George Osborne Cuts His Own Welfare

George Osborne, the Chancellor of the Exchequer, a man whose salary totals £134,565 receives government welfare.

But he claims he is about to give up the dole in the interests of fiscal sanity.

In an Op Ed in the Daily Mail Osborne writes:

This week my family will not receive the child benefit we’ve been getting every week since our children were born. Any household where at least one member is earning more than £60,000 will be in a similar position.

They can either choose to stop receiving child benefit, as we have done, or they can have the equivalent sum taken away through the tax system later.

Those earning between £50,000 and £60,000 will lose a portion of that child benefit cash.

It’s not an easy decision we’ve taken as a Government – these days, there aren’t any easy decisions.

Osborne’s claim is that only through contracting spending can we reduce the deficit, and only be reducing the deficit can we have a brighter future. He couldn’t be more wrong.

While it is absurd that rich men like Osborne receive child benefit that they don’t need while severely ill and seriously disabled individuals are thrown off welfare and told they are have to find work (even though unemployment is already elevated, with eighteen people applying per vacancy in 2012, so just how disabled and sick people are supposed to find work in such a depressed economy is quite a conundrum) this is merely a side issue to the wider folly of Osborne’s economic policies.

Balancing a government budget is not simple arithmetic like balancing a household budget. The two policy tools typically discussed in dealing with deficits — cutting spending, and hiking taxes — have powerful hidden effects that often (paradoxically) make deficits bigger, as has happened in the case of the extreme austerity in Greece.

If spending on welfare is cut, then the income of those who would have received that spending is cut, in turn cutting the incomes of others — shops, manufacturers, service-providers — who could have otherwise sold things to them, cutting the incomes of their suppliers, and so on.  And the government will also lose any tax revenues that would have been paid, shrinking revenue and leading to bigger deficits.

If taxes are hiked, then not only does this shrink disposable income — leading to a similar contractionary effect as welfare cuts — but it also leads to Laffer-curve-style tax avoidance, as those subjected to higher tax rates move their income offshore, and use loopholes and creative accountancy to avoid paying taxes. This too can actually drink revenue and lead to bigger deficits.

The better option is to stop trying to balance the budget using contractionary budget cuts and tax hikes and instead focus on increasing output and decreasing unemployment by growing the economy. If the economy grows significantly, and government spending remains the same, then the budget deficit will by definition close itself (and the welfare bill will by definition shrink as more people find jobs). Although the capital markets are offering governments the ability to borrow at very low rates, there is really no straight binary choice between debt-fuelled stimulus and austerity. Policies that promote growth are possible without adding a penny of debt.

  1. Attract more foreign capital into Britain — there are trillions of dollars of foreign capital in emerging markets like the middle east, Russia and China. Britain could offer British citizenship and other incentives for citizens of foreign countries that invest in the UK. Foreign capital can be used to improve British infrastructure, like improving the road, rail and broadband networks, which will in turn provide new jobs.
  2. Increase entrepreneurship — use the bailed-out part-nationalised banks as a vehicle to offer business startup loans to unemployed people. There are millions of jobless people who want to work or a start a business, but cannot because of credit conditions and the weak job market.
  3. Deregulate small business — decrease the regulatory and tax burden for new businesses. Make it easier and simpler to achieve planning permission to build new homes.

Indeed, the current government has paid lip-service to some of the above, but with few tangible results. Britain’s difficult immigration laws continue to deter foreign investment. Four years after the bailouts and in spite plenty of promises from the government, the banking sector is still not lending to small business. The overwhelming thrust of the government’s policy has been contractionary austerity. And the overwhelming result has been weakness and contraction:

uk-vs-us-real-gdp-in-current-downturn

If Cameron and Osborne don’t change their strategy — move away from trying to cut absolute government spending, and move toward trying to boost the wider economy, and so cut government spending as a percentage of GDP, then the economy is highly likely to stay depressed.

And that would be a cut to everyone’s welfare.

About these ads