There is a fascinating paradox at the heart of current government policy. That is that in the name of reducing government expenditure and waste the government are increasing government expenditure and waste! This is the paradox this article seeks to address.
The UK’s coalition government is spending a fortune and increasing the deficit in order to inflict pain on the poor and vulnerable, yet it appears that many people think they are more economically competent than Labour and that their cuts are saving the taxpayer money.
Much resistance to the coalition’s austerity programme has centred on how it is unfair (tax cuts for the highest earners whilst government cuts affect most deprived areas) and is inflicting serious pain on and even killing vulnerable people in the UK. I have even advocated that the best way to oppose the government’s ‘fantasmatic’ narrative regarding benefit claimants, is to appeal to people’s emotions rather than to use reason (the government and Daily Mail readers wouldn’t know a rational argument if one hit them round the head repeatedly and taxed their second homes ). However I feel I ought to give the rational approach one last try. This is because there actually appears to be an emotional hatred of waste and government spending developing in British contemporary culture. The government have, in fact, used the emotional aspect of this hatred of waste and spending to push through an agenda which makes no sense at all from an economic perspective.
There is an economic argument to be made for the welfare state, even if we ignore the unfairness and pain inflicted by cutting back on welfare expenditure. There is an assumption (made mainly by those on the Right) that cuts to welfare result in absolute savings to the public purse. There are many reasons to think this is a dubious argument. If welfare expenditure is cut (as it is being) then there are likely to be knock on costs elsewhere in the economy. Thus far the coalition have been cautious about cutting benefits to people of pensionable age, although this accounts for a large proportion of total expenditure; and therefore the majority of cuts have impacted (and will continue to impact) people of working age. If benefits that top up incomes are cut (as they are being) then it is likely people will not be able to afford to live in places where there is easy access to employment opportunities. This is because costs of housing have increased at a much greater rate than wages. This, combined with an increasing reliance on the private rented sector, has been the primary driver of the increase in housing benefit expenditure. Quite obviously this will mean that fewer people are able to work and contribute to the treasury in terms of taxation. It also means they will have less money to spend and this will lead to continuing depression of demand in the economy which has an impact on GDP growth. The upshot being a vicious spiral of declining growth, fewer jobs, leading to more reductions in growth and fewer jobs and reduced tax revenues and increased expenditure in terms of unemployment benefits and so on and so on. Currently unemployment benefit makes up only a tiny fraction of benefit expenditure; but it is likely that coalition polices will increase the proportion spent on unemployment benefit in the long term (perversely this may well justify even further cuts, from the perspective of the Right’s strange logic)!
However there are likely to be additional costs associated with the increase in deprivation. The consequences of increases in deprivation especially amongst children and the disabled are likely to lead to increase demand (and so costs) on health, social care and police services. Therefore the money ‘saved’ in welfare budget reductions must be offset against long term increases in health, social care and policing costs that these cuts are likely to lead to. This is in addition to the effect these cuts will have on employment and growth. Thus cuts to welfare are likely to both affect economic growth (and thus government revenue) and costs elsewhere in the system. There will be some delay between cuts to welfare and the knock on costs these cuts cause. Therefore it will be some time before we can fully assess the long term impact of the coalition’s policies, or so you might think.
Interestingly, cuts to local housing allowance (housing benefit paid to people in the private rented sector) that were brought in in April 2011, have provided us with a speeded up; worked example of how cuts lead to increased expenditure.
Due to government capping the amount of benefit paid to people to live in rented accommodation, people are forced to present themselves as homeless to the local authority that have a duty to house them. As there is little accommodation (in many areas) with rents that can be covered by the government’s benefit caps, local authorities are forced to pay for these families to live in accommodation which is much more costly was previously the case when they were housed in rented accommodation Therefore, due to government benefit cuts, the taxpayer is now spending more than they otherwise would be to house people. Yes, you did read that right, thanks to government policy the taxpayer is now paying more to house people in less suitable accommodation – paying more for less. The fact such accommodation is unsuitable will also affect people’s health and their children’s education will suffer, which in turn will lead to an increase demand on the NHS (even more cost to the taxpayer) and more unemployment (and perhaps crime) in the longer term (even more costs in policing and prisons).
[A]nalsis shows that local authorities across England are now spending on average up to £650 a week to keep people off the streets. …Charities and councils say a combination of welfare cuts and lack of affordable housing has led to the almost ninefold increase. The latest figures show 900 adults and children had been housed in B&Bs for a month and a half at a time, often sharing a single room without a kitchen or any meaningful storage space
Tory flagship borough of Westminster is spending almost £85,000 a week housing families in 10 West End hotels, with more than £22,500 a week paid to the Central Park Hotel, two minutes’ walk from Hyde Park, and more than £17,000 a week to the Copthorne Tara Hotel in Kensington. Labour pointed out that this would work out at almost £4.5m a year. The Guardian spoke to one mother of three who was placed for nine weeks in four different hotels and bed and breakfasts last year after her husband’s building business collapsed. Westminster council was paying almost £1,000 a week to house her family inside the borough and in Lambeth, south London.
Source (my emphasis)
I have to admit that even I have been shocked that the time between increases in government spending and the government cuts that drive this spending increase has been so short. However this may partially explain why the deficit increased last year and is going to increase again despite Osborne’s failed attempts at dodgy accountancy and massive cuts to government spending.
As if this wasn’t bad enough, more evidence of the wasteful nature of government policy emerged recently, this time regarding the decision to raise tuition fees. Here analysis by London Economics shows this will end up costing 6 and a half times more, than it will save!
Cuts to welfare may be good politics, in the sense they play well with the Daily Mail; but they are bad policy and a false economy. The coalition’s reckless cuts are not something that the country can afford in a time of economic crisis.