to land ownership (i.e. more or less the opposite of LVT*), but even assuming we need to have it, for political reasons, why does everybody assume that the status quo is ‘normal’? What if twenty years ago the government had simply capped it at £50 per person per week or something and not indexed it for inflation? Then the ‘hard pressed families’ who are now being ‘ethnically cleansed’ wouldn’t be where they are in the first place.

Luckily, there’s a breath of fresh air from the Blue Corner: Cllr Philippa Roe, Westminster’s strategic finance chief said the figures were based on all pupils whose families would be affected by the caps – not those expected to have to move. She said the higher figures did not take into account other families who could move into properties vacated because of the caps, pupils who would move home but stay at the same school and outer-borough pupils. “It does not mean we are going to have lots of empty desks,” she said.

Cllr Paul Dimoldenberg, Labour leader on Westminster council, claimed some schools could see cuts in funding, which is based on pupil numbers, and be forced to sack teachers*. But Cllr Roe said many schools were already oversubscribed. The limits of £400-a-week for a four-bedroom home, £340 for a three-bedroom home, £290 for a two-bedroom home and £250 for a one-bedroom home already apply to new housing benefit claimants and will come into force for families already receiving the payments in January.

* As a Land Value Taxer, I’ve had it up to here with tales of Poor Widows In Mansions Being Forced To Downsize (none of them would be forced to actually sell up, by very definition, as the LVT on any home would always be less than the potential rental income therefrom) and all this wailing about ‘ethnic cleansing’ and ‘mixed communities’ is water off a duck’s back, frankly. The result of caps on Housing Benefit will be that overall rent levels for non-HB claimants fall slightly, which is surely A Good Thing?

** Presumably, if there is a mass upheaval and pupils really shift to schools in cheaper suburbs, the better teachers will have no prob’s moving jobs? They might even find it more convenient for travel.

Pensions myths and other assorted stupidity

Exhibit One, from The Daily Mail:

The number of private sector workers with a company pension has fallen to its lowest level since the Fifties. Of the total private sector workforce of 23.1million, only 3.3million – a paltry 14 per cent – are in a company scheme. This contrasts starkly with the public sector, where almost nine in ten will receive a gold-plated pension. (1)

Joanne Segars, chief executive of the National Association of Pension Funds, warned that Britain’s ageing society is on ‘a collision course with its own retirement’ as it fails to save enough. (2)

The basic state pension is currently worth a little over £100 a week, (3) although many are not eligible to claim the full amount. The typical public sector worker enjoys a pension of £7,841 a year, or about £150 a week. (4) If a private sector worker happens to be in the minority that gets a company pension, the average payout is about £1,300 a year – just £25 a week.

1) I’ll return to these factoids in points (5) and (7) below.

2) Vested interest, irrelevant.

3) Lie. There’s been an outbreak of commonsense, and the current government is going to replace a whole mish-mash of taxpayer-funded old age pensions and benefits with a flat rate Citizen’s Pension of about £150, as well as harmonising pension age for men and women. Which is what I was recommending all along.

4) Aha! The magic figure of £150 a week again. If the government plays its cards right, what it could do is follow through my proposals to their logical conclusion and treat public sector pensions as just another taxpayer-funded pension, i.e. you get the higher of [whatever your weekly taxpayer funded income would have been under the existing rules] and £150 a week, which would be an enormous cost saving without allowing too many people to end up in poverty.

Exhibit Two, from The Guardian:

Lord Hutton of Furness will warn of a “serious” risk of a mass exodus from the local government pension scheme – which is funded and has 3.5 million members – if contributions are raised too high and no other compensation is provided… (5)

Ministers have acknowledged the risk of the welfare system being left to pick up the pieces (6) after a mass opt-out from public sector pensions.

5) If the employee contributions are set ‘too low’ relative to potential benefits, then everybody will opt in; if nearly all public sector employees who are eligible (not all of them are) opt in, then clearly the employee contributions are much ‘too low’. I’d guess that if half opt in and half opt out, then the terms are ‘about right’.

6) What ‘welfare system’? Why do authoritarians on left and right constantly wail on about “encouraging people to save to ease the burden on the welfare state”? Are they completely stupid, badly informed, lazy or corrupt?

If everybody gets their Citizen’s Pension (or existing State Pension + public sector pension) then we don’t need any more welfare on top of that, do we? The total cost of the Citizen’s Pension would be about £75 billion a year (i.e five per cent of GDP, seems fair enough) as against the cost of tax/NIC breaks for private pensions saving of about £43 billion and implied taxpayer subsidy to unfunded public sector pensions of about £30 billion.

Out of these two items of expenditure, which do you think does more to alleviate poverty in old age? And for comparison, the entire cost of the other old-age related benefits (primarily Pensions Credit and Council Tax Benefit) is only about £20 billion a year, it’s chicken feed, so this is spending a pound to save a penny.

