Tag: benefits

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A Spring dose of fiscal policy

On March 23, Rishi Sunak, the UK’s Chancellor of the Exchequer, delivered his Spring Statement, in which he announced changes to various taxes and grants. These measures were made against the background of rising inflation and falling living standards.

CPI inflation, currently at 6.2%, is still rising and the Office for Budget Responsibility forecasts that inflation will average 7.4% this year. The poor spend a larger proportion of their income on energy and food than the rich. With inflation rates especially high for gas, electricity and basic foodstuffs, the poor have been seen their cost of living rise by considerably more than the overall inflation rate.

According to the OBR, the higher inflation, by reducing real income and consumption, is expected to reduce the growth in real GDP this year from the previously forecast 6% to 3.8% – a much smaller bounce back from the fall in output during the early stages of the pandemic. Despite this growth in GDP, real disposable incomes will fall by an average of £488 per person this year. As the OBR states:

With inflation outpacing growth in nominal earnings and net taxes due to rise in April, real living standards are set to fall by 2.2 per cent in 2022/23 – their largest financial year fall on record – and not recover their pre-pandemic level until 2024/25.

Fiscal measures

The Chancellor announced a number of measures, which, he argued, would provide relief from rises in the cost of living.

  • Previously, the Chancellor had announced that national insurance (NI) would rise by 1.25 percentage points this April. In the Statement he announced that the starting point for paying NI would rise from a previously planned £9880 to £12 570 (the same as the starting point for income tax). This will more than offset the rise in the NI rate for those earning below £32 000. This makes the NI system slightly more progressive than before. (Click here for a PowerPoint of the chart.)
  • A cut in fuel duty of 5p per litre. The main beneficiaries will be those who drive more and those with bigger cars – generally the better off. Those who cannot afford a car will not benefit at all, other than from lower transport costs being passed on in lower prices.
  • The 5% VAT on energy-saving household measures such as solar panels, insulation and heat pumps will be reduced to zero.
  • The government’s Household Support Fund will be doubled to £1bn. This provides money to local authorities to help vulnerable households with rising living costs.
  • Research and development tax credits for businesses will increase and small businesses will each get another £1000 per year in the form of employment allowances, which reduce their NI payments. He announced that taxes on business investment will be further cut in the Autumn Budget.
  • The main rate of income tax will be cut from 20% to 19% in two years’ time. Unlike the rise in NI, which only affects employment and self-employment income, the cut in income tax will apply to all incomes, including rental and savings income.

Fiscal drag

The Chancellor announced that public finances are stronger than previously forecast. The rapid growth in tax receipts has reduced public-sector borrowing from £322 billion (15.0 per cent of GDP) in 2020/21 to an expected £128 billion (5.4 per cent of GDP) in 2021/22, £55 billion less than the OBR forecast in October 2021. This reflects not only the growth in the economy, but also inflation, which results in fiscal drag.

Fiscal drag is where rises in nominal incomes mean that the average rate of income tax rises. As tax thresholds for 2022/23 are frozen at 2021/22 levels, a greater proportion of incomes will be taxed at higher rates and tax-free allowances will account for a smaller proportion of incomes. The higher the rate of increase in nominal incomes, the greater fiscal drag becomes. The higher average rate of tax drags on real incomes and spending. On the other hand, the extra tax revenue reduces government borrowing and gives the government more room for extra spending or tax cuts.

The growth in poverty

With incomes of the poor not keeping pace with inflation, many people are facing real hardship. While the Spring Statement will provide a small degree of support to the poor through cuts in fuel duty and the rise in the NI threshold, the measures are poorly targeted. Rather than cutting fuel duty by 5p, a move that is regressive, removing or reducing the 5% VAT on gas and electricity would have been a progressive move.

Benefits, such as Universal Credit and the State Pension, are uprated each April in line with inflation the previous September. When inflation is rising, this means that benefits will go up by less than the current rate of inflation. This April, benefits will rise by last September’s annual inflation rate of 3.1% – considerably below the current inflation rate of 6.2% and the forecast rate for this year of 7.4%. This will push many benefit recipients deeper into poverty.

