False Economy has issued another of its brilliant FactSheets, this time on five things you need to know about welfare cuts and the economy, which they say are:
1 Welfare payments can stabilise the economy
In a recession people lose their jobs, businesses stop investing and the economy risks a downward spiral. But social security, benefits and tax credits kick in, propping up incomes and acting as ‘automatic stabilisers'. Government spending increases temporarily to ensure people still have money to spend on basic needs. This means businesses have customers, keeping the economy stable and preventing a terminal spiral of decline.
2 Countries that increased welfare payments had the strongest economic recoveries
Families on low incomes are most likely to spend extra money quickly in their local shops and services, boosting demand and helping businesses. The International Institute for Labour Studies found: ‘Social and cash transfers [following the credit crunch] not only assisted those in need, but by putting cash in the hands of those most likely to spend it, helped to shore up household consumption. For this reason, countries that strengthened the policies towards income transfers managed to recover faster than others.'
3 Cutting welfare can damage growth
When deep cuts to welfare dramatically reduce the incomes of families who are already on low incomes, the opposite of fiscal stimulus happens: fiscal hindrance. Billions of pounds are removed from the active economy, so struggling businesses lose customers and lay off more staff. A vicious cycle is created.
4 Welfare cuts are shrinking the UK economy
Economists say that in a recession, increased welfare spending has a strong multiplier effect of around 1.6. This means every £1 is worth £1.60 to national income once it has worked its way around the economy through shop tills and pay cheques. When welfare is cut, the multiplier works in reverse. So £20bn of welfare cuts could depress the economy by as much as £32bn — more than 2% of GDP.
5 The Chancellor wants even deeper cuts
Despite the damage the cuts are causing, George Osborne wants to cut another £10bn from welfare. This will not just be a social disaster, it could cut a further 1% off the economy, meaning a longer depression, a larger deficit and more debt for Britain.
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False Economy is quite correct to point out the macroeconomic stabilisation effects of welfare payments. But these effects are only available in sovereign nations where the government has the cojones to stick to the policy. Places like Greece, Italy, Spain or even Germany obviously don’t meet the basic requirement of sovereignty, since they do not control their nation’s money supply. The UK is slightly better positioned, but still does not asset the necessary sovereign authority to follow through on welfare to the extent necessary.
The downsides to this approach to welfare are not mentioned. Most notably, the serious adverse impact on incentives and the high METR. (Marginal Effective Tax Rate). Welfare withdrawal rates for means-tested welfare build in a poverty trap. The welfare system is complex, burdensome and fraud-prone. It is also politically divisive.
The solution is simple for any sovereign nation willing to try – a Citizens’ Dividend (also known as a Basic Income or demogrant). This is an unconditional regular payment to all citizens. If the economic surpluses of government are all shared out among citizens on an equal basis, regardless of personal means, all the quoted benefits of welfare are delivered, without the poverty traps and adverse incentives mentioned above. The Dividend payments are made in a similar way to a universal Child Benefit, but without the age limit. Dividend payments make the state old age pension, Housing Benefit, Jobseeker’s Allowance, Child Tax Credits and similar schemes redundant. There’s even a conference this week on the Citizens’ Dividend in Munich : http://www.basicincome.org/
Any well-designed, inclusive economic system should place the distribution of a Citizens’ Dividend at the heart, rejecting costly means tests. The steady financial flow into the economy must of course be matched by a corresponding financial outflow associated with the natural economic rents (those associated with land location, minerals, fuels and certain monopolies).
Why does TJN back defective policies (such as means-tested welfare), when much simpler policies which overcome the well-known difficulties are available?
The Citizens’ Dividend is a natural complement to a Land Value Tax. Means-tested welfare has no legitimate role in a well-structured economy.
I regret I don’t see LVT as a panacea, as it is clearly not
And therefore your logical follow on is hard to conclude logical as a result