Politicians keep telling us that benefits are a black hole draining the economy. The truth? They're one of the best ways to grow it. In this video, I explain why paying benefits to those who need them keeps money moving, creates jobs, raises tax revenues and actually balances the books.
This is the audio version:
This is the transcript:
If you ask the average politician about benefits, they will in some way or other imply that we are pouring money into a black hole and we've got to cut them, because that's the only way in which the government can balance its books, and apparently the government balancing its books is vital for economic growth.
All of that is complete and utter nonsense. The actual reality is that making benefit payments in the UK is one of the best ways that we have available to us to stimulate growth in this country. If Labour only understood that, they would never have got themselves into the mess they did around personal independence payments. They would never have had to fall out with their own party. They would never have looked like the fools that they now do. But they were totally confused by neoliberal myths. So let's talk about the economics of benefits.
Let's be clear. The benefits that are paid by the UK government do almost entirely go to poorer households, those who are in the bottom half of the income distribution overall.
Yes, some of them do go to people who have reasonable incomes because they are in situations where they need those benefits to be paid to them. For example, people who do have personal independence payments, who can work, but who nonetheless need to be assisted with the extra costs that their disability creates.
Nonetheless, though, however it is looked at, the vast majority of the benefit payments in the UK go to people on lower incomes. And if there's one thing that we know about people in the UK who are on lower incomes, it is that they have very few savings. Only 9% of UK wealth is owned by people in the bottom half of the income distribution. And as a consequence, what we know is that the vast majority of the money that they get month in, month out is spent by them and virtually straight away.
But that doesn't mean to say that the money that we pay them in benefits is wasted. Far from it, in fact, because the reality is that the moment the people who receive these benefits get them, they begin to spend them and they become someone else's income. The benefits that a person receives immediately begin to support somebody's job, somebody's business, or somebody's services. And understanding this is absolutely vital, because if we understand that benefit payments immediately become the income of people who are working inside the economy, what we can see is that benefit payments don't just support those who need them, but they support our businesses as well.
And what is more, they also support tax receipts because the moment that a person spends the money they receive by way of benefits, they'll do so with a business that will probably pay VAT as a consequence. It'll also pay corporation tax. And that business will then pay its staff, who will, as a result, pay income tax and national insurance. So the benefit payment gives rise to an almost immediate, significant tax flow back to the government. The money isn't lost. It's fueling government revenue.
But this isn't a process that happens once, because of course, once the staff who are paid by the business who receives the income that the benefit recipient had, have their net pay at the end of the month, they'll go out and start spending it, because they, most likely, will still be in that group of people in the UK who save very little. So they too will now be boosting the UK economy as a consequence, in effect, of the benefit payments which were paid to the person who paid it to the business that employed them, that then provided them with the opportunity to spend, and so the cycle goes on.
We do, in fact, create a virtuous cycle, which economists call the multiplier effect because this money goes round and round and round and round; okay, always in ever smaller amounts, because tax is paid on each and every cycle, but nonetheless, first of all, there's a boost, and a continuing boost to real incomes as a consequence of the benefits payment made to the first recipient, but secondly, tax is paid on every occasion when the money goes around in this cycle. And as a consequence, it could, if the cycle kept running, actually return to the government, all that it's spent by way of the benefits payment.
Benefit payments aren't, therefore, money poured into a black hole. They're just a way of actually generating economic growth for vastly more people than the recipient in the first instance, and also a way of guaranteeing that the government will, as a consequence of that growth, which is created as a result of the benefits payment, get as much back in tax as they probably spent.
Except, and here I have to add a caveat, except if the person who receives the money, which was originally generated as a consequence of the benefit payment to the first recipient who went on and spent it, if the person who receives that income then saves it. The person who saves the money they get as a result of the cycle that I've just described breaks the chain. They stop money going back into the economy. They stop the cycle working. They stop there being new income for somebody else because they've kept money for themselves. They've turned this live money, which is creating good things in the economy into dead money, which is precisely what savings are, they're money put aside and it's dead thereafter.
