Welfare spending is set to rise and rise in cash terms: this Chancellor is no thrift-crazed axeman
When Scrooge saw the Ghost of Christmas Yet to Come he was mortified, as the phantom scattered “gloom and mystery” with a hellish premonition of the miser’s future. A Christmas Carol was first published in 1843 and, I’m delighted to report, solid progress on many social issues has been made since then. Some things, however, never change.
The scattering of gloom and mystery continues, as the Spirits of Christmases Long Gone Her Majesty’s Opposition and its fellow travellers peddle a vision of unremitting hardship. For them, contemporary Britain has become a Dickensian horror show, a dark place run by the progeny of a misanthropic money-counter in which George Osborne is cast as the “squeezing, wrenching, grasping, scraping, clutching, covetous old sinner”.
With his Dick Dastardly looks and congenital sneer, the Chancellor is a bespoke villain for those with a stake in persuading voters that the Government’s big idea is thin gruel, other than for its privileged chums (even though the top 1 per cent of earners pay 27 per cent of all income tax receipts and the top 5 per cent pay 47 per cent).
After the Autumn Statement, Unite’s press release was a masterpiece of poorhouse imagery. The union’s general secretary, Len McCluskey rarely undersold in the department of cut-price hyperbole said: “Working men and women will ask, where are the jobs? Can we face the future without fear? It [Mr Osborne’s chill wind] will punish our people for years to come.”
Mr McCluskey’s difficulty is that his union’s narrative and the real storyline are diverging. Were he to trawl through the economic and fiscal outlook, published this month by the Office for Budget Responsibility, he would be disturbed to learn that its projections for employment and wages are wholly positive.
In the five years from 2013-14 to 2017-18, employment is forecast to rise from its current record high of 29.6 million to 30.5 million. Almost all the additional 900,000 jobs will be created by the private sector. In that time, the claimant count is expected to fall from 1.68 million to 1.40 million, removing 280,000 people from the dole.
Over the same period, nominal wages and salaries are forecast to rise by 2.5 per cent next year, then 3.5 per cent, 4.6 per cent, 4.8 per cent and 4.9 per cent. Thus, if the Bank of England keeps its nerve and holds the Consumer Price Index close to the 2 per cent target, the OBR foresees many more jobs, falling unemployment and rising real wages.
Yes, these are only forecasts. The OBR’s number crunchers, who are independent of ministers, could be wrong. But that’s not supported by evidence from employment agencies. Figures this month from Reed, one of the UK’s larger recruitment operators, show that the jobs market is at its most buoyant for three years. Its rival, Manpower (NYSE: MAN - news) , surveyed 2,100 employers and found much the same, with more companies expected to take on staff in the next three months than cut workforces.
So much for the gloom. What about the mystery?
Well, there is one on page 135 of the OBR’s report, which deals with “total managed expenditure”, ie, where the taxpayers’ money goes. The eye-catching line is “social security benefits”.
Given the OBR’s expectation that over the next five years there will be more people in work, fewer people out of work and higher real household incomes, you might conclude that the total cost of welfare will soon be falling. You would be wrong. Even as the economy recovers and national output grows, the bill keeps rising from £179.8 billion in 2013-14 to £196.6 billion in 2017-18, a 9 per cent increase in cash terms. Inflation will reduce the real outlay but why is it going up at all?
Unfortunately, the benefits system is not unlike weight that’s put on over the festive season. At the time, an extra pound here and there doesn’t seem too damaging. It’s only when we examine the flab more closely and resolve to do something about it that the problem’s near irreversibility becomes evident.
Since the onset of the credit crunch in 2007-8, out-of-work benefits have risen by 20 per cent, whereas average earnings have gone up by just 10 per cent. On that trend, if left unreformed, the system would collapse as the mounting burden of fiscal transfers crushed those who were bearing it. By capping future increases in welfare payments to 1 per cent a year, the Chancellor is simply recognising the difference between desirability and affordability. This is not a concept with which the previous government was well acquainted. It used the widening and deepening of welfare largesse to suck ever more electors into its client state.
In 2000-1, 43.8 per cent of total households received more in benefits (including benefits in kind, such as health and education) than they paid in taxes (including indirect taxes, such as VAT). By 2010-11, the figure had jumped to 53.4 per cent, according to the Centre for Policy Studies. About three million more households were net recipients of state largesse than just 10 years earlier.
Frank Field MP, Labour’s voice of sanity and an expert on the dysfunctionality of our welfare arrangements, concludes: “Britain’s experience goes some way to disprove the theory that simply throwing money around will somehow solve fundamental welfare reform issues. Our current system discourages work, taxes savings and does not encourage the declaration of earned income.”
Back in 2004-5, when Gordon Brown was cranking up state handouts to make sure his party would win a third term, the government was spending £492 billion a year, about 40 per cent of GDP.
This was a very considerable sum, as Labour’s 2005 election manifesto reminded us. It was a document dripping in hubris, boasting of “a modern welfare state”, providing “prosperity for all” and “world-class public services”. There was no mention of soup kitchens, breadlines or other features of cruel parsimony.
Fast-forward the video to 2013-14 and the Coalition is expected to spend £719 billion, roughly 44 per cent of GDP. Adjusting for inflation is slightly subjective, because it depends on how you measure it, but give or take a couple of pence, £1 at 2005 price levels is the equivalent of £1.25 today.
That means, calculated in 2012 money, Labour was spending £615 billion seven years ago. Next (Other OTC: NXGPF - news) year, Mr Osborne will spend £104 billion more than that, a real increase of about 16 per cent since 2005.
Some of the rise will be accounted for by higher interest payments (and whose fault is that?) but this is only part of the story. Somewhere, somehow the cost of running the British state has increased dramatically, well beyond our ability to pay without borrowing heavily (another £99 billion will be needed in 2013-14).
Why can’t we go back to the real-terms spending of Labour in 2005? The country wasn’t falling apart then, was it?
Politically the Chancellor is in a terrible place: successfully portrayed by critics as a thrift-crazed axeman, chopping his way to national calamity, when, in truth, government spending is set to rise as a percentage of GDP next year, its cash outlay will be about £45 billion higher than this year’s, and national debt is on course to hit £1.53 trillion by 2017-18, 50 per cent more than in 2011-12.
The Washington Post’s London correspondent warned recently that Britain’s “radical experiment in austerity” had forced us over our version of the “fiscal cliff”. This is beyond fanciful. There has been no radical experiment in austerity. If you want to see what a real one looks like, take a peek at Ireland (OTC BB: IRLD - news) . What is more, Britain is not over a fiscal cliff. It’s not even on the edge.
As Ebenezer put it: “Bah, humbug!”
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