By forgetting the welfare state’s consumption-boosting role, Coalition Liberals risk doing economic as well as social damage, argues Alan Shipman...
But Chancellor George Osborne insists a further round of austerity measures is needed before the next election because public borrowing is running well above the targets set in 2010. As well as continuing to reduce the range of benefits and eligibility for them, the Treasury is considering a freeze on benefit rates on the basis that most wage-earners haven’t had a real pay increase for several years.
Both coalition parties are likely to find they are embarking on an electorally slippery slope, but for contrasting reasons.
The Conservatives making a case for this freeze still tend to depict employees and benefit recipients as two distinct groups, hoping to fuel antagonism between working families (inevitably depicted as ‘hard-working’, if not employed in the public sector) and households receiving benefit (which, by implication, aren’t working hard or working at all).
While politically convenient, this distinction ignores the growing number of households that do as much paid work as they can and still depend on social benefits. Around half the UK population (30 million people) received at least one state benefit in 2010, according to the Institute for Fiscal Studies. While this is sometimes due to high living costs (especially linked to disability or care needs), it increasingly reflects low rates of pay, especially for jobs created during the present recession. Benefits and tax credits have become as much a subsidy to employers, or to landlords taking advantage of the chronic housing shortage, as to the households now under government fire – though it is those households that will lose from any benefit reduction.
The UK’s benefit-receiving – but hardly benefit-dependent – 50 per cent is not far from the 47 per cent that US presidential candidate Mitt Romney recently drew attention to.
As might be expected from a successful private equity investor, Romney’s arithmetic is faultless. His only mistake is to assume that all those benefit recipients are welfare-state ‘dependents’ who automatically vote for big government, when many are working hard to avoid the need for further public assistance and support the Republicans’ laissez-faire version of the American Dream.
Britain’s Liberal Democrats are missing an opportunity to deploy economic logic, as well as social fairness, against Conservative colleagues’ squeeze on social subsidies. The BBC’s recent documentary on John Maynard Keynes, which launched its exploration of three of the past century’s most influential economists, highlighted one of the insights from this great Liberal thinker that became accepted wisdom in the high-growth years of the post-war 20th century, only to be sadly forgotten in the recessionary depths of the early 21st.
Households on the lowest incomes tend to spend the highest proportion of that income, and save the least. So if governments redistribute income from richer to poorer households, aggregate demand goes up. And because that extra spending puts money into the pockets of other wage-earners who can then also spend more, national income can rise by much more than that initial injection of demand.
At times – like the present – when businesses are sitting on uninvested cash and governments are having to rein-in their deficits, that private spending boost can be vital to recovery. The magic of the ‘balanced budget multiplier’ is that, by raising the proportion of income that gets spent, output and employment can be raised without pushing the public finances further into the red.
Conversely, if benefits are cut (and if, at the same time, higher-income households are being taxed less), total expenditure falls, dragging the economy into even deeper unemployment and surplus capacity.
The coalition rejects such ‘Keynesian’ reasoning because a consumption boost appears less conducive to boosting output in the long term. It implies lower national saving, conventionally linked to lower investment and slower growth once the immediate jobs boost passes. So the government’s preferred course is to strengthen the ‘supply side’, largely through ministers competing to set up new state-funded banks. Dr Cable’s new £1bn small-business investment bank, though smaller than its promoters would have liked, has captured the momentum from Mr Clegg’s Regional Growth Fund, which has struggled to meet its initial targets for disbursement or job creation; while the Green Investment and Big Society banks still chafe under restrictive Treasury rules.
Even if they work, the problem with mobilising more funds for private investment is that few businesses will want them if demand for higher output isn’t there. Nick Clegg’s predecessors used to take pride in recalling that Keynes (who explained why market economies sometimes need a budgetary boost to regain their momentum), and William Beveridge (who showed how a comprehensive welfare state could strengthen them), hailed from the UK’s Liberal tradition, not those of British socialism. If his hold on the party, or the Liberal Democrats' role in the coalition, becomes untenable before the next election, betrayal of those great Liberals' legacy through callous and counterproductive benefit cuts will be largely to blame.
Alan Shipman is a lecturer in Economics at the Open University. He is responsible for the modules You and your money:personal finance in context and Personal investment in an uncertain world, part of the foundation degree in Financial Services.
2 October 2012