Exhibit Three, from The Telegraph:

The funding gap faced by local government pension schemes in England has grown to £71.5bn, (7) new research has revealed, despite a rally in equity markets boosting returns on investments.

7) Remember that this is like a ‘funded’ (i.e. slightly underfunded) company pension scheme, local governments actually take the contributions and invest them in stuff. The article suggests that we can increase the £71.5 billion by £10 or £15 billion, call it £80 billion all in. Right. £80 billion deficit divided by about 4 million members is a shortfall of about £20,000 each.

Compare and contrast with pension schemes in the private sector, which had a deficit of about £148 billion a year ago and £79 billion now (from here). Take a mid figure of £114 billion and divide by 3.3 million (from (1) above), gives you a deficit per member of £34,000.

So local government is doing pretty well, by comparison.

No doubt some mal-informed commenter will mention ‘Gordon Brown’s pensions raid’, which, as much as I enjoy(ed) Brown-bashing, is yet another stupid myth.
Please note: unfunded civil services schemes are a completely different topic, these are pure and utter complete fraud and extortion.

If you’re going to reform pensions, why not go the whole hog?

From The Daily Telegraph*:

Discussions have begun at the Treasury over the move which would see the axing of tax relief currently paid out on pension contributions by people who pay income tax at the higher rates of 40 per cent and 50 per cent. The money saved could go towards cutting the budget deficit or – in what would be a more politically popular decision – be used to provide a significant increase to the value of the basic state pension…

Some Conservative MPs expect the axing of higher-rate relief to be merely the first stage in a more extensive and radical plan which would end up with all tax relief – including on contributions made by people paying the basic 20p rate of income tax – being abolished, saving £22 billion a year in total. Such raids, which could be announced in next year’s Budget, would be greeted with howls of protest by the pensions industry.

However, experts estimate that abolition of all tax relief on pension contributions – except employer rebates which would be likely to be retained – could be used to boost the value of the basic state pension by up to half.

OK, how about this for a plan?

It’s not £22 billion, for a start. HMRC’s Table 1.5 gives the total cost of income tax relief for pensions contributions and tax exemptions for pension funds as £20.3 billion and relief from Employer’s NIC as £7.9 billion. Contracted-out rebates cost £9.5 billion. There’s no figure for the ‘cost’ of relief from Employee’s NIC, so let’s guess another £6 billion for that, total £43.7 billion.

Let’s then split that £43.7 billion into four chunks of £11 billion and see what we could do:

a) Increase the proposed Citizen’s Pension by £20 a week.

b) Reduce Employer’s NIC’s from 12.8% of wages to 10%. Even better, scrap the lower threshold and apply a flat rate of 7% or 8% to all wages.

c) HMRC’s Table 1.6 tells us that getting rid of the 50% additional rate tax would cost £0.7 billion, and reducing higher rate tax from 40% to 20% (i.e. scrapping higher rate tax) would cost £12.6 billion, but let’s factor in some Laffer effects and call it £11 billion as well.

d) Increase the income-tax personal allowance and Employee’s NIC threshold by £1,500 a year.

What can possibly go wrong?

* Spotter’s Badge MBK.

I can’t see this possibly going wrong.

From The Daily Mail:

A million jobless people are to be forced into a massive new welfare-to-work scheme run by private firms to ensure British jobs are filled by British workers, ministers will pledge today.

Companies, as well as some charities and public sector bodies, will be paid bounties of between £4,000 and £13,700 for every unemployed person they get into long-term work.

The plans include recruiting former Army officers to help instill discipline into young jobseekers, setting up restaurants to train people to work in the catering industry and creating funds for those that want to start their own businesses…

Just off the top of my head, I reckon it’s pretty inconceivable that it could ever happen that when somebody is offered a job somewhere, somebody in the HR department at that company gets in touch with a mate at the W2W provider, and instead of taking on that person directly, they re-route the recruitment process via the W2W to bank the lovely £4,000 – £13,700 bonus, which the W2W provider and actual employer then split between themselves.

We can also rule out the possibility that a lot of existing recruitment agencies for lower-end jobs see their business dry up.

Four or five economic thought experiments rolled into one

Ralph Musgrave, who did a good summary of Modern Monetary Theory, emailed me a link to a splendid article titled How to exit the Euro which is ostensibly about Quebecois independence, on which the author has no strong views one way or another, but also builds in the following:

i. What Modern Modern Theory is, i.e. fiscal and monetary policy boiled down to a single variable.
ii. Why there’s no need for deficit spending
iii. How to introduce a parallel currency
iv. Why taxes on land values are far better than taxes on income, output and profits
v. Introducing a Citizen’s Income by the back door.

