Should welfare benefits be increased to reduce inequality?

Readers Question: Should the government provide more welfare support programs such as child tax benefit and unemployment insurance in order to decrease economic inequality?

This is a classic dilemma that governments face. To simplify the argument.

  • Higher welfare benefits help to reduce inequality and reduce relative poverty. Higher benefits will give those on low income a better living standard and help contribute to a more cohesive society.

However, opponents argue that:

  • Increasing welfare benefits creates a disincentive to work. If welfare benefits are too generous, people may have a strong incentive to avoid work or work fewer hours. Furthermore, higher welfare payments increase the burden on the government requiring higher taxes and/or higher borrowing. Both taxes and borrowing place economic costs on society.

Both arguments have merits and setting the optimal level of benefits is not easy. It will partly depend on which you feel is more important – reducing inequality in society or limiting the role of government and creating incentives to maximise individual incentives to work.

Between each polarised view, most economists would probably agree on certain principles which will be helpful in setting the level of welfare benefits.

  • Guaranteeing a minimum income to avoid absolute poverty is desirable.
  • It is important children are not too adversely affected by the choices of their parents.
  • Welfare benefits should be designed so there is always some incentive to work rather than stay on benefits. Ideally, benefits would be temporary to help families through difficult times – not a permanent handout.
  • Welfare benefits should be deemed to be fair, easily accessible and available to all legitimate claimants.

Read moreShould welfare benefits be increased to reduce inequality?

Benefit spending in the UK

A quick look at benefit spending in the UK. This is a follow up to  Social security spending. Thanks to HM Treasury for help in finding useful data set.

Source: Public Expenditure Statistical Analysis 2014 | Data Chapter 5 – 5.2

Social Protection spending

Firstly, there has been a modification to the category of government spending, now labelled – ‘Social protection spending’ – See: Social protection spending. This is not just welfare benefits. It includes personal social services, e.g paying for nursing, care in the community; (spending which could  perhaps be better included with health care).

Secondly, by far the biggest level of social protection spending is pension spending. This includes both state pension payments and (I believe) state occupational pensions to retired public sector workers.

social-protection

It is a very unwieldy sub-division of government spending, but if we look at whole budget it increased significantly during the great recession 2009-2013. This is partly due to the cyclical higher welfare payments expected during a period of unemployment and low income growth.

However, on closer examination, by far the biggest increase in spending from the social security budget is from pensions. Pension spending increased from £83bn in 2009/10 to £104.4 bn in 2013/14. An increase of £21 bn. In a period of so called austerity, that is a big increase in government spending.

  • Unemployment benefit payments fell in this period from £5.5 bn to £4.9 bn
  • Sickness and disability benefits rose from £30.6 bn to £37.5 bn
  • Income support, tax credit (both family and social exclusion) declined from (£45.8bn) to £ 43.9 bn)
  • Housing benefit from £22bn to £26bn (see: more on Housing benefit)

UK Pension spending

pension-spending-uk

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The Growth of Welfare Spending in the UK

Welfare spending in the UK is a controversial topic. There is significant political and public concern at the growth of welfare spending in the past few decades. In particular, there is a fear that the growth of the welfare state is encouraging a ‘dependency culture’. But, how much has welfare spending actually increased by? Are we really a nation of scroungers or is the extent of welfare payments exaggerated? One important point to bear in mind is that in a recession, we expect welfare spending to increase. That is really the whole point of the welfare state – to provide a minimum income during a period of temporary unemployment.

Welfare spending includes benefits the government pay to those out of work or on low incomes. It includes:

  • Job seekers allowance – unemployment benefit
  • Income support
  • Housing benefit
  • Child Benefit
  • Winter fuel allowance (1)

Growth in Nominal Welfare Spending

welfare-spending-nominal

Since 2001, welfare spending has increased from £57bn t0 £115bn. However, the government are planning to stabilise welfare spending at £115bn through limiting entitlement and the increase in the amount paid. The government may argue without firm action now, the trend would see continued unaffordable increases in welfare.

Welfare Payments in Real Terms

welfare-real

If we look at welfare payments in real terms (adjusted for inflation), we see the growth is less spectacular. Nevertheless, even adjusted for inflation, the welfare bill has increased by £34bn since 2001.

Read moreThe Growth of Welfare Spending in the UK

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