Another fine mess you've got us into

In Moneyweek, James Ferguson points the finger at welfare for workers, the brainchild of our late, unlamented Prime Minister, as being largely responsible for getting the UK into the mess that it's in.

Britain has strong GDP growth and low unemployment. But we also have zero growth in productivity, or real (after-inflation) wages, or growth per person. And how can the government spend the equivalent of 43% of GDP (high by
historical standards), yet food banks still exist? And why, when we have one of the lowest relative poverty readings in
the OECD group of wealthy nations, do we suffer from extreme perceived inequality?

..income inequality is flat to falling – yet perceived inequality is high and rising. Why? The key reason is that benefit spending per person in the UK has soared by 60% in real terms over the last 15 years. That’s a huge and perhaps
unsustainable shift (given our chronic deficit). And why is food bank use rising, even as unemployment falls? Because these new benefits are largely going to workers, rather than job seekers.

The majority of the £215bn (12.5% of GDP and 28% of all government spending) welfare spending bill goes to the retired (£87bn). But the next largest chunk goes not to the unemployed (who receive just £8bn), but to the employed (£76bn). Supplementary payments to boost earned income include tax credits, income support, housing benefit and other allowances.

It must have seemed like a good idea at the time to top up the earnings of the politicians’ favourite group, “hard-working families”. But the structure of these in-work benefits creates economically destructive incentives.

To qualify for tax credits, a couple must work at least 24 hours a week between them. So the cynics among you won’t be surprised to learn that not only does a third of the working population work part-time (nine million people in total) but that the average hours worked per person is just over 12 hours a week – ie, 24 hours per couple.

Part-time work pays £11.24 an hour on average. That’s an annual post-tax income of £14,250 for a couple. At this level, tax credits alone would boost household disposable income for those with three children and childcare costs to £35,203 – before any other welfare entitlements, including housing benefit. For a full-time, salaried worker to earn the same disposable income, they’d have to be on £48,500 – almost double the average.

Why put in a six-day week in a semi-skilled job when you could do a couple of hours a day on an easier job and potentially earn almost twice as much?

So next time you hear someone blaming the unemployed Romanian gypsy immigrants with twelve kids living in a mansion on housing benefit for all the country's ills, remember who is really responsible.