One measure rejected by Rishi Sunak is to impose a temporary windfall tax on oil companies, which have profited from the higher global oil prices. Such taxes are used in Norway and are currently being considered by the EU. Tax revenues from such a windfall tax could be used to fund benefit increases or tax reductions elsewhere and these measures could be targeted on the poor.

Articles

OBR data and analysis

Questions

  1. Are the changes made to national insurance by the Chancellor progressive or regressive? Could they have been made more progressive and, if so, how?
  2. What are the arguments for and against cutting income tax from 20% to 19% in two years’ time rather than reversing the current increases in national insurance at that point?
  3. What will determine how rapidly (if at all) public-sector borrowing decreases over the next few years?
  4. What are automatic fiscal stabilisers? How does their effect vary with the rate of inflation?
  5. Examine the public finances of another country. Are the issues similar to those in the UK? Recommend fiscal policy measures for your chosen country and provide a justification.
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Is growing inequality fair?

In a series of five podcasts, broadcast on BBC Radio 4 in the first week of January 2021, Amol Rajan and guests examine different aspects of inequality and consider the concept of fairness.

As the notes to the programme state:

The pandemic brought renewed focus on how we value those who have kept shelves stacked, transport running and the old and sick cared for. So is now the time to bring about a fundamental shift in how our society and economy work?

The first podcast, linked below, examines the distribution of wealth in the UK and how it has changed over time. It looks at how rising property and share prices and a lightly taxed inheritance system have widened inequality of wealth.

It also examines rising inequality of incomes, a problem made worse by rising wealth inequality, the move to zero-hour contracts, gig working and short-term contracts, the lack of social mobility, austerity following the financial crisis of 2007–9 and the lockdowns and restrictions to contain the coronavirus pandemic, with layoffs, people put on furlough and more and more having to turn to food banks.

Is this rising inequality fair? Should fairness be considered entirely in monetary terms, or should it be considered more broadly in social terms? These are issues discussed by the guests. They also look at what policies can be pursued. If the pay of health and care workers, for example, don’t reflect their value to our society, what can be done to increase their pay? If wealth is very unequally distributed, should it be redistributed and how?

The questions below are based directly on the issues covered in the podcast in the order they are discussed.

Podcast

Questions

  1. In what ways has Covid-19 been the great ‘unequaliser’?
  2. What scarring/hysteresis effects are there likely to be from the pandemic?
  3. To what extent is it true that ‘the more your job benefits other people, the less you get paid’?
  4. How has the pandemic affected inter-generational inequality?
  5. How have changes in house prices skewed wealth in the UK over the past decade?
  6. How have changes in the pension system contributed to inter-generational inequality?
  7. How has quantitative easing affected the distribution of wealth?
  8. Why is care work so poorly paid and how can the problem be addressed?
  9. How desirable is the pursuit of wealth?
  10. How would you set about defining ‘fairness’?
  11. Is a mix of taxation and benefits the best means of tackling economic unfairness?
  12. How would you set about deciding an optimum rate of inheritance tax?
  13. How do you account for the growth of in-work poverty?
  14. In what ways could wealth be taxed? What are the advantages and disadvantages of such taxes?
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Basic Income: a step forward?

The UK benefits system is complex and this is just one reason why some people fall through the safety net. There are criticisms that it doesn’t reward work and doesn’t provide sufficient incentives to move off benefits and into work. One rather radical policy that has been discussed in numerous countries is the idea of a ‘Basic Income’.

The Basic Income or Citizen’s Income is a policy where individuals receive a regular payment from the government, essentially for doing nothing. The income is paid and aims to cover basic living costs and on top of this, individuals can then work, earn income and pay tax on it. Experiments of this policy are already in place and over the next few years, we may see many more being trialled and much discussion of the possibility of implementing this in the UK. We tend to be fairly risk averse when it comes to radical policies and so while we may see discussion of it in the UK, I imagine we’ll want to see the relative success of the policy in other countries first!

There are many variations of the scheme and lots of questions that need addressing. Will it encourage people to work more or less? Might it reduce the stigma of claiming benefits, if this is a basic income that everyone receives? Does it simplify the system and hence provide more people with a basic income thus targeting poverty?

