Good times, Bad Times

By John Hills

A visitor to Britain learning about our society and the public policy problems facing us from the newspapers and television could be forgiven for thinking that it is all very straightforward. A hard-pressed majority, whose living standards have been squeezed ever tighter and tighter since the start of the economic crisis in 2008, is paying higher and higher taxes to fund hand-outs – ‘welfare’ – to a minority living long term on benefits, people who have often never worked, and have no intention of doing so.

This view of the country as separated into two distinct and unchanging groups is so pervasive it is often hardly noticed when it more subtly underpins policy debates.

Britain’s welfare state is widely misunderstood, with many people believing in particular that the bulk of what it does consists of hand-outs to unemployed people, and that its beneficiaries are an unchanging group, separate and distinct from those who pay for it. Neither of these beliefs is true. *

Those views are underpinned by two beliefs: first, that what the welfare state mainly does is ‘redistribution’ – taking money from the richer (not necessarily much richer) and giving it to the poorer; and second, that a large and growing part of the social security budget is spent on hand-outs to those who do not work.

To set all this in context, we look first at how unequal society really is.

Two-thirds of people have ‘below average’ incomes.

This kind of picture makes Britain one of the most unequal countries in the industrialised world.

By 2010 only four industrialised countries had more unequal incomes than the UK.

In passing, it should be noted that inequality in income is put in the shade by inequalities in wealth.

If we were to look only at the incomes people get from the ‘market’ rather than from government – their earnings, private pensions, investment income – the picture is even more unequal.

Before the state intervenes, the top tenth has incomes 30 times the poorest; after it they have cash incomes 14 times as much.

So taxes and benefits are doing quite a lot to make the income distribution less unequal, but we still end up being one of the most unequal of the industrialised countries.

Only Ireland and Chile had more inequality before the state intervened.

Taxes and benefits narrowed income inequality in the UK more than in archetypal egalitarian countries such as Sweden, Norway and Denmark.

Despite our greater than average redistributive effort, we still end up as one of the most unequal countries in the rich world because there is so much inequality in the incomes people receive from the market compared with elsewhere.

Back in 1979, many of those with the lowest incomes were pensioners. By 2010–11 pensioners were, for the first time, no more likely to be poor than the population as a whole.

So today’s low-income population has a lot more non-pensioners in it than that of 1979. *

So there is one sense in which the poor ‘got more expensive’, that is, if one concentrates on non-pensioners, and looks at what happened between 1979 and 1996–97, as unemployment grew.

Why, then, should there be a perception that middle-income people have been getting a raw deal, if that has not come from rising redistribution towards the poor in recent years?

If they felt they were losing ground compared to the total available income, they were right.

The squeeze on the middle has come from the top, not the bottom.

Instead, the reason why the shares of all of the bottom four-fifths fell over this period was that the share of the top fifth grew * .

Going beyond that, most of the increase actually went to those in the top 10 per cent who were in the top 1 per cent.

In this sense, the slogan ‘We are the 99 per cent’ has some bite – it was the top 1 per cent whose share was increasing, while the shares of other groups lost ground or stood still.

A large majority of the public think that it is the government’s responsibility to narrow income inequalities.

People widely support a tax system that is proportional or progressive, and benefits that are spread equally, according to needs.

But Britain’s market incomes are so unequal (behind only Ireland and Chile among the industrialised countries) that even after allowing for cash benefits and income taxes, the UK remains one of the six most unequal countries in the industrialised world.

Because the UK has so much inequality to start with, our welfare state has to work much harder than in other countries even to get to this position.

Within that, nearly all of those gains from 1979 to 2007 went to just the top 1 per cent, with their gain nearly equivalent to the whole of the income share that goes to the bottom 20 per cent.

If anyone got too expensive, it has, in fact, been the rich.

While cash transfers for pensioners and related to children both represented a greater share of national income in 2010–11 than they had in 1996–97, other working-age transfers fell as a share of national income, contradicting the popular image of a government that increased ‘hand-outs’ to the unemployed.

The Labour years had a marked effect in smoothing out incomes over the whole life cycle, the Coalition years are reversing this for younger people, but leaving in place many of the gains for older people.

The overall effect is to move towards a welfare state that looks much more like that of the US.

If we take people as a whole, then, they pay more into the system in their working lives than they get out from it, but after retirement, the reverse is true.

What an average household could eventually get out of the welfare state of the mid-2000s was the equivalent of more than 25 years’ worth of the average disposable household income of the time – the value of three houses.

The system is dominated by universal entitlements, not by the stigmatised ‘welfare’ benefits for those with low incomes; as a result, most people’s stakes in it are very large.

But as a general pattern, what people do is to pay into the system during their working lives in return both for receiving services then (or as children), and for pensions and services in retirement.

To untangle what this all adds up to for different kinds of people would mean not just following them across their whole lives, but also getting them to live in a world that stayed the same forever.

But the larger part of what is going on is people paying for their own benefits. Apart from the poorest group, within all the other groups more than half of what comes out represents what people themselves pay in at other points in their lives – ‘self-financed’ benefits.

