Thursday, 12 January 2012

Welfare Reform

18 months ago the government published a consultation document 21st Century Welfare.  The document proposed reforming the UK's benefit system with the aim of reducing what it called "Marginal Deduction Rates" for the low paid.  It means by that the percentage of any increase in earnings that is lost in reduced benefits.  It gives an example whereby "a couple with a single earner and two children sees a Marginal Deduction Rate of 95.5 per cent on earnings between £126 and £218".  (That range of weekly earnings corresponds to 22 to 38 hours a week at the then minimum wage.)  The paper proposes to ameliorate this unhappy state of affairs by combining all benefits into a "Universal Credit", which will then be progressively withdrawn as earnings increase at a "taper rate" to be decided.

By November 2010 the government was ready with its white paper Universal Credit: Welfare that Works.  The white paper specified a taper rate of 65%.  For workers paying income tax (at 20%) and national insurance (at 12%), i.e. those earning more than £143 per week, the taper rate would apply to their net earnings, giving a combined deduction rate of 76.2%.

I suggested last month that a marginal tax rate of 52% is discouraging.  How much more so is a marginal deduction rate of 95.5%?  I doubt that anyone could seriously oppose the underlying aim of this reform.  76.2% or 65% still seem much too high, but at least they represent a significant improvement, and create a mechanism to make further reductions administratively straightforward.  I am very much in favour of the proposal.

In February last year, the government was ready with its legislation.  (The full text of as currently proposed is here.)  The bill sets out a whole new system of benefits, and some of the proposals reduce benefits to some claimants.  Three of those cuts, affecting sick and disabled people, were defeated last night in the House of Lords.  It's impossible to reform any system of payments without either spending a lot more money on it or leaving some people worse off, but, according to the BBC report, the government is defending these proposals not as a necessary part of the package but on the grounds that tough decisions have to be taken to cut the government's deficit.  It's a pity that the government is making it difficult or impossible for some people to support an important reform by combining it with a package of cuts.

I would like to more towards a system in which the marginal rate of deduction for the lowest earners is zero.  Then I would like to abolish all laws forcing claimants to seek employment on pain of loss of benefit.  And at the same time I would abolish the minimum wage.  The effect would be to subsidize low-paid employment rather than trying to force people into it.  I would be quite comfortable with employers taking advantage of this to hire people on very low pay rates, knowing that the employees are working of their own free will, that they are financially better off with the jobs than without them, and that they are doing something productive with their time.  My hope is that there would be many things worth employing people to do at £2 per hour that would be automated or left undone if you have to pay £6.08 an hour.  While the government would get no direct tax income or benefit savings from the employment, it would receive indirect taxes, and the economy would be better off by the added value of the labour performed.  I suppose that the right would hate the unrestricted benefits, and the left would hate the low wages, but society would benefit from both the economic and human effects of reduced unemployment.

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