Some proposals have this payment as a universal one – non means tested and not conditional on anything. Other proposals, including one in Finland, sees just the unemployed receive the benefit and appears to be a social experiment to see if such a policy discourages the unemployed from taking jobs. Traditionally individuals receive a benefit if they are out of work, but this benefit can be cut (in some cases quite substantially) if they begin to work. This creates a disincentive to supply labour. However, under the basic income scheme, those who moved into work would continue to receive the basic income payment and hence the disincentive effect is removed. The policy thus creates a basic level of economic security. As Howard Reed and Stewart Lansley argue, it would offer:

“…financial independence and freedom of choice for individuals between work and leisure, education and caring, while recognising the huge value of unpaid work”.

There isn’t universal support for this type of scheme and many remain very cautious about such a radical policy and how the incentives will work. Key questions focus around the marginal rate of income tax that might be needed to finance such a policy. Furthermore, there is discussion about the equity of the policy if it is universal and hence non means-tested.

In Switzerland, the policy was put to a public referendum and it was rejected, with 75% of voters voting against such a policy. However, with changes in the structure of economies and, in many countries, technological change increasingly leading to automation, some argue that such a system will help to protect people. Lord Skidelsky, Professor of Political Economy at Warwick University said:

“Credible estimates suggest it will be technically possible to automate between a quarter and a third of all current jobs in the western world within 20 years … It [Basic Income] would ensure the benefits of automation were shared by the many, not just the few.”

Basic Income or Citizen’s Income is certainly something we are likely to hear a lot about during 2017. Whether or not the time has come for implementation is another matter, but it’s a good idea now to look into both sides and the relative success of the upcoming trials around the world.

8 basic income experiments to watch out for in 2017 Business Insider, Chris Weller (24/1/17)
What is basic income? Basic Income Earth Network (January 2017)
Finland trials basic income for unemployed The Guardian, Jon Henley (3/1/17)
Howard Reed and Stewart Lansley, Universal Basic Income: An idea whose time has come? Citizen’s Income Trust (14/6/16)
Is the world ready for a guaranteed basic income? Freakonomics, Stephen Dubner (13/4/16)
France’s Benoit Hamon rouses Socialists with basic income plan BBC News, Lucy Williamson (24/1/17)
Universal basic income trials being considered in Scotland The Guardian, Libby Brooks (1/1/17)

Questions

  1. What is basic income?
  2. What are three advantages of this policy? If you can, try to use a diagram to explain why this is an advantage.
  3. What are three disadvantages of moving towards this type of policy?
  4. Why does the provision of benefits affect an individual’s labour supply decision?
  5. Do you think that income tax would have to rise in order to finance this policy? Do you think high income earners would be prepared to pay a higher rate of tax in order to receive the basic income?
  6. If the trials showed that the policy did create an incentive to work in countries like Finland, do you think the results would also occur in the UK?
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Perspectives on poverty

In this post we focus on three aspects of poverty around the world. The first is the definition of poverty. Is it an absolute or a relative concept? Does its definition change as the world develops. The second is the extent of poverty. Is the problem getting worse as inequality deepens, or are the numbers (absolutely or proportionately) getting smaller despite increased inequality? The third is policy to tackle the problem. What can be done and is being done? What answers are being given by policymakers in different parts of the world?

As far as the measurement of poverty is concerned, the simplest distinction is between absolute and relative poverty. Absolute poverty could be measured as income below a certain real level deemed necessary to achieve a particular standard of living. This could be specified in terms of sufficient income to have adequate food, shelter, clothing and leisure time, and adequate access to healthcare, clean water, sanitation, education, etc. An obvious problem here is what is considered ‘adequate’, as this is partly culturally determined and will also depend on physical and geographical features, such as climate.

The World Bank defines extreme absolute poverty as living on under $1.90 per day in purchasing-power parity terms. However, even after adjusting for purchasing power, what is considered the poverty threshold differs enormously from country to country. As the Wikipedia entry states:

Each nation has its own threshold for absolute poverty line; in the United States, for example, the absolute poverty line was US$15.15 per day in 2010 (US$22,000 per year for a family of four), while in India it was US$1.0 per day and in China the absolute poverty line was US$0.55 per day, each on PPP basis in 2010.