Now, neoliberals don't describe things this way. They say that we should, if we want to grow the economy, let the wealthy get as wealthy as possible, and then their money will slowly trickle down into the economy and that this will, as a result, make everybody richer. There's absolutely no evidence to support this absurd claim, because if you are rich and you get some more income, which is what the neoliberals say we should ensure that the rich do get, you save it. And when you save your money, nothing trickles down. All you do is just turn it into yet more dead money.
And that's what neoliberalism is all about. It's about capital accumulation for a few at cost to the many.
But if we start injecting money instead into the economy with those who are amongst the poorest benefit recipients, what we can guarantee is that we get the maximum payback on that money because it will circulate many more times before the wealthy get their hands on it, put it aside, and break the cycle of growth, which it gives rise to.
Far from wealth trickling down, the truth is that wealth in our economy floods upwards, and it is the accumulation of wealth by the wealthiest that actually prevents the reality that growth could be much larger than it is in the UK if only they didn't put money aside.
Now, what does that mean? We need to stop the wealthy from hoarding is the actual truth of the matter. Far from money being wasted on making payments to those in receipt of benefits, as most of the wealthy would claim, where money is wasted in the UK economy is by letting the wealthy have it, who then don't want to use it.
And that should be glaringly obvious. Leaving money with somebody who doesn't want to use it can never create new wealth because nobody's got it to spend. So as a consequence, what we need to do is, and let's be blunt about this, tax the wealthy more, redistribute to those on lower incomes, and as a consequence, that dead money, which the wealthy had, which we've now put back into circulation as a consequence of taxing them so that we can then manage the consequences of giving those on benefits more money to spend, that process will fuel growth.
Giving money to the wealthy won't.
Giving money to the poorest in our communities will.
Benefits are the way to make our economy stronger.
They're not about charity.
They're not about feeding black holes. They are literally about how our economy is kept running.
And it's the greed and ignorance of neoliberalism that has fueled the imaginations of politicians who actually believe all the nonsense that it has to say that is holding us back.
We can beat the problem of low growth and a stagnant economy, but we can only do it by taxing the wealthy more and by providing more income to those who do not have enough because they will spend it, and that will fuel our economy, and employment, and growth, and investment.
And what is more, and let's be clear about this, the government would even balance its books because the money would circulate for longer before it ended up in somebody's savings account, and as a result, government revenues as the proportion of GDP were rise, not because we increased tax rates, but simply because the money was allowed to circulate for longer.
The economics of benefit payments are the reverse of what we are normally told, but that's always true in macroeconomics, because macroeconomics normally runs the other way round from microeconomics, which is the economics of the household. And far too many of our politicians believe that the economics of the household are what should be applied to the management of the state.
They're not. If we only understood that if we feed money into the bottom of our economy, we get the maximum growth rate, but if we feed it into the top, we get the lowest possible growth rate, then we would have a better economy, a better society, and better off people. Why don't politicians want that? I wish I knew.
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This post is excellent but I think Kevin Bridges’s version is more entertaining:
https://www.youtube.com/watch?v=c8mRWW3C_Kk
🙂
Very good
Should we invite him to do a guest post?
Do you think a high‑quality universal state pension combined with free elderly care could have a major effect on the economy and public finances, as it would massively reduce the need for saving?
With a generous, secure, inflation‑linked pension for everyone, individuals would no longer feel compelled to lock away savings in private pension schemes. In addition, it would collapse the need for the tax subsidies that back the schemes. Freed from private pension contributions, the money could instead be redirected into consumer spending, growth‑oriented investment, and tax‑raising activities that buoy GDP.
The risk of costly future long‑term care induces significant private saving – I suspect £ billions annually held back from the economy. By providing free, dignified care as needed, we would relieve this pressure, boosting demand and consumption.
Stimulating growth, increasing tax revenues, accelerating deficit reduction. What’s not to like?
This is the sort of radical thinking we need
I intend to explore such issues iver coming weeks / months
Similarly, we could increase the tax allowance to offset the tax gain from taxing and national insurance on non earned income
Thereby keeping the idiotic LINO promise that taxes wouldn’t be increased, its just being redistributed
Is it possible to get a rough idea how much this would increase tax allowance by ?
Not right now….sorry
If I may add to this: the Euro Commission has just passed a state aid package – allows govs to support industry by providing a subsidy to them for up to 50% of the cost of wholesale elec in the bills (provided the wholesale elec does not fall below Euro50/MWh).
