Benefit Britain

Why we need to rethink welfare and wages in this country

Key welfare policy movers: Torsten Bell and Liz Kendall

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A frequently touted success of the UK economy in the past decade has been its surprisingly strong employment figures. Unemployment has remained at reasonable levels since 2013, despite sluggish growth and numerous external shocks, as well as periods of ‘fiscal consolidation’ (i.e. tax rises and spending moderation). But we need to talk about the character of this work behind the figures – which means we need to talk about wages.

The recent debate over the two-child benefit ‘cap’, for me, outlined our need to rethink the way we talk about work and poverty in this country. The cap keeps around 500,000 children in poverty, and so campaigners are absolutely right to call for its abolition, though the way John McDonnell and other left-wing Labour MPs did so should be criticised for a lack of forethought – rebelling on the King’s Speech, treated as a confidence vote, was never going to end well. 

But it is not enough. Lifting the cap would leave the vast majority of the current 4.2m children in relative poverty – including 3.6m in absolute poverty – suffering that ignominy. But if 95.8% of the healthy working-age population is in work, why are a third of children in poverty?

Low Wages, Low Security

A short answer is that wages are chronically low for a plurality in Britain. A median average of £35,000 in 2023 is far behind our north-European competitors and American counterparts (hardly worthy of the ‘competitor’ label, given how far their economy and wage growth has outpaced us over the past decade and a half). Wages remained stagnant for over a decade as economic growth slowed, public sector pay froze and productivity growth fell off a cliff.

Combined, this means around 40% of Universal Credit-recipients in this country are in work: 2.3m people of an employed population of around 33m. The state is effectively subsidising businesses who don’t pay their employees enough, forced into protecting millions from poverty – or not, given that provision of welfare is clearly insufficient to do so effectively.

We have our first answer to the earlier question, then – Universal Credit (UC) payments are often too low to keep claimants in general out of poverty because they require the state to make up for work that doesn’t pay. This particularly affects children because half of all households receiving UC have children.

Welfarism

This fundamental problem in our economy has been papered over by welfarism. It has been the case for decades – it is only that it has become more apparent than ever in recent years. Much has been made of the move to a smaller state in the 1980s and 1990s, including the end of state subsidies for unproductive businesses, one of the main allegations made toward the big-state economics of 1947-1979. But benefit spending has skyrocketed since the 1980s as government has picked up the tab – in the first place a huge unemployment benefit bill paid by Thatcher, and in the second when Blair and Brown concentrated their domestic agenda on a larger welfare state. The benefit system has propped up jobs for over three decades, including 2.3m at this moment, making it complex to reform and leaving millions struggling. 

The first port of call in spending cuts has been the welfare bill. This also means our consumer base is more vulnerable than it should be to periods of state austerity, as cuts or freezes to benefits weaken the spending power of a significant number of those in work as well. So yes, employment has stayed high despite periods of fiscal consolidation (‘austerity’) - but stagnant wages since 2008, cuts to benefits and a higher cost of living means many people have been made increasingly poor, with ramifications for our economic base of consumption.

This speaks to another problem with this welfarist approach. As happened after the significant welfare state expansion under Blair and Brown, spending more on poverty does nothing to entrench the change – the austerity programme of Cameron and Osborne reversed huge swathes of their progress in cutting poverty, and particularly child poverty (Brown’s stated ambition having been its abolition) – as we can clearly see at this moment, the two-child cap having been passed in 2015.

Welfare has been used to paper over these cracks in wages and our economic model for decades, which is why we need to talk about the pay and character of the jobs market in the same conversation as benefit increases. To not do so would be to reflect the falsehood underlying our economic system since 1979 – that the state spends dramatically less on businesses than in the previous consensus. Instead of discussing how to maintain this status quo where the state is forced to step in by increasing our welfare bill – and this piece is certainly not to demonise those on benefits – we must talk about increasing wages and restructuring the economy so the government does not have to. It is a travesty that people in full-time work do not earn enough to live and support their families. Worse, the state has proven to be an unreliable safety net - our second answer to my earlier question: the welfarist system is too prone to cuts, external shocks and public opinion to be effective.

The Finances

This macro employment model is a financial problem too. The state of Britain’s finances has, in the big picture, become increasingly shaky since 2007. Of course, this is largely down to external shocks that governments have little control over, but there is a strong case to be made that over-spending on an ever-larger welfare state has left us more vulnerable than we need have been. Increasing our spending on welfare, therefore, needs to be done with caution, only in line with a more virulent economy – which will only be helped by higher wages for workers, as long as it doesn’t create a concurrent jump in unemployment. Evidence from America, where strong employment growth has been seen under President Biden (influential to the new Labour government’s economics, as I wrote here) with the Democrats’ ‘middle-out’ approach to economic growth, suggests this could be successful. 

Which is where we return to wages. Not only would higher wages be a more significant factor in lifting children, and our general population, out of poverty, but it would also reduce the burden on the state in doing so and provide a stronger base for our consumption-based economy. Lifting the child benefit cap in the short-term may well be a moral, and technical, necessity – but its seemingly poultry costs now will increase over time. Only children born after 2017 are currently barred from receiving such a benefit. As the years go by, the extra £2.5-3.6bn a year that abolition would cost now will, of course, only increase. The debate over the two-child benefit cap misses the woods for the trees. Yes, it should absolutely be lifted, no child should live in poverty and the government should act to lift hundreds of thousands out of it. But its abolition would still leave millions of children in poverty, many of whose parents are in work.

Lastly, a note on the politics. A Labour government rightly focused on fiscal responsibility to avoid spooking wary global markets and currently dealing with a significant overspend in the last year of the Conservative government is unlikely to shift in the immediate term. Another strategy is needed for those of us who want to see an end to poverty, child or otherwise.

Any Ideas?

Policy suggestions to solve our low-income problem deserve more than a mere paragraph - and I will be writing pieces in future with some more detailed proposals. But it would be easy to write this piece without any suggestions, so here are a few in that direction:

First, to offer incentives to businesses to pay their employees more, tax relief could be implemented for those that gave significant wage increases. This would be similar to Jeremy Hunt’s move to reduce corporate taxation for big businesses that spend that money on capital investment instead, shifting our perspective of private investment to include the workforce. Additionally, making Hunt’s policy shift permanent could help reverse our productivity stagnation, with greater capital investment in new technology and techniques particularly over the long-term, offering stability for businesses that wish to invest.

Second, though not a wage increase per se, introducing progressive tiers for the personal allowance, as we have for income tax rates, would allow those at the bottom of the ladder to keep more of the money they do earn. This would be an extension of our current tax code, which provides no personal allowance to those earning over £125,000. Moving back from there, one could lower the personal allowance for higher earners, potentially adding new brackets in order to pay for a higher allowance for those taxed at the basic rate.

Finally, and most problematically, the non-professional jobs with the highest pay are in manufacturing. Our shift to a services-based economy is a big part of our current low-income status quo. Shifting the dial more toward manufacturing work, or at least in industry which creates / builds rather than just services. If we can take advantage of the move toward green tech and energy solutions, it would be significant. Again, this is something already happening in America, which has seen a manufacturing boom in the last four years. We have seen signs of this in Labour’s 2024 manifesto, as I wrote about here – it remains to be seen if this will prove enough.

It is time, therefore, to reorient the debate away from an ever-expanding welfare bill and back to making work pay. For the Left this should be home territory. The Democrats have been speaking in these terms since 2020, and were doing so just a few days ago at their National Convention. For a home-grown source of inspiration, the Labour Party can look inward – the clue’s in the name.

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