Relative poverty is normally taken to mean when a person’s income falls below a certain percentage of the mean or median. Thus in richer countries, for a given percentage, the poverty threshold would be at a higher absolute income. In the EU, people in relative poverty are defined as those with disposable income (after monetary benefits) less than 60% of the median.

Both approaches focus on consumption. Other approaches include social and cultural exclusion as dimensions of poverty.

What is clear is that poverty has a number of definitions. One problem with this is that politicians can focus on whatever definition suits them. Thus in the UK, with relatively high levels of employment, but often at low wages and only part-time employment, the Conservative government has redefined poverty as where no-one in a family is in work. Yet many working families have very low levels of income, considerably below 60% of the median.

The second aspect of poverty is its extent and whether it is growing. According to the United Nations, globally ‘extreme poverty rates have been cut by more than half since 1990. While this is a remarkable achievement, one in five people in developing regions still live on less than $1.25 a day, and there are millions more who make little more than this daily amount, plus many people risk slipping back into poverty.’

Despite this progress, in many countries extreme poverty is increasing. And in others, although the number in extreme poverty may be declining, it is still high and inequality is increasing so that more people are living only just above the extreme poverty line. The articles look at dimensions of poverty in different countries.

For example, the first The Conversation article argues that the financial crisis of 2008–09 led to a substantial increase in poverty across the European continent.

The impoverishment of Greece, Italy, Cyprus, Spain and Portugal has been so severe that these southern European countries, taken together, had higher levels of poverty and deprivation than many of the former Communist nations that joined the European Union in 2004.

The third aspect is how to tackle the problem of poverty. There are three broad policy approaches.

The first is the use of cash transfers, such as unemployment benefits. The second is providing free or subsidised goods and services, such as healthcare or education. The ability of a country to support the poor in either of these ways depends on its tax base. Also, clearly, it depends on its priorities. There is also the issue of incentives. Do benefits encourage or discourage the recipients from seeking work? This depends on the design of the system. For example, if childcare is subsidised, this may both aid poor parents and also encourage parents responsible for looking after young children to seek work.

The third is to attempt to improve the earning power of the poor. This may in part be by the second approach of improving education, training and health. But it may also involve removing restrictions to employment, say by making various forms of discrimination illegal. It may also involve increasing land rights. In many developing countries land is very unequally distributed; redistribution to the poor can make a substantial contribution to relieving poverty. Another approach is to encourage agencies which supply microfinance for poor people wishing to set up their own small business.

The articles below look at a number of dimensions of poverty: its measurement, its extent and its alleviation. They look at the problem from the perspective of different countries. It is interesting to see to what extent the problems and solutions they identify are country-specific or general.

Articles

Extreme poverty affects 1 in 8 globally Buenos Aires Herald (20/7/16)
How poverty has radically shifted across Europe in the last decade The Conversation, Rod Hick (20/7/16)
The economics of poverty The Tribune of India, S Subramanian (22/7/16)
Poverty Chains and Global Capitalism. Towards a Global Process of Impoverishment Global Research (Canada), Benjamin Selwyn (20/7/16)
Asia’s cost of prosperity The Nation, Karl Wilson (24/7/16)
Private rental sector is the ‘new home of poverty’ in the UK The Guardian, Brian Robson (20/7/16)
Challenges in maintaining progress against global poverty Vox, Martin Ravallion (23/12/15)
California, sixth largest economy in the world, has highest poverty rate in US wsws.org, Marc Wells (22/7/16)
How gross inequality and crushed hopes have fed the rise of Donald Trump The Conversation, Nick Fischer (21/7/16)

Information
Sustainable Development Goals – Goal 1: End poverty in all its forms everywhere United Nations
Children of the Recession: Innocenti Report Card 12 UNICEF, Gonzalo Fanjul (September 2014)
Listings on Poverty Joseph Rowntree Foundation
Poverty The World Bank
Hunger and World Poverty Poverty.com