There’s no point me cutting and pasting bits, as you have to read the whole article, which might take you ten or fifteen minutes to understand, but we can use this model as a non-confrontational way of introducing a Georgist system where taxes on land values are used to pay a Citizen’s Income, as follows:

1. The government issues every UK citizen with one thousand special tokens (whether physical or electronic does not matter), maybe 500 for kids and 2,000 for pensioners.

2. So it has issued (say) 75 billion of these tokens.

3. It then values each house and each building and each plot of land and demands the payment of exactly 75 billion of these tokens from the owners of all UK land and buildings, proportional to the value of the land and buildings.

4. So some households end up with a surplus, and some end up with a deficit. Let’s say a mum dad two kids family gets three thousand tokens and the payment demanded for an average home is three thousand tokens (75 billion tokens divided by 25 million homes).

5. How surpluses and deficits (and hence net redistribution) are distributed is illustrated by the Georgist Flag (click to enlarge):6. All the surplus tokens are put up for auction, and because the surplus which some have is exactly equal to the shortfall which other people have, they will somehow end up with a market price in £-s-d for each token, that might be 1p, it might be £10, I do not know and do not particularly care.

7. The auction would be run in the same way as stockbrokers match bid and ask prices, i.e. every seller sets the minimum price at which he will sell; and each purchaser sets the price which he is willing to pay, with the bolt-on that all tokens are then redeemed/sold at this price (to prevent unwilling sellers holding out for an unreasonable price). Let’s guesstimate that the market price comes out at £2 per token.

8. The next step is to somehow replace the existing tax system; if we remember the lessons of Modern Monetary Theory, it’s actually quite simple: you just reduce other taxes in absolute terms and other cash (non-token funded) spending in real terms. So in Year Two, we scrap VAT or Employer’s NIC (or whichever your most hated tax is). The dynamic revenue shortfall is usually only half the static shortfall, so cash tax receipts go down by (say) £50 billion and people end up better off by (say) £75 billion because they get not just the cash value of the tax cut, but the benefit of lower dead weight costs.

9. Most of that extra £75 billion flows through into higher house prices or rents, so next year, when the government repeats the exercise with 75 billion tokens, the market value is miraculously bid up to £3 per token (instead of £2).

10. Then you just keep cutting other taxes and allowing the market to sort out how much should be redistributed from land owners to citizens. The two groups overlap to a large extent so the net redistribution is only a sixth of the total value of all tokens, i.e. assuming they change hands for £3 each, total revenues/spending is not 75 billion x £3 = £225 billion, it’s more like £40 billion (i.e. the area on the flag between the vertical axis, the blue line and the red line).

11. No doubt the Homeys and Faux Libs will cry foul, but hey. At least we can find out in practice what people really think of Georgism. If a majority of people (who end up with a surplus of tokens) really think nothing of it and are happy for people on whom society bestows the most benefits to continue to enjoy them tax free, then they are free to set a price for their surplus tokens of nil, or 1p each (thus cutting off their noses to spite their faces as they are giving away money), or to hand them over to charities collecting tokens for the Poor Widows In Mansions Benevolent Fund and nothing actually changes either.

Westminster Council adopts an idea from UKIP’s Welfare Manifesto

From our Welfare Manifesto (2010 version, pdf)

6.5 UKIP therefore recommends that social rents be set at a single inclusive figure (rent plus Council Tax, net of notional Council Tax and Housing Benefit) calculated at around 20 per cent of each household’s gross income: This would ease the poverty trap for the most needy; social tenants on very low incomes would keep 49p for every £1 earned (assuming a flat tax rate of 31%) rather than 4.5p as at present.

It would also encourage households on higher incomes to move into the private rented sector or owner-occupation, as above a certain level of income, the social rent they are paying would be higher than a comparable rent in the private sector or the cost of a repayment mortgage. This may seem unfair, but it is exactly these households who will benefit most from UKIP’s proposal to double the tax-free personal allowance, so taking the two measures together, very few households will lose out.

The preceding paragraphs 6.1 to 6.4 are worth a read if you want to see the workings. I explained how the extra ‘about 20%’ could be collected with the minimum of administrative hassle by using K-codes for PAYE on my ‘blog here (scroll down a bit to the section beginning “Here’s my crash course in the existing PAYE system”).

Lo and behold, from yesterday’s Daily Mail*:

Conservative-led Westminster Council has asked Government for new powers to introduce a sliding scale which would link social housing rents to incomes. The move comes after the council found it had 2,200 social housing tenants earning more than £50,000-a-year, and more than 200 on over £100,000…

Many of those on £100,000 or more were paying rents of £97-a-week for a one bedroom flat, or £110-a-week for a two bedroom place, said Mrs Roe. She said a new formula should be applied which would see tenants paying 35 to 40 per cent of their net income on accomodation, the national average.

They say 35 to 40 per cent of their net income, we said 20 per cent of their gross income, which comes to the same thing in £-s-d, only 20 per cent of gross income is far easier to calculate.

