Can we get off the welfare state escalator?
Previewing a new book: ‘On Morality, Human Behaviour, and Economics’
Dr Chris O’Leary, Senior Lecturer – Public Policy and Homelessness, Manchester Metropolitan University
This essay previews a chapter by the same author in the forthcoming book ‘On Morality, Human Behaviour, and Economics’ jointly published by the Institute of Economic Affairs and the Vinson Centre for the Public Understanding of Economics and Entrepreneurship at the University of Buckingham, later this week.
Every UK government since 1979 has pledged a ‘once in a generation’ reform of welfare benefits. Pensions, unemployment support, sickness and disability, and housing subsidies have all seen a plethora of reform proposals over the past 50 years, with governments claiming that they are moving people into work, reducing welfare dependency and cutting the benefits bill.
The reality is very different. Reforms have been piecemeal and minor rather than radical and significant. The welfare bill continues to climb, and the numbers of people dependent on the state continues to grow. Over half of the UK population now receive more from benefits than they pay in tax, with over a third in receipt of welfare benefits. The share of GDP spent on working age benefits has more than doubled since 1979, and a fifth of the working age population is economically inactive, a number which continues to rise post-pandemic. The benefits bill is around £350bn and expected to rise substantially over the coming two decades and is one of the highest in the OECD.
This growth in the size and scope of the system of welfare benefits is known as the ‘welfare state escalator’ (Lewis, 1999). It is entirely predictable, and indeed was predicted by many including both Milton Freidman (1962, 1977) and James Buchanan (1988). It is not unavoidable.
An ever-growing welfare state is unsustainable and unaffordable. There are also moral arguments for reform, the biggest of which is welfare dependency. This not a criticism of those in receipt of welfare benefits. They are responding perfectly rationally to the incentive structures they face in our current welfare system. Rather, it is a criticism of the system that increase state coercion through ever-higher taxation, rewards rent-seeking, encourages a growing client state.
Welfare dependency is not just bad for society. It has some pretty dire consequences for those who become dependent. It crowds out, replaces and prevents voluntary mutual associations from delivering welfare services, with inevitable consequences on levels of social trust and reciprocity. It fosters long term worklessness, which increases risks of lifetime poverty, and is incredibly bad for physical and mental health. It necessitates higher taxation, which distorts consumption and replaces voluntary choice with state coercion.
What is needed is a radical, rebalancing of the welfare state, reforms reduce state dependency and increase voluntary support and self-reliance. It is a limited welfare state, which is not focused on reducing inequality but rather on provide a safety net for every citizen. Such a limited welfare state is entirely consistent with the works of Locke. Hayek and Smith (Lehton, 2015), of Freidman (1962, 1977) and Buchanan (1988), and it draws on several key tenets of classical liberalism. Such reforms need to be universal in design to prevent rent seeking. It would need to be simple to administer, to prevent capture. It should alleviate poverty, so as to counter more collectivist and equalitarian arguments. It should enable and foster voluntary mutual aid associations, so as to ensure individuals can choose whether and how their wider welfare needs are met.
In the chapter of a new book, On Morality, Human Behaviour and Economics, I put forward proposals for such a rebalancing of the welfare state. This is different in form and function to today’s welfare states. It aims to reduce economic insecurity, not reducing inequality, by providing a safety net, a basic income level that society deems necessary.
This vision has at its core two key proposals. The first is to champion the role of voluntary association in the delivery of welfare benefits and in wider civil society. Civil society is a fundamental concept in classical liberal thought, as it acts as bulwark against an expansive and coercive state, because coercion is the antithesis of liberty and freedom.
The main proposal in the chapter is that of Milton Freidman’s Negative Income Tax (1962). It would allow the state to meet the basic needs of all citizens, without distorting work incentives or incentivising rent seeking. It is simple in design and inexpensive to administer. A minimum income level is set, above which income tax is paid and below which an income – the negative income tax - is provided. This income is proportional and is paid above any income earned, up to the point at which the minimum income level is reached.
There ia a growing consensus, from all walks of life, that we need a paradigm shift in welfare state policy. Classical liberalism provides the vision for such a paradigm shift, towards a limited welfare state based on a Negative Income Tax and a vibrant network of voluntary mutual aid associations. This chapter has sought to set out how such an approach would be consistent with classical liberal principles. But it also sets out why such reform will be far from easy.