Questions

  1. Distinguish between absolute and relative poverty. Give examples of specific measures of each and the extent to which they capture the complex nature of the problem.
  2. Discuss the appropriateness of the seven measures of poverty used in the first The Conversation article.
  3. How did the financial crisis affect the proportion of people living in poverty? Explain.
  4. What is the relationship between poverty and inequality? Does a more unequal society imply that there will be a greater proportion of people living in poverty?
  5. How has international poverty changed in recent years? What explanations can you give?
  6. What are the advantages and disadvantages of using income per head as a measure of poverty, whether absolute or relative?
  7. Why is poverty so high in (a) the USA as a whole; (b) California specifically?
  8. How does globalisation affect poverty?
  9. Are adverse environmental consequences an inevitable result of reducing poverty in developing countries?
  10. Is freer trade likely to increase or decrease poverty? Explain
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A ‘comfortable’ position for Osborne?

One of the most controversial policy changes being made by the Conservative government relates to the tax credit system. For many years, the tax and benefits system in the UK has come in for significant criticism. It has been described as overly complex, a system that doesn’t reward work and yet a system that doesn’t provide sufficient incentives to move off benefits and into work.

The changes that the government is proposing are wide-ranging and focused in part on reducing the deficit. With changes to tax thresholds, the introduction of the National Living Wage (NLW) and changes to the thresholds at which tax credits are available, the Treasury suggests that £4.5 billion will be saved per year. It also says that most working families will be made better off. However, the IFS suggests that some families could lose up to £1000 per year following the changes.

In addition to these changes, the amount of tax-free childcare is also set to increase, helping those households with young children

Tax credits are designed to help low income families and working tax credit, in particular, is aimed to encourage people to move into work. A key change to this tax credit will see the threshold at which the recipient’s payments of this benefit begin to decline move from £6420 to £3850. The withdrawal rate – the rate at which the benefit is withdrawn – will also be increased.

The idea is that this will help to target the benefit more tightly – make it more vertically efficient. But, the concern is that this will also mean that low-income working households are worse off, despite the introduction in April 2016 of the National Living Wage. The Chancellor suggests that anyone who is working full time will be better off following these changes and that as such the changes will actively encourage work and lead to an increase in the supply of labour. This, the government argues, is a good policy for the working population, tax payers and for the wider economy.

This policy will remain controversial, with changes set to come in from 2016 and then 2017. It is certainly difficult to assess the impact of these changes on households and part of that stems from the complexities of the existing system, which mean that some households are eligible for some benefits, whereas others are not.

The final impact, if such changes are approved, will only be known once the tax credit changes are implemented. The House of Lords will vote on whether to ‘kill’ the tax credit cuts and Mr. Osborne, despite some concerns from Conservative back-benchers has said he is ‘comfortable’ with the policy and that the House of Lords should respect the views of the other house. Until we see the results of the vote and, even then, the impact of the changes on households, both sides will continue to produce data and estimates in support of their views.

Tax credit changes: who will be the winners and losers? BBC News, Brian Milligan (20/10/14)
Tax credit cuts: Osborne ‘comfortable’ with plan despite pressure from fellow Tories The Guardian, Rowena Mason and Heather Stewart (22/10/15)
George Osborne insists he signalled tax credit cuts before the election Independent, Jon Stone (22/10/15)
George Osborne: I am “comfortable” with tax credit cuts The Telegraph, Steven Swinford (22/10/15)
Commons Speaker warns Lords not to block tax credit cuts The Guardian, Patrick Wintour (21/10/15)
Tax credits: George Osborne ‘comfortable’ with ‘judgement call’ BBC News (22/10/15)
Osborne stands firm despite tax credits unease Financial Times, George Parker and Ferdinando Giugliano (22/10/15)
Austerity was a political choice. Now it’s starting to look like a bad one The Guardian. Heather Stewart (25/10/15)

Questions

  1. What are tax credits?
  2. How do they aim to affect the supply of labour?
  3. Using indifference analysis, explain how the income and substitution effects will work, following a change to tax thresholds.
  4. What is meant by vertical efficiency and the targeting of benefits?
  5. Why would the changes to tax credits help those in full-time work more than those in part-time work?
  6. What are the main arguments for and against the changes to tax credits?