The implications of this are crucial in terms of how much we all have a stake in it: without the NHS, state education, and pensions, all households would have to pay private medical insurance, school fees, and much higher private pension contributions.

In the absence of a tax-funded welfare state, there would, of course, have to be much wider use of private insurance and savings. But for many that would be much more expensive.

A woman born in 1930 would have had her childhood in the pre-war welfare state, reached adulthood as the Attlee government’s expansion of it got under way, and retired in the 1990s into a pension system built on a mixture of Barbara Castle’s 1980 system as reformed by the Thatcher government, but would have received most of her healthcare and pensions under Blair, Brown and Cameron – and may still be going strong as new reforms and cuts take effect in her mid-eighties.

By implication, if it all was suddenly brought to a juddering halt, and we decided to move away from this ‘pay as you go’ system, shrinking its scale substantially, a generation could find itself greatly out of pocket.

Indeed, this generation would have such a large grievance that it is hard to imagine it being politically possible, outside a collapse of the whole economy.

The large majority of what the welfare state does is ‘life cycle smoothing’. This is because it is dominated by universal entitlements (such as pensions, education and healthcare), not by stigmatised ‘welfare benefits’ for the poor. The result of this is that incomes after allowing for the benefits people receive and the taxes they pay are much flatter across the life cycle than those from the market.

Over their lives all families pay into the system through taxes as well as receiving benefits and services. Even those who turn out to be in the poorest tenth over their lifetimes would – on one set of modelling results – pay for half of what they get back. Those with higher lifetime incomes pay for more, but still get back most of what they pay in.

One implication of this is that nearly all families have a major stake in the system, both through what they are likely to get out of it in the end, but also from the way it insulates people from risks, including those of living longer than anticipated.

Prolonged receipt of Jobseeker’s Allowance is very rare. Indeed, when the Centre for Social Justice recently ranked British cities by the number of people who had been receiving Jobseeker’s Allowance for 10 years or more, the top place in the table was taken by Birmingham, where this was true of just 60 people.

In fact, far from being a British phenomenon, long-term unemployment is much less common in the UK than in most of the rest of the EU.

The reason why the long-term unemployment rate jumped between 2008 and 2010 was not that people suddenly became ‘dependent’; it was because the economy shrank in the wake of the financial crisis. *

If there really was an unchanging ‘underclass’ of benefit recipients funded by an unchanging – if resentful – class of taxpayers, it would at least be easy to work out who should get what and who should pay what. But with around a million people losing work and around a million gaining it every three months, the situation is not like that.

As a corollary of this kind of turnover, the caricature families where two, let alone three, generations have ‘never worked’ are very rare, and wholly unrepresentative of those who become unemployed and get benefits, usually for a short time.

Caricaturing people on low incomes as being an unchanging and static underclass may make good propaganda, but it is a very poor basis for designing policy.

Wealth inequalities are much greater than income inequalities * .

Indeed, the richest 200 families included in the Sunday Times Rich List had wealth said to average more than £1 billion each between 2008 and 2010.

But one of the most striking features of wealth inequalities is how great they are between people of different ages.

Wealth inequalities are very large within age groups, not just between them.

Wealth inequalities dwarf those in income discussed earlier in the book.

For households of all ages, total wealth for those near the top (with only 10 per cent wealthier) is 70 times that for households near the bottom (with only 10 per cent poorer). But just looking within those aged 55–64, the same ratio is still nearly fifty to one.

Looking across the range of public policies towards wealth, two things stand out. First, that the treatment of different kinds of assets and kinds of people varies widely, from strong encouragement and assistance to penalties that must lead some to query why they ever bothered saving. Second, it is often those who start with the highest incomes and greatest wealth who are the biggest beneficiaries of the most favourable treatment.

Nearly all ploitical parties across the spectrum aspire to the idea that there should be ‘equality of opportunity’...we are currently very far from equality of opportunity, whatever definition we use.

Wealth is a strong predictor of longer life expectancy for older people.

The performance of British children is notoriously more affected by socio-economic background than elsewhere. For instance, 14 per cent of the variation in how well pupils do in the PISA tests in England is related to family background, but only 8 per cent in Finland and 9 per cent in Canada.

Political perspectives and politicians differ in the extent to which they believe that their role is to reduce inequalities in economic outcomes. But almost all agree that an aim of policy should be to create greater equality of opportunity.

What happens in the ‘early years’ is clearly important, but advantage and disadvantage reinforce themselves at successive stages throughout the life cycle.

This makes it extremely hard to achieve equality of opportunity for future generations in societies where there are large differences in economic outcomes within the current generation.

Once people find themselves on a favourable economic trajectory, those advantages tend to compound themselves through their working lives, into retirement, and even into life expectancy.

General cuts in the welfare state bear much more heavily on those with low incomes at the time than on those with high ones, while general tax increases tend to hit people in rough proportion to their incomes.

And with the Coalition’s decision that 80 per cent or more of deficit reduction should come from spending cuts and only 20 per cent from tax rises, it is virtually unavoidable that austerity will hit the poor much harder than those with higher incomes, as we saw at the start of the chapter, even before allowing for cuts in services.