Exactyl the same result (cut of 50% in the price of wholesalec elec) would be achieved through elec’ market reform (apologies for the broken record). I don’t see this is radical – just fixing total market failure – which is widespread in society – but the winners from this failure do not want change (something to think about ref pensions).
In both cases (pensions & elec) complexity provides the angles needed for “players” to make money. KIS (keep it simple)
Why do they find the bleedin’ obvious so hard to see when you and I can spot it from a mile off?
Thanks Cliff.
Agree with this wholeheartedly.
We are saving for our retirement, we have no desire to rely on the state pension. The money will be spent eventually, just not yet.
These are exactly the reasons that I save. Were these things provided as you describe, I wouldn’t feel the pressure to save, which is real, because poverty is horrendous, and I refuse to place myself at risk of being in that predicament. We also need to add the stress, anxiety, dread and misery that this system creates as it necessitates saving (that as you point out could be rendered unnecessary). And you speak to my current situation, as my father has dementia and is defined as “self-funding” for care, like it’s a lifestyle choice. Currently, 5 different people from 3 different agencies (nurse, social worker, etc.) visit my parents regularly, and between them they provide nothing but a state policing role (monitoring and assessment). The social worker is particularly useless, stating nothing but the bleeding obvious as well as making repellent statements such as “the beauty of being self-financing is you get to choose”. I wonder how someone with dementia living alone would manage such beauty. Actual care (food preparation, support to go out, medication support, cleaning, life administration, etc.) all have to be paid for. Actually, I do the life admin, and my mother does most of the rest. What the state does is interfere, it is judgemental and cold, disregarding the emotional and physical demands of all that caring left to families entails in a labour-divided society.
The sdtate has been corroded by neoliberalism
The best scenario from a personal perspective, of course, is to die heavily in debt…
Wow, I like this idea, just think what £50-60 billion in pension tax relief could do
The suggestion seems to be that raising Universal Credit by £20 a week would prevent something like several hundred thousand cases of mental illness.
So it could potentially save money
It could
The link between welfare payment levels and suicide levels is clear. Predictions can be accurately made between payment levels and the number of deaths, such that the increase you describe can be modelled. The single greatest suicide prevention measure that a govt can make is to increase welfare payments. States are culpable for the majority of deaths by suicide for their failure to adequately support those they assume power over and, moreover, wilfully place in untenable predicaments through the kinds of cruel and hateful policies that are rightly complained about here.
I tend to agree
But the state is now happy to usher in assisted dying, for the highest humanitarian reasons, of course.
Spot on. The politicians were at it again yesterday, complaining that the predicted rise in benefit payments was “unsustainable”. Quite the reverse, I’d have thought. (And on BBC Radio4’s Westminster Hour last night the politicians were, as so often, talking over each other again so it became impossible to listen to. At least in the actual Westminster they have strict rules about not interrupting; would that the “Westminster Hour” had a similar rule!)
Thanks
Of course I agree – but it’s not just that neoliberalism doesn’t understand how modern economies really work, nor is it driven just by greed for tax cuts. I realised this researching the struggle for allotments in the early trade union movement – which were a key demand, along with the right to emigrate, alongside the familiar pay and conditions. Often, allotments, even large gardens, and emigration, were more fiercely opposed by landowners, etc, than higher pay. Why? – because ANY additional source of nourishment or hope for a better life gives workers more power, and bosses less in what remains our economy’s central question.
In the US, studies have shown that most businesses would save money, and therefore be more profitable, if health care was provided by the state rather than employment-based insurance. Yet they mostly oppose this change. They oppose more profit. Why? – because the most important thing is workers absolutely dependent on working for them.
Agreed
Hi Richard – haven’t read much of your stuff before, but like the clarity.
Of course it is worse than this. Money doesn’t ultimately end up in savings as savings are invested in Assets – the two main being the Stock Market, and Property. This is why the market rises year after year despite the economic outlook, and why house prices are so unaffordable. A century of fiscal stimuli and budget deficits have just ended up pooling in house prices and the great casino we call the markets. In the Western World housing is 4 or 5 times more unaffordable than it was only 50 or 60 years ago.
