Benefit Cuts Bodge

Depending on the precise date of the calculation, the deficit on the British government’s expenditure for 2009/2010 as inherited by the incoming government on May 11 was £160-170 billion, the lower figure amounting to some 12% of national income (GDP).  An even more serious indicator of the utterly irresponsible management of the country’s affairs by Gordon Brown, former Prime Minister and Chancellor, is the ratio of the deficit to the government’s actual income (£500 billion) i.e. 32%.

The fundamental, largely unacknowledged point is that the vast majority of this gross over-expenditure is not an investment for the future – as in buying a house or production equipment – but on the country’s running costs and benefits.  The Treasury is currently engaged month after month in borrowing money to pay for these costs, borrowing which has to be repaid eventually and on which interest has to be paid immediately.  £17 billion was borrowed in August, the annual interest on which is around £700 million.  The interest just for the new borrowing made by Labour to cover the 2009/10 deficit alone is around £7 billion – bigger than the £6 billion token “cuts” announced by the Coalition government last May and over five times the just announced £1.2 billion cut in child benefit which the government is already backing away from.

The additional borrowing from foreigners – mainly banks and sovereign wealth funds (SWFs) owned by Qatar, Kuwait and China for example – will double the April 30 2009 national debt figure of around £600 billion even if the deficit were completely eliminated by April 2015, which is very unlikely, given the Coalition government’s plans to reduce spending by only £88 billion per annum over the next 5 years.  For the other £72 billion of the £160 billion deficit they are relying (extremely optimistically) on growth in tax revenues.

Clearly the £1.2 billion they claim they will save by removing child benefit from “households” with one or more individuals earning above £43,890 (how will the relevant government department tell? – will only married couples pay?) is chicken feed – much smaller than the overall welfare budget accounting “adjustments” made routinely at each year end.

Referring to the absurd inequity in removing child benefit in this way, the Work and Pensions Secretary, Iain Duncan Smith, could only say lamely on the BBC “World at One” that “we tax people individually not by households.”

But the giving or removal of all sorts of benefits is done for couples, for example by councils (housing benefit, council tax benefit, school meals) by the Department of Business and Innovation (university fees rebate), by Duncan Smith’s own department (income support, the income guarantee credit, the savings credit).  All these require much form-filling and full disclosure of couples’ incomes.  Likewise, the proposed cap of £500 per week in total benefits (tax-free) is by households, not individuals.  (Or how will this be administered given the multitude of different benefit sources?)

Clearly this botched partial withdrawal of child benefit has been done to give “moral” cover to the capping of total benefits to £500 a week (tax-free) – the average weekly (taxed) wage for males in work.  The more than 50% of people earning less than this may well ask is not the cap set too high?

The simplest way of effecting an income related withdrawal of child benefit is to require couples to apply for the benefit, as with all others except the winter fuel allowance, and refuse it for couples earning joint taxable incomes of more than a give amount – say £60,000 (as attested by their income tax return).  Like all benefits this figure can be changed annually or stepped down in relation to earnings.  This way mothers at home will not be unfairly penalised.

We shall be returning shortly to the real-world public sector cuts and benefits reductions needed to make a serious inroad into the £160 billion overspend.  Meanwhile it may be observed that halving the housing benefit at £21 billion and rising is a win for everyone except landlords.

This huge wedge of money, perhaps half of all the rental income paid in the private and public sectors combined, is holding all rents up, especially in the private sector, which affects mobility and young people more than anyone else.  £100 per week for a single room in a university town (much more in London) is something we could well do without.  The withdrawal of £10 billion from this market will reduce rents overnight, because landlords have to let their properties and many have had an extremely comfortable living from them in the last 15 years or so.

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