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

Greeks Want to Stay in the Euro? Why Don’t They Move to Germany?

Above 80% of Greeks want to stay in the Euro:

About 80.9 percent of Greeks believe Greece should struggle to stay within the eurozone “at any cost,” fresh opinion polls showed on Wednesday.

Some 45.4 percent of respondents in a survey conducted by GPO firm for local private television Mega channel said that they regarded as most probable a Greek exit from the European common currency. And 48.4 percent of the respondents said that such a prospect was less likely.

But they don’t like the austerity measures that staying in the Euro entails:

About 77.8 percent expect the next government to emerge from the June 17 general elections to renegotiate the harsh austerity terms of the two bailout deals reached since May 2010 with international lenders to avoid a disorderly default

So the question is why don’t they leave Greece and move to the core where companies are hiring and public services aren’t being slashed, and where there is no overhanging threat of being thrown out of the euro?

Greeks claim that that’s exactly what they want to do:

Conducted in January by the Focus Bari company using a sample of 444 people aged between 18 and 24, the study shows 76% of interviewees believing that leaving Greece would be the best response to the effects of the economic crisis.

But they’re not doing it:

However, for most of them, the idea of leaving appears a dream that cannot come true. Half of those interviewed (53%) spoke of having thought about emigrating, while just 17% said that they had resolved to leave the country and that they had already undertaken preparatory actions.

A slightly lower percentage (14%) stated that they were forcing themselves quite consciously to stay in Greece, as it is their generation that has to bring about the changes that the country so desperately needs.

And it’s not even like they have to return home should recent immigrants become jobless — after twelve months working in another European state, Europeans are generally entitled to welfare:

Who can claim benefits in the European Economic Area (EEA)?

You may be able to get benefits and other financial support if any of the following apply:

  • you’ve lived, worked or studied (a recognised career qualification) in an EEA country
  • you’re a stateless person or refugee and you live in an EEA country
  • you’re a dependant or the widow or widower of anyone who was covered by the regulations (your nationality doesn’t matter)
  • you’re the widow, widower or child of someone who worked in an EEA country and was not an EEA national or a stateless person or refugee (but you must be a national of that country)
  • you’re not an EEA or Swiss national but legally resident in the UK
  • you’ve lived in the EEA country long enough to qualify

Just twelve months of work separates a jobless young Greek and austerity-free arbeitslosengeld

Yet this isn’t just a Greek issue. Labour mobility is much lower in Europe than the US:

The fact that labour mobility is low in Europe is indicative of a fundamental problem. In any currency union or integrated economy it is necessary that there is enough mobility that people can emigrate from places where there is excess labour (the periphery) to places where labour is in short supply.

Now, there is free movement in Europe, which is an essential prerequisite to a currency union. But the people themselves don’t seem to care for utilising it.

Why? I can theorise a few potential reasons people wouldn’t want to move — displacement from friends and family, moving costs, local attachment.  Yet none of those reasons are inapplicable to the United States. However there are two reasons which do not apply in the United States — language barriers and national loyalty. It is those reasons, I would suggest, that are preventing Europe from really functioning as a single economy with a higher rate of labour mobility.

The people who built the Euro realised that such problems existed, but decided to adopt a cross-that-bridge-when-we-come-to-it approach:

I am sure the Euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.

Romano Prodi, EU Commission President, December 2001

But long-term and deep-seated issues like language barriers and nationalistic sentiment cannot simply be eroded away in a day with an economic policy instrument. No bond-buying bazooka can smooth the underlying reality that Europe — unlike the United States — is not a single country.

Greeks who want to stay in the euro in the long run would do well to move to the core.