There are very few things in life that are more straightforward than the economics of paying benefits to those who need them.
The simple, straightforward, obvious fact that should be known to every politician in this country is that paying benefits can, and often does, pay for itself. The reason is simple.
Almost no benefits are paid to anyone with a high income. The majority of benefits are paid to people on very low incomes. And, what should be glaringly obvious to anyone who thinks for a moment about people on very low incomes is that they will spend almost every single penny they get on meeting their essential needs in life.
Understanding this really matters. If you listen to the average right-wing politician, you would think that every penny given to a person on benefits is money wasted. Nothing could be further from the truth. Money spent providing people on very low incomes with benefits does, in fact, enhance the wealth of the UK, and most especially, the wealth of the wealthiest in the UK.
That needs some explanation, because it is countercultural to make such a claim, and yet it is obviously true. If a person on benefits spends all the income that they get, it is not wasted, but it does, instead, become the income of someone else.
That someone else might be a carer, paid to provide them with support.
Or, it might be a supermarket that sells them their basic household needs.
Alternatively, it is an energy company, a landlord, or anyone else to whom they have to pay their bills.
The key point is that their spending is someone else's income. So, if you cut the income of those on benefits, you inevitably cut the incomes of all those people who enjoy the consequences of people on benefits spending whatever it is that they are paid.
In fact, this virtuous cycle created by the benefits people receive being spent back into the economy does not just happen once, but it can happen many times. Economists describe this as the multiplier effect. This also needs explanation.
Let's presume that the recipient of a benefit spends it all at a supermarket. Of course, that is not the end of the story. The supermarket will pay over VAT, and potentially corporation tax, as a consequence of receiving the income from the personal benefits. The government gets an immediate cut from the spending of those on benefits, in other words.
But then, the supermarket also pays staff, and as a result, income tax and national insurance are paid. The government gets another cut in that case.
Another part of the sum spent at the supermarket also goes to the suppliers of goods to that shop. VAT is also paid on that, and of course, the supplier might also pay corporation tax, business rates, and their staff, with yet more income tax and national insurance going as a result to the government.
But let's be clear, although tax is paid, everyone will have money left over after those liabilities are settled, and since the bottom 70% of households in the UK have remarkably few savings, this means that most recipients of most wages will also recycle almost all the net income they get back into the economy, meaning that this whole cycle then begins again, with more tax being paid every time the cycle happens.
In fact, the cycle would almost inevitably continue until all sums spent into the economy as benefits were returned to the government as taxes paid, unless it is interrupted, which it is when someone saves the money that they receive. Then, and only then, will the tax payment cycle come to an end. And, ironically, it is the savings of the wealthy that actually prevent the government from collecting as much back by way of tax paid as it might have done by paying benefits in the first place.
If you believe in neoliberal economics, you also, inevitably, believe in what is called trickle-down economics. This theory suggests that if only the wealthy are allowed to accumulate more wealth without limit (in other words, without taxation interfering in that process), their additional wealth will eventually trickle down through the economy, benefiting everyone.
In fact, the exact opposite is true. As my example shows, paying benefits into the economy creates a benefit for everyone, which can deliver growth, help balance the government books, and improve well-being right through the economic cycle, except for the fact that the wealthy, who can afford not to spend, prevent this happening to the maximum extent precisely because they do not need to spend all their income, and so save some instead. They do, as a result, stop the virtuous spending out of income from benefits that otherwise happen.
There is, however, another important point to draw out of this. Because it is the savings of the wealthy that halt the economic growth that results from benefit payments, they ultimately become the beneficiaries of these payments. In that case, there is no such thing as trickle-down. There is only a case of wealth flooding-up.
That is why we need additional taxes on wealth. With them, we would reduce the amount that the wealthy save, and release more funds into the economy via higher benefit payments, which would improve income and wealth for everyone, including the wealthy, if only they really understood how the economy works.
It is the economic ignorance and unenlightened greed of those who promote neoliberal economics that is, then, preventing us from having the benefit system that we need, and also preventing us from having the economy we desire.
Taking further action
If you want to write a letter to your MP on the issues raised in this blog post, there is a ChatGPT prompt to assist you in doing so, with full instructions, here.
One word of warning, though: please ensure you have the correct MP. ChatGPT can get it wrong.
Comments
When commenting, please take note of this blog's comment policy, which is available here. Contravening this policy will result in comments being deleted before or after initial publication at the editor's sole discretion and without explanation being required or offered.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
The obvious conclusion we can draw from this is that a government that aims to grow the economy should start by increasing the amount of of the benefits that they distribute rather than reducing them.
Yes. Within reason, obviously.
in theory the more you pay people benefits and the higher the amount you make the benefits the more the economy benefits, does this then make a case for a basic income policy?
I like the idea of guaranteeing a basic income.
