Raise wages to cut spending

Philip Collins’s article (£) on welfare seems to be written by someone who steadily ignores a herd of elephants rampaging through the room while contemplating how he might deal with a small mouse hole in the corner. The idea that reliance on past contributions set the level of current and future welfare payments is an illusion rather than a panacea. What use is it to anyone taking a first job, only to find it closed down within a few weeks by the multinational owner with little or no rights to compensation?

When I take out an insurance policy to cover damage to my car, the loss of valuable articles to burglars or premature death, benefits are not limited to the premiums I have paid to date. Frank Field (£) is of course right to see the solution to the welfare conundrum in a soundly based insurance system—though this is not simple to set up.

Benefits such as jobseeker’s allowance and disability pay should indeed be related to previous income, with contributions also linked to it—that is an essential element of insurance. It is most unfortunate that the Labour party seems on the verge of joining those unable to appreciate that benefits based simply on the total of premiums paid fail to meet the first principles of insurance.

Strangely, neither Collins nor Field mentions a trend that has been distorting the whole economy and the pattern of work within it. Of the 11m households receiving various benefits, almost half—over 5m—include at least one member who has a job. That they are drawing benefits—means-tested or not—is clear evidence of inadequate pay. Since 2003, real wages have stagnated and the proportion of personal incomes taken by profits and dividends has risen by 5 percentage points at the expense of pay.

This has created a lunatic merry-go-round, with the state making up pay packets to more than adequate levels, raising tax on employers to do so and setting up expensive administration systems to pay the money out and to try to minimise error and fraud. Eliminating this subsidy to employers would cost about £60bn a year, but government expenditure would drop by the same amount. Also, revenue would fall by less because lower taxes on profits would be partly replaced by higher receipts of income tax and national insurance. There would be a net stimulus to the economy with a minimum of inflationary impact giving incentives to industry to expand and invest to meet growth in effective demand.

If the government’s own borrowing is to be reduced, the financial surplus of other sectors of the economy (primarily households and companies) must contract correspondingly. Corporations are sitting on £750bn of financial assets—equal to around half of total national income—and doing nothing with it.

It is sometimes argued that the margin between the level of welfare benefits and income in work is too narrow to provide an effective incentive to take a job. This is often true, but the correct response is to widen it by raising wages rather than cutting benefits. Nor should politicians be deterred from taking positive action on these lines by fear of public opinion, which appears to have become less sympathetic to claimants in the last year or so.

There are dangers in the likes of Peter Kellner producing opinion poll results showing one or other political party’s position on an issue apparently contradicted by the popular view—and implying that its policy should therefore be changed accordingly. That misses out the essential step of considering how well informed public opinion actually is. A classic example is the US survey which reported an overwhelming belief that overseas aid took too much of the federal budget—over 80 per cent agreed. But, asked how much they thought was spent, the average answer was around 25 per cent, whereas the correct figure was less than 1 per cent.

Last year I carried out a small survey in Winchester asking people if they thought that the level of six different benefits was too high, too low, or about right. Over three-quarters of all the responses said too high. But when asked as a follow-up what they thought the rates of payment were, more than nine people in ten either came up with an over-estimate or had no idea. (Subsequently the TUC sponsored a more comprehensive study which produced very similar results.) Politicians should not take their cues from such misinformation.