I was reading the BBC news website a couple of days ago and I stumbled across an article about the new benefits cap which is being proposed by the coalition government. They want to limit the amount of benefits that any one household can earn to £26,000 – which is just about the British median wage. That certainly seems reasonable enough. It seems very unfair that you should be able to earn as much by sitting back and doing nothing as you can by going to work everyday. But on closer inspection it doesn’t seem so fair. The BBC article focussed on a family with 7 people at home, and both the parents were unemployed. Right now they receive £582.40 a week, which isn’t very much to support a family of that size, however if the proposed plans go ahead this will be cut to just £500. The article also gave a break-down of the family’s weekly spending. Sure there were a couple of things that could probably go – mainly the Sky TV – that was about it. Both the parents smoke and drink and lot’s of the comments say that they should just quit and then that’ll be the bulk of the savings done. But it isn’t actually that easy to quit, smoking especially, and chances are that the smoking will stay and they’ll just spend less on their kids.
Clearly something needs to be done to try and manage benefit spending. In 2010, according to the Guardian, the government spent £152.35bn on benefits, making up just under a quarter of all government spending and equating to almost 10% of GDP. Admittedly the biggest component of that is spent on pensions and winter fuel allownace for the elderly (45%), but that still leaves another £79.82 billion pounds of benefit spending – one hell of a lot of money. But if we look closer again, we say that contrary to whaat many people believe, Jobseeker’s Allowance is only a tiny part of that, equating just £4.5 billion pounds. In fact council tax benefit, incapacity benefit and employment and support allowance, income support, disability living and attendance allowance and housing benefit all cost the taxpayer much more money, and the majority of those go to people with jobs as well as without. Housing benefit costs us £21.61bn, almost 5 times more than Jobseeker’s Allowance. So perhaps a more sensible solution would be to increase the provision of social housing in order to decrease the amount of benefit spending, and stop the current situation where the government pays for grossly overpriced private housing through housing benefit.
Furthermore, if we examine the macroeconomic situation we can see even more advantages to the “build more houses” plan. At the moment the British economy is working well to the left of the LRAS, or the economy’s productive potential. A bit like this:
So we can see that the unemployment is almost certainly “cyclical” ie there just isn’t enough jobs to go around. So although the benefits cap will increase incentives to find work, the number of people with jobs isn’t going to go up. In fact the number of jobs, and therefore the number of people in work, will probably go down as the benefits cap is going to seriously harm aggregate demand, moving us even further to the left of the LRAS. The affect will be exaggerated by the fact that everyone affected by the change will be people on low earnings, so it’s not even as if you’re taking away money which was just going to be put in the bank .So overall although the govrernment’s plan will decrease the amount of money spend on each unemployed person, it will probably increase the number of people claiming benefits in the first place, cause significant damage to the economy and could even increase overall benefits spending.
However Plan “Build more Houses” (the name’s a bit of a clue as to what it’s about) is likely to have the opposite affect. It will increase aggregate demand, as the money being paid in wages to the builders, plumbers, architects etc is money being pumped back into the economy, which will boost economic growth and reduce unemployment. Cheaper houses will also mean a decrease in the amount of housing benefit given out. It would be naive to say that this won’t cost the government anything, but the costs are likely to be reduced by the decrease in benefits paid out and increase in taxes collected (from the increase in employment – remember the builders and plumbers building the houses). The belief that the government should ease off on the austerity and perhaps give the economy some much needed support is becoming more and more widely accepted, especially with the fact that UK government bond rates are at an all time low.
In short the message is that the benefits cap is probably going to do lots of harm and little good, and there are plenty of other options which could be adopted.
ConDem Government: Bad Choice