But UBI makes no sense
The problem is I believe that those at the top are already not seeing people who are there in the economy – these people don’t register with policy makers in the pockets of capital because as your previous post says, growing money by financial engineering and public sector retrenchment is what matters. Why bother collecting all those little transactions when I can use my money to raid and steal someone else’s work on the stock market or steal a bit of the public sector at a knock down rate and get a big transaction?
So, it’s a valid argument you have, but already it is money that matters – not people. What we have is a cognition problem; money has been separated from people and its tangible outputs – stuff that makes things work. Money is becoming detached from reality because it has made human beings who have too much of it ill – pleonexia, dragon sickness whatever. And because they are ill, they are dangerous to society. The rich are the typhoid Mary’s of our generation.
In the terms of quantum physics, they are seeking to disentangle money from reality.
They will not succeed, but it will be mesas whilst they try.
I would write to my MP about this issue but as he is a two faced failed ex Tory Minister only interested in himself there isn’t any real point.
His track record of voting to ingratiate himself with his ‘Leader’ on all issues – including ones where the way to vote was obviously opposite to the way he did, demonstrates a man with no redeeming morals of any sort. It’s probably too complicated for his brain dead gnat sized intellect to understand anyway.
Labour told us last year that state spending should balance taxes and borrowing should only be for investment.
You have explained many times why the assumptions behind this don’t reflect reality.
When I have tried to explain the benefits of state investment, most will concede it has value but most will argue that only applies to things like new infrastructure and not benefits or even higher wages for public servants. I fear we have a way to go before the penny drops. Most don’t see the bigger picture of the economy which you do.
It gives me no end of frustration to keep hearing the phrase “but who’s going to pay for that!” when we talk about supporting people with better wages and benefits. Your explanation is bang on, but I think we also have to go and bang the collective government’s heads together.
The biggest hurdle to kick-starting the economy through injecting money “at the bottom” is this social problem we have become mired in – that the problem of poverty has been successfully turned into a ‘deserving’ conversation by the right wing.
In other words, “all those lazy scoundrel layabout dole scummers” don’t ‘deserve’ benefits or livable wages. But it only takes one round of injection to prove the experiment – with a well thought out scheme of welfare paid out to anyone living below the poverty line we could eliminate this problem. And if Labour had the guts to do it, they’d secure themselves the next election, with or probably without the right wing press.
Now when the government cuts benefits, with the idea of saving expenditure, this has an unforeseen consequence in that the cut in expenditure also means that the government will not receive the taxes
the government expects and the expected reduction in debt will not happen.
CUTTING BENIFITS WILL NOT REDUCE THE DEBT.
Agreed
Neoliberalism is also underpinned by a fake morality too, the morality of those often lower than a snake’s belly but who act as if God is on their side, no matter how vile their attitudes, opinions and comments may be.
The last round of the Tory Party saw some of that, it seemed to be who can suggest the nastiest and most vile thing this week. Political talent, acumen, ability or anything else is irrelevant, all they wanted was more an more fascist lite and fascist rhetoric and hey presto we’ve got our Tories. As someone said, it should be called sado-populism.
I barely can believe the last 10 years, let alone the 40+ years of it all. Yes, I know Callahan’s Labour Party wasn’t up to much either but this doesn’t excuse the monstrosity and abomination of what passes for politics and the social and economic landscape we now have.
So yes, the morality of those without moral or other restraints becomes a sick inversion of what real morality, truth, justice and fairplay should look like. Of such horrors has the world been adversely shaped by. We’re living through it at this time. A speck of truth and honesty shows up what a load of brain addled and amoral nonsense it all is, the cesspit of UK governmance and the whole shebang.
The potential savings rate will also have an impact on the ‘velocity of money’ too!
Correct
For anyone who thinks it’s just Richard’s opinion that consumer spending is a major contributor to economic growth, the OBR have kindly put some figures to it, figures which seem to be surprisingly widely recognised (except by the media, economists and politicians, especially Party leaders):
‘Household consumption is the largest component of expenditure, representing around two-thirds of GDP.’
( Office of Budget Responsibility)
But does investment via savings promote growth? I asked ChatGPT: “What percentage of savings in the UK are invested in ways that truly promote growth (e.g. new businesses, infrastructure etc.) as opposed to simply bidding up the prices of shares, property etc?”
ChatGPT’s summarised answer was “well under 5%”. It said…
While it’s not possible to quote a single, exact percentage without oversimplifying, it’s clear:
• The vast majority of UK savings do not support new business creation or infrastructure.
• A very small slice—likely well under 5% of total savings—is channelled into growth-promoting investment.
…So the oft-repeated argument that we need rich people to have vast savings which they invest in our future is a weak one.
And if people “leave the UK due to higher taxes”, only <5% of their savings made any positive difference.
Interesting
Thank you