An ageing population and the structure of our welfare state means we will have to spend more just to stand still in terms of services in relation to needs and living standards. That leaves us with two choices in the long run – cutting services in relation to needs or raising more revenue.

We have been living through dramatic changes to taxes and benefits as first the Labour government and then its Conservative-Liberal Democrat successor have tried to reduce the public deficit in the wake of the financial and economic crisis since 2008.

The impact of those * changes has not been evenly spread across the population.

One of the crucial reasons for this is the decision that the balance of adjustment should overwhelmingly come from cuts in public spending, especially on social security benefits rather than from taxation.

The analysis presented here shows that the general impact of the changes has also been regressive, bearing more heavily on people the lower down the income distribution they are.

Btitain’s Welfare State now accounts for two-thirds of all government spending.

How it operates, for whom, and how it evolves are probably the most important questions in British politics.

It is the rich who have got more expensive, not, as has been alleged, that the ‘cost’ of the poor has risen.

If the new Universal Credit does eventually come into being, as currently planned, the system running it would have to cope with 1.6 million changes in circumstances every month among the 7.5 million households receiving it.

With wealth now being so much larger in relation to incomes than it was 20 years ago, it takes many more years of incomes and saving to move each rung up the wealth ladder.

Middle wealth households aged 55–64 have £340,000 more wealth of all kinds than those aged 25–34.

To close that gap over 30 years would require the younger group to save the equivalent of nearly half of average take-home income every year. There is no sign that this is going to happen, quite the reverse in fact.

Wealth inequalities – and the inheritances they eventually create – are just one of the factors meaning that the life chances of those born to different kinds of family vary.

We are a very long way from having the ‘equal opportunities’ that all the main political parties say they aspire to.

And these differences in life chances depending on background are stronger in the UK (and the US) than they are in some other, generally less unequal, countries.

Boosting ‘social mobility’ without reducing current inequalities is hard – but doing something about the two together would mean confronting very strong interests that push in the other direction.

The new ‘welfare cap’...implies that living standards for many in the bottom half of the income distribution will automatically fall behind others...poverty will rise.

Jobseeker’s Allowance and associated Housing Benefit are as a share of the total – less than £7 billion, or less than 4 per cent of social security and tax credits and 1 per cent of all public spending.

People believing that unemployment benefits are such a large part of what we spend on social security, their other beliefs about them cloud attitudes to the welfare state as a whole.

Britain’s high degree of cynicism is, in some ways, surprising, given how comparatively un-generous our benefit system is towards those who are out of work.

People in the UK are more likely than any other Europeans to agree that benefits and services ‘make people lazy’.

The DWP’s own estimate across the whole of the benefit system (including pensions)...just 0.7 per cent of all benefits was over-paid as the result of fraud.

When people were asked in 2012 what proportion of the total benefits and tax credit budget was ‘claimed fraudulently’, half thought that this was 20 per cent or more, and the average amount was 27 per cent.A quarter thought that 40 per cent or more of benefits were being claimed fraudulently. This would require virtually all non-pensioner claims to be the result of fraud (such as there being no children at all in the country).

Misconceptions about the welfare state and the way it is abused are not just a matter of harmless misunderstanding. They create serious problems in how the welfare state is run.

Actual fraud of Jobseeker’s Allowance may be less than one thousandth of all spending on social security, according to official analysis, but if we believe it to be over a tenth of the total,11 we will demand that our politicians react accordingly.

The ‘Bedroom Tax’ s targeted only at low-income working-age social tenants, who have between them fewer than 3 per cent of the nation’s ‘spare’ bedrooms.

The hardship to those affected is most obvious in the rapidly escalating use of voluntary food banks across the country, with more than 900,000 people receiving three-day food parcels from the Trussell Trust charity in 2013–14.

What was once a national safety net, albeit not a very generous one, now has substantial holes init.

Many more people benefit from the operation of the welfare state than are affected by narrowly selected parts of it at any one time – indeed, nearly all of us do.

If we continue to think about policy as if all its benefits, costs and problems affect a group of ‘other’ people, we will make choices that fail to meet our own interests, even if we never expect to be out of work or to face sickness or disability ourselves.

The alternatives to it,are hugely expensive, and out of the question for most.

People are unlikely to agree to spending what is needed if they misperceive what the system does and who benefits from it.

Those with an interest in keeping down the contribution from taxes on higher incomes or greater accumulations of wealth may continue to feed those misperceptions.

How perceptions could be better brought into line with the reality of what is going on is now one of the central challenges facing those making and debating social policies and their future.

We cannot afford to make choices and decisions by myth, rather than in the light of reality.

The problems of social policy and the effects of the welfare state are presented in terms of a static group of ‘them’ who benefit, and another static group of ‘us’ who pay for it.

But this characterisation is profoundly to misunderstand the implications of the dynamics of our lives.

As a result of all this variation in circumstances over our lives between good times and bad times, most of us get back something at least close to what we pay in over our lives towards the welfare state. When we pay in more than we get out, we are helping our parents, our children, ourselves at another time – and ourselves as we might have been, if life had not turned out quite so well for us. In that sense, we are all – or nearly all – in it together.

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