The benefits system

19 February 2011
In the UK, benefits chew up 28% of government income, and the ever-rising costs are not clearing the problems they are intended to fix. A fundamental problem with the benefits system is its complexity, which in turn means it tends to benefit those who know the system. In other words those who either are on a welfare lifestyle, or have paid someone to see how much can be claimed. It is estimated that 15-25% of eligible benefits goes unclaimed, with the dole being one of the lowest at under 65%. Having looked into the system, it is in dire need for reform, as it seems it is a system intended for the benefit of an army of administrators.

The Universal Credit is intended to fix the worse of the problems presented below, although in the short-term the simplification might actually increase welfare spending. However combining all income-related benefits into a single payment is the only way a smooth tapering of benefits can be done, and although the administrators facing the axe won't like the changes, cutting back on the complexity is an inevitable part of the road that leads the UK away from default.

Benefit fraud & errors

Benefit fraud has been estimated to cost £900 million per annum. This might sound a lot, but this is small compared to the £4.2 billion that is lost due to errors. In other words losses due to people defrauding the system are minor compared to the losses caused by people screwing up. Crackdowns in general are just all talk, and there have been high-profile cases where there costs of investigations and prosecutions far outstripped the cost of the detected fraud. 1% lost to fraud is already low by international standards, and I suspect vendettas account for most fraud detections. Considering the complexity of the system fraud detection initiatives tends to pull up people who happen to have ticked the wrong box rather than those who systematically milk the system.

Housing benefit

Housing benefit takes up £24 billion per year, which is a bit less than the entire transport budget. It is only a slice of how much is spent on benefits overall, but it is also the slice where individual claims themselves are big in themselves.

Mansions on benefits: Although there are not that many families that go to the extreme of claiming £170,000, it does bring into question whether the state should subsidise people to breed. General prognosis for such children is for themselves to have a life on welfare. Having a family is one thing, but these are cases of large families that would be unsustainable if supported via actual salaries. To financially support such a family would quite likely preclude at least one of the parents from spending much time with the children.
The ill-feeling: Even a relatively common £20,000 handout equates to a pre-tax salary of £28,100, and to pay for this £20,000 handout would require close to the entire Income Tax takings of four people on £28,100. Take account that this £20,000 is just housing cost and factor in other living costs, and sustaining the same lifestyle requires someone to be at least pretty close to the 50% income tax threshold. And this is even before considering those who claim higher amounts, where a single claimant family is being paid for by pretty much by all the taxes everyone else on the street pays. Don't mention spare time either..
Cost-blind handouts: Part of the reason for the high housing bill is that there was no incentive to keep rents downs. With price-insensitive tenants, landlords were able to charge above market rate, and this in turn quite likely helped drive up private lets. The £2,000 per week cap is still £104,000 per annum, and even then it is more a potential veto than an actual cap

Middle-class benefits

Some benefits do not even have any means-testing, and allowing middle classes to claim then is basically a way of blunting benefits from the criticism of being a nothing-for-something for those who pay the taxes that fund them. However it means that the government are well embedded as far as most people are concerned, and it is intended to make it practically impossible to change the system without pissing off a lot of people.

Perverse incentives & rampant duplication

For those on very low incomes, withdrawal of benefits with rising income means people work for next to nothing. Due to tapering, there are many instances where someone working on minimum wage is only better off by 24p working. A bit under £2 for a full day's work is not exactly an incentive when it only just about covers the bus fare to and from work. To make matters worse, those working under 15 hours (or not at all) fall under unemployment benefit, whereas those working 16 or more fall under Working Tax Credits. And there is a very nasty seam between these two systems. Some people are put off just by trying to work out whether taking on a few extra hours of work actually makes them better off, and for people who do regularly straddle this seam it is a bureaucratic nightmare. Different agencies all requiring similar information to do different assessments, with the predictable costs in task duplication.

The bill, sir

Welfare is the UK's top budget expenditure, and at £190 billion is not that far off the second and third budget items (NHS spending and Education, totalling £207bn) combined. It also is roughly the size of the country's deficit. It certainly needs to come down in the long-term, but given that the issue was shelved during a boom, it also has to be cut in the shorter-term. A 1% cut to the welfare bill (£1,00 million) corresponds to about 41% of the country's University teaching budget, and is significantly more than the entire HEFCE research budget. Ring-fencing of the Heath budget is already an expensive ring-fence, and to protect Welfare as well would require wholesale elimination of whole other departments.