From the point of view of the council, there must be a revenue maximising point; i.e. if they set the rate too low then they won’t get much rental income and much longer waiting lists; if they set it set it too high then they’ll discourage out of work and low earning tenants from earning more and they’ll lose all their better earning tenants.

Sure, there may be some middle to higher earners who would end up paying above market rents on the place they’re in in the short term, but – even if they don’t move out – the advantages to them are:

a) The council will be more inclined to upgrade them if a nicer council house or flat becomes available, and

b) It’s like unemployment protection insurance with a mortgage; you overpay while you are still working, but if you lose your job, take a pay cut or retire and draw your pension, then you get your money back.

c) It’s got to be better than being turfed out entirely, as the Tory government has vaguely suggested, a strategy with pretty obvious unintended consequences…

d) The local council will then give preference to people on the waiting lists who have jobs, so you’ll probably end up with nicer neighbours.

* Spotter’s Badge, MBK.

Nice bit of Indian Bicycle Marketing…

Zoe Williams, kicks off an article on Comment is Free titled “The reason mothers work – and Tories try to stop them” with this bald claim:

Benefit cuts, childcare costs and marriage tax breaks are forcing families back into a single breadwinner model”

1. None of her assertions or inferences are true (to any great extent), but you must always remember that the behaviour of the three big UK parties is summed up in the book 1984:

2. Under this lies a fact never mentioned aloud, but tacitly understood and acted upon: namely, that the conditions of life in all three super-states are very much the same… It follows that the three super-states not only cannot conquer one another, but would gain no advantage by doing so. On the contrary, so long as they remain in conflict they prop one another up, like three sheaves of corn. And, as usual, the ruling groups of all three powers are simultaneously aware and unaware of what they are doing.

3. To wit, if a stereotypical Tory voter reads that article, he will think “Hurray! Stick it to those benefit scrounging cheats! A mother’s place is in the home and so bring on those marriage tax breaks!” and a stereotypical Labour voter or feminist will think “Boo! Those nasty Tories are slashing benefits, preventing mothers from going to work and imposing their patriarchal view on society!”. A Lib Dem voter probably muddles his way between the two.

4. So, that first sentence reinforces whatever prejudices people had anyway, and makes them more likely to vote for whichever party they were going to vote for anyway. The interesting bit is why the Tory government doesn’t point out that these claims are not true; benefit rates have not been reduced, the Tories have merely tinkered at the edges a bit; childcare costs are dictated by childcare providers, not the government; and there is not, as yet, an actual tax break for marriage (unless I missed that memo?)

5. The answer is, there would be no advantage to the Tories of doing so; no stereotypical Labour voter is going to vote for them anyway, and if they admitted that welfare policies have developed piecemeal under both Labour and Tory governments without any big swings in either direction, then they’d lose the support of the stereotypical Tory voters.
When you read the article, the only example of benefit cuts she can actually point out is that the childcare element of Working Tax Credits now only covers 70% and not 80% of eligible childcare costs, which is true. However, this does not mean that people have to pay 30% rather than 20% of childcare costs – which would be a fifty per cent increase – it is far less dramatic than that:

a) You couldn’t 80% of the full amount anyway, the amount for which you can claim is capped at £175 a week for one child and £300 a week for two or more children. You had to pay the rest yourself.

b) For children aged three to five, there is a much better system, a leftover from the Tory government of the 1990s, called Early Years Funding. If you send your child to nursery, the council just gives you a voucher/part payment of 15 hours x about £4 a week, i.e. £60; non-means tested, non-contributory, sorted. Remember: the Tories increased this from 12.5 hours to 15 hours last September, so that’s an extra £10 a week for millions of parents.

c) The eligible amount (from a) was reduced by the amount of EYF you got anyway, you only were entitled to claim 80% of the net amount.

d) The fact that you can claim for 80% or 70% of something does not mean that you will get it; the childcare element of Working Tax Credits are reduced by 41 pence for every £1 that either parent earns (this used to be 39 pence, long story) above a certain threshold. So if the two parents earn e.g.£22,000 between them a year, they lose £6,388 a year of their tax credits, i.e. £123 a week.

e) So let’s assume that these two parents have two children at nursery and one is aged three to five, and it costs them £350 a week. They can only claim for £300 minus 1 x £60 EYF = £240 a week, their maximum entitlement is £240 x 70% = £168, and they lose £123 of this (see d) so they get £45 tax credits plus £60 EYF = £105.

f) Using 80% and 12.5 hours EYF, they would claim for £300 – £50 = £250 x 80% = £200, reduced by £123 = £77, plus £50 EYF = £127.

g) So their net nursery costs have gone up from £223 to £245, which is only a ten per cent increase, and not the fifty per cent increase which the article suggests.