The real problem is that our tax code is completely wrong. Gary Stevenson bangs on about “Tax Wealth, Not Work” because he acutely understands the above point. Gary has deliberately shied away from suggesting how this might be done, as he probably realises that we aren’t ready for the truth, but I have an inkling.
Taxing money being spent is easy, but it is also counter productive, as it reduces the effective velocity of money, and hence economic activity. We should tax capital gains at very, very high rates with the goal of eliminating asset price inflation entirely, and that includes inheritance / estate tax*. At the same time, eliminate virtually all consumption taxes, and most income taxes under a certain point – in fact go even further and make income taxes negative for the lowest tax bracket (aka UBI – Universal Basic Income). Keep consumption taxes for things you want to socially engineer (like Tobacco, Alcohol, & drugs (legalise cannabis and turn it into a revenue stream like most Blue US states have done). Also we should think of ways to reduce the rentier economy, which is a form of asset inflation.
One other point along these lines – with AI and robotics for the first time in human history we will have divorced the linkage between economic growth and wellbeing from labour entirely. Depending on what economic price model you buy into, that implies that the true economic price of most goods and services will go to zero (price is based on input labour)…and what THAT means, is that we break the capitalist model, and most goods and services should be part of the sovereign wealth.
In any regard, the language behind national accounts is wrong – the government doesn’t need to raise money to spend it – under a Fiat system it has access to an infinite supply. What it needs to do is to bleed out excess money from the system – and the most effective place to do that is at the point where it ends up (in assets). Inflation, not deficits is the target.
*Labour’s Farm Inheritance Tax was misguided because the farms are being valued incorrectly – they should have been valued as going concerns, not at a theoretical break-up cost based on the marginal price of land. Done this way, it would be clear that farms in the UK are not actually assets – most are barely economically viable.
Thanks
Good video particularly because it had a narrative about money moving and doing stuff (or not). It got me thinking (shout out to Mike Parr!! 😉 )
Some suggestions –
1. For those of us who struggle with the more abstract economic concepts – I like to think about actual hard cash – a fiver or tenner. Say, Mr & Mrs Sterling and their children – like “this little piggy went to market…”
The Sterling children were all born in the Bank of England because that’s where all government money comes from.
This little ten pound note became a benefit payment…
This little ten pound note became part of a care worker’s salary…
This little ten pound note paid some of the care worker’s taxes and went wee wee wee all the way back to the government
This little ten pound note became tax relief for a millionaire…
This little ten pound note became a shareholder dividend…
then we hear their story, including “this little ten pound note ended up in a rich persons savings account because they already had billions, he didnt know what to spend it on, and then it went to sleep, and was never heard from again.”
2nd suggestion – what about developing your idea of questions/dialogue in the videos?
I’m thinking of more confrontational questions, “yeah, but what about…?” type of questions.
Eg:
Yeah but…
Wont that cause inflation?
The markets won’t bear it.
Didn’t Liz Truss try that?
But surely we have to get the debt down?
Surely balancing the budget is a GOOD thing?
etc etc
(the sort of assumptions that lie behind most Richard Partington articles, but asked by an omnibus passenger – turn Thomas into an offscreen troll who cuts into your presentations?
Just suggestions from a buzzing brain.
Note to readers – you CAN try this at home.
All noted
I will train Thomas as a troll…
That’s an excellent suggestion. Answer the expected questions before they’re even brought up in the comments.
Thanks for this.
Recently I have several conversations where I describe the multiplier effect of state spending. I point out the long term effects of poverty and spending on better housing, health and education etc. is an investment but it rarely gets through. The argument with which I am confronted is that the spending has to be on assets which provide a return -such as better roads, new energy sources etc Not on ‘consumption’.
This gives an answer. My MP needs to see it.
Send it…
While I agree that benefits bring multiplier effects to the economy as well as the direct impact on the recipient, is it the case that saving is the main way the cycle gets stopped?
From the perspective of the UK economy, wouldn’t the same happen once you buy something imported, whether that is a mobile phone from China or staples like tins of beans from Italy and apples from South Africa? Or does that get nullified by the trade balances of textbook economics?
Does importing something destroy well-being?
And what about exporting. Does it?
Or do they / should they both provide value?
