From doom loop to bloom loop
Cutting social security too far will only yield further stagnation. Taxes must rise to meet spending pressures and achieve the government's missions. But how?
The government’s recent green paper on social security, Pathways to Work: Reforming Benefits and Support to Get Britain Working, outlines a series of proposed reforms that will cut social security expenditure by £5 billion by 2029/30. It includes the biggest cut to disability benefits in a generation, with a combination of more restrictive eligibility criteria and lower levels of disability benefits. Taken together, these changes will cost some households more than £100 per week, although for others this will be partially offset by an increase in the universal credit standard allowance and more funding for employment support.
We will find out more at Wednesday’s spring statement, but this morning Politico reports on potential cuts in other unprotected departments ahead of the spending review, including education, alongside big cuts to the civil service.
The government is facing daunting economic and geopolitical headwinds, and it would be facile to suggest that there is no scope for efficiency savings to be made in government, but, as Will Hutton argued in yesterday’s Observer, its response “must be more than regressing to the Gradgrind orthodoxies of the penny-wise, pound-foolish ‘Treasury brain’.”
This article outlines the moral, political and policy arguments against the planned cuts to social security, before examining how the government could finance its spending needs through tax rises (acknowledging that other options also exist, including changing the fiscal rules to permit more borrowing, in particular for defence spending).
The moral arguments against social security cuts
The government’s planned social security cuts do not pass the fairness test in relation to our five principles (the ‘fair necessities’):
Fair essentials: Social security cuts will affect millions of people in lower-income households, and will push many into (or deeper into) poverty, while increasing inequality.
Fair opportunities: Cuts will exacerbate poverty and inequality, which undermine people’s mental and physical health and their educational attainment. Wealth inequality disincentivises work by making what you own (including housing) more important than what you earn.
Fair rewards: The focus on paid work undervalues other forms of social contribution, including unpaid care work. Many people with disabilities face additional costs. Many people on benefits are in low-paid jobs that do not cover the rising costs of living.
Fair exchange: Supporting those in need is a key part of the social contract, especially given that a key reason that they are in need is that our unequal society undermines their opportunities to contribute to it, but our social security system fails to meet people’s basic needs or to help them to contribute.
Fair treatment: Equal dignity and respect should not only apply to those people who are able to work. These cuts will disproportionately affect disabled and vulnerable people, who are not being given enough input into policy changes that treat them as targets for cuts rather than as equal citizens.
The political arguments against social security cuts
The planned social security cuts also fail to address increasing public concern about an inadequate social safety net; Opinium have found that people are more concerned about benefits being too restrictive than about them being too generous. The public are more likely to lean towards thinking that “it is worse if a person who does deserve benefits can’t get them” (46%) than thinking “it is worse if a person who doesn’t deserve benefits receives them” (32%).
The policy arguments against social security cuts
Worse still, the cuts will undermine the prospects of achieving all five of the government’s missions, including growth, while damaging faith in both democracy and social cohesion into the bargain.
Missions: Social security cuts will increase poverty, income and wealth inequality, and rates of physical and mental illness. These in turn will undermine all five of the government’s missions. Poverty and ill health undermine productivity, while economic inequality denies people opportunities to contribute to our economy, wasting talent and undermining growth.
Democracy: The sense of unfairness exemplified by social security cuts (see above) is likely to further undermine low levels of public faith in the ability and willingness of ‘mainstream’ politicians to improve their lives and the life chances of their children, leaving the door open for authoritarian populists.
Social cohesion: Social security cuts, and the increasing poverty and inequality that they will cause, combine with a sense that the economic ‘winners’ in society play by a different set of rules to everyone else, and that those who have not achieved financial success are not worthy of dignity and respect. This growing issue is likely to undermine trust and increase social divides, leading to an increased risk of rioting and broader social unrest.
The alternative
A doom loop of poor public services and a fraying social safety net, low growth and poor social outcomes, stagnating tax revenues and democratic decline is not inevitable. There is another way.
This point has been made many times, but it bears endless repetition: in Britain we expect Scandinavian levels of public services alongside American levels of tax. The IFS points out that tax revenues in the UK are much lower (as a proportion of GDP) than in most other Western European countries, and the IPPR argues that most advanced economies with higher taxes than the UK have higher levels of income growth. As YouGov found last year, most Britons think that public services are poor and taxes are high, but the public are more likely to want higher taxes and more funding than lower taxes and less funding (mirroring our own research).
Higher taxes could turn our doom loop into a bloom loop, by enabling us to invest more in what the IPPR describes as “the infrastructure, targeted industrial development and public services needed to support a healthy, well-educated and flourishing workforce”. This would support the achievement of all five of the government’s missions.
Raising taxes on wealth would raise considerably more money than making damaging cuts to the social security system, while helping to correct a demonstrably unfair imbalance in the tax system between levels of taxation on employment income and wealth. Tax Justice UK have published a report showing how ten tax reforms could raise £60 billion for public services. For example, further reforms to capital gains tax could raise £12 billion per year, while applying National Insurance to investment income could raise £10.2 billion per year.
Some argue that it’s not possible to raise the amounts needed without increasing taxes more broadly, rather than targeting the very wealthy. It’s certainly true that the wealthiest 50% of the UK population - broadly, those who own housing and/or other assets - have seen their wealth increase over recent years, albeit that the lion’s share of gains have gone to those in the top 10% (and especially the top 1%).
If this is case, the obvious question is how to make broader tax rises politically feasible when the government was voted in on a manifesto not to raise rates on any of the big taxes (VAT, income tax, National Insurance and corporation tax).
Arguably, the only way to sell broader tax rises to the public is to start by asking the wealthiest to pay more. Wealth is hugely under-taxed in the UK; income is taxed at an average rate of 33%, but increases in wealth are only taxed at an average of 4%. Some people earning £10m a year pay a similar tax rate to their cleaners, because they are paid through capital gains. Tax breaks such as the ‘carried interest’ loophole that allows private equity bosses to minimise their tax contributions are demonstrably unfair (including to other high earners who pay lots of income tax). An annual wealth tax probably needs to be part of the answer, but it is by no means the only way to tax wealth more effectively.
With these changes in place, further, progressive increases in income tax rates (alongside existing ‘stealth taxes’ on income via freezes on thresholds) become more plausible, and breaking a manifesto pledge could be justified on the basis of the unprecedented and unforeseeable situation in which we find ourselves in 2025.
Higher tax receipts would allow for increasing spending on defence alongside investing in both public services and the social safety net, rather than hollowing these out in a vain attempt to find the money needed for the defence budget. This does not mean allowing the social security budget to balloon out of control. As Will Hutton has suggested: “The best way is to have the faith to invest in people. Work opportunities for the one in five adults not working, and especially for the one million 16- to 24-year-olds not in education, employment or training, have to be created and funded (and people rewarded for changing their behaviour).”
Turning the doom loop into a bloom loop, the vicious cycle into a virtuous cycle, won’t be easy - it will take guts, and will be attacked from all sides. But the alternative is continued stagnation and decline. A clear-eyed appreciation of risk is needed; the risks of cutting spending dwarf the risks of increasing taxes.