George Osborne and the Politics of Means-Testing

by Reihan Salam

George Osborne, Britain’s Chancellor of the Exchequer (it’s really wonderful to type that, I have to say), has embraced Iain Duncan Smith’s proposal for creating a universal credit scheme designed to tackle the problem of high effective marginal tax rates for low earners. As The Guardian reports:

The government is to bring a universal single payment of welfare that will cover tax credits as well other benefits including housing benefit, jobseeker’s allowance, and council tax benefit. But the 10-year timescale suggests the Treasury is still sceptical that this scheme, advanced by Iain Duncan Smith, is practical. But Cameron suggested yesterday that some universal benefits given out irrespective of income, for example, the heating allowance to anyone aged over 60, could be reined back to free up money to use elsewhere. Others possibilities relate to child benefit and education maintenance.

Government sources said the credit would first apply to 1.5 million unemployed people, before extending to all those eligible for benefits, including those in work.

By starting with the unemployed, the scheme should realise savings within four years – the period of the spending review. The unemployed are due to be placed on a new, integrated work programme, under which voluntary and private sector providers will be paid according to the length of time they keep someone in work.

One of the most controversial aspects of this initiative is that it will claw back child benefit for more affluent families, a step that Paul Goodman of ConservativeHome opposes:

 

I’m not asking for universal rather than means-tested payments in general.  I am for asking, in each individual case: what’s this payment for?

Child benefit is for recognising the costs to families of raising children.  That’s what the old family tax allowances were for.  That’s what this (mis-named) payment does.  I believe that its purpose is sound.

We rightly slammed Gordon Brown for dragging more and more people into dependency on means-tested benefits.  Why would the facts be different were a Conservative Chancellor to do the same thing?  Child Benefit must not be rolled into the Universal Credit.

Yet James Forsyth of The Spectator, one of my favorite political reporters on either side of the Atlantic, points to a potential upside to this approach:

Now, if you accept that the poor are currently being taxed to provide child benefits for the rich (a slight exaggeration given that higher rate taxpayers contribute far more than they take out in services) then this argument applies with equal force to all other universal benefits. Why should someone on £17,000 a year pay taxes to help cover the cost of Felicity Kendall’s pension or Judi Dench’s winter fuel payment?

 

Labour understands this point and that Osborne has, as I say in the magazine this week, laid a trap for them: if they accept the child benefit cut they’ll be accepting a shift from a welfare state to a welfare safety net.

Conservatives have rarely succeeded in rolling back welfare state provisions, and it’s not obvious that this effort will prove any different. But I’m gratified to see that Osborne has made an effort to protect the poor while making the case for middle class and affluent households to make their own way. I’m sympathetic to Paul Goodman’s position, yet the parlous state of Britain’s public finances suggest that this is a necessary measure. And if cuts are to be made somewhere, better they be made to “weak claims” rather than “weak claimants,” to use David Stockman’s language. 

P.S. I should clarify something important! Withdrawing benefits will of course increase implicit marginal tax rates. But IDS has been working on this question for years with a special focus on MTRs for the poor, culminating in his Center for Social Justice report on “Dynamic Benefits.” As Peter Hoskin wrote in July:

The expectation, though, is that the end result will follow the broad contours of the “dynamic benefits” system proposed by IDS’s Centre for Social Justice last September. We’ve summarised that here and here, among other articles and posts – but the basic idea is that various out-of-work benefits can be rolled together into a universal benefit, which would then fall at a uniform rate as claimants get back into work. This avoids the alarmingly high marginal effective tax rates that claimants currently face. For some, an extra £1 in earned income can effectively put less than 10p into their pocket, as tax increases and benefit withdrawals kick in.

The actual reform proposed by IDS and Osborne doesn’t solve this problem by any means, but it is sensitive to the goal of encouraging poor individuals to work, as Nicholas Timmins reports in the FT:

The white paper suggests that while marginal tax rates of 90p and more may go, the likely guarantee is that people in work will retain at least £2.50 of each extra £10 they earn. As a Conservative MP put it, a 75 per cent withdrawal rate would still be “a pretty big deterrent to most of us” – let alone bankers.

This looks like progress, but of course that remains to be seen.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.