Discuss, as I used to say…
What he said. According to Modern Monetary Theory (MMT), (from Wikipedia) “Imports are an economic benefit to the importing nation because they provide the nation with real goods. Exports, however, are an economic cost to the exporting nation because it is losing real goods that it could have consumed.[59] Currency transferred to foreign ownership, however, represents a future claim over goods of that nation.” The last part is true in exactly the same way that savings are a future claim on the goods of a nation.
So to answer your question, @Jonathan B, from a money circulation perspective, I believe you are right – an import takes money out of circulation in the real economy. Considering that the only thing that (net) exporting country can ultimately buy with the money they receive from the importer are denominated assets (eg: government bonds or stocks), this is exactly like domestic “savings” (which similarly also always end up in assets – stocks, bonds, or property). So the money either goes back to the Treasury, or into asset inflation – in either case it ceases to be a multiplier. Interestingly from an MMT perspective, in the case of government bonds, money that is ‘frozen’ in government debt is mildly inflationary in the short term, as the government has to print money to service the debt, but can be catastrophically inflationary in the long term if it is liquidated abruptly.
I believe, but am not entirely sure, that textbook economics treats trade imbalances as purely a currency exchange phenomenon? MMT, on the other hand, treats everything from an inflation perspective – the difference being a Gold-backed currency, versus a Fiat one.
That sounds like Mosler, and he really is not right on this stuff, as I have said many, many times. If it was Bill Mitchell, he is even more wrong. Because it has a badge of MMT on it does not mean it is right. MMT is about money, not trade.
Mentioning well-being brings out the thinking behind my question.
If a disabled person receives a PIP and spends it on a carer, then that not only helps the recipient (well-being) but contributes to the carer being employed (well-being) and the government receiving some income tax (financial return in the sense usually meant when talking about multipliers). If the carer spends some of that income buying apples from Tesco, then a fraction of the money supports the supermarket workers involved with a bit going in tax, but another part goes to a South African fruit farmer and employees and their tax payments. Thinking globally that contributes to those people’s well-being and the ability of the South African government to carry out their functions. But if not thinking globally – and you suggested this as a justification of benefits payments to UK politicians who tend to think very parochially – that has become dead money.
“Discuss” is exactly what I intended. The virtuous circle gets moved across borders by buying imports, away from any UK audit of well-being and the circulation of the original benefit payment back to the government. There are a number of issues though: if the proportion of income spent on imports is lower in benefit recipients than the wealthy that might be a fiscal reason (as opposed to ethical) for prioritising paying benefits over tax cuts, and if economists claim a natural balance between imports and exports (not sure whether that is gobbledegook) then that spending indirectly contributes to well-being and tax paid in export businesses.
Stiglitz has said similar things about how to get growth. Maybe rent controls needed to stop the leakage from benefits into asset inflation/ savings of the wealthy?
That benefits to low income people will be spent on real things in the real economy – is sort of simple and obvious – but the ‘black hole’ mantra is so universally and casually embedded that BBC never questions it.
I must think about this.
Once again it’s economics for dummies. It’s literally where all economic teaching starts.
Why do so many politicians from across the political spectrum not see this?
Succinctly put, Richard. It would make an excellent party political broadcast for someone…… Frankly, if you can’t understand this, maybe you should question your fitness to vote.
Very timely, as I have referred a colleague to this site this morning. He was blarting on about there being ‘no money’, and I got this site up on his computer – and this was the first thing that caught his eye. It might shut him up (he’s the staffroom bore).
I hope so…for your sake
But he will probably be abusive and say what do I know
So remind him of this:
YI am a Fellow of the Academy of Social Sciences, one of only 10 accountants to have ever been elected to that body.
I was ranked as high as seventh in the world in taxation by the International Tax Review over a period of more than 12 years, over which period they included me in their world top 50.
I was described as social media accountant of the year for five years in a row by the Institute of Chartered Accountants in England and Wales.
In addition, two universities have appointed me to full professorships, and a third has done so to a visiting professorship, whilst three others have appointed me as a visiting fellow.
I have a Google Scholar research ranking that lists more than 3,400 people referencing my research work.
If the Treasury understood this, they would fight against austerity instead of quietly promoting it with “Chancellor, the country cannot afford this”. Sam Freedman of the Institute for Government calls the commitment to balancing the books “Treasury Brain”.