UK Benefits Crisis

poverty-ethnicity420x250By Jim and Margaret Cuthbert

There is plenty evidence that the British benefits system, with its associated tax and employment policies, has been failing Scotland for a long time, (along with the rest of Britain). There is also plenty of evidence that the situation is getting worse. Could independence really make a difference? Here we show how policies on employment, tax and benefits, (all of which are policies reserved to Westminster under the present constitutional set up), could be positively transformed under independence: and we show why this transformation is impossible under the union.

Let’s look first of all at some of the evidence of how the current system is failing Scotland. We are at present in a situation where:

1) Child poverty is rising again: moreover, 110,000 children are in relative poverty in Scotland in families where at least one adult is in work: this represents 59% of all children in relative poverty. This demonstrates how the UK labour market and benefits system fail to deliver an adequate living wage to those who earn low wages.

2) Where there are huge variations across the country in the proportion of the working age group who are consigned to poverty and inactivity because they are long term sick or unemployed: in West Dunbartonshire, no less than 19.6% of the working age group fall in this category, and in Dundee it is 18.6%.

3) There are high concentrations of pockets of intense multiple deprivation within certain local authorities – particularly Glasgow. To illustrate just how unevenly deprivation is spread over Scotland, Glasgow has 45% of all of the zones in Scotland which are in the 5% most deprived nationally, yet Glasgow makes up only 10.7% of all zones.

4) The chances of a young person in a deprived area being in neither employment education or training are almost three times as great as in the rest of Scotland. (29.4% of 16 to 19 year olds in the 15% most deprived areas of Scotland were neither in employment, education or training in 2012: 10.6% in the rest of Scotland.) This is one example of how deprivation has a powerful negative impact on the life chances of young people born and brought up in deprived areas: which in itself transmits deprivation from generation to generation.

These are just a few items drawn from an extensive factfile we have compiled, mainly from official sources, on the labour market, social conditions, and benefits: this fact file can be accessed under Theme 2 on our website, which can be accessed via this link: www.cuthbert1.pwp.blueyonder.co.uk .

So quite clearly the current system is not working. But in addition, the benefits system itself has become an instrument of oppression, bearing down on the least privileged sections of society. Again, more details can be found in our fact file: but to quote just a few:

a) the introduction of more severe sanctions on claimants of Jobseekers allowance and employment support allowance has had dire effects. Since October 2012, more than 65,000 of Jobseeker Allowance claimants have had sanctions imposed at the higher level. This implies loss of benefit entitlement for a minimum of 13 weeks and possibly up to 156 weeks.

b) The current stated intention of the UK government is to impose sanctions on universal credit claimants who refuse a zero hour contract “without good reason”.

c) 18.5% of housing benefit claimants in the social rented sector in Scotland, that is 69,916 recipients, have had their housing benefit reduced through the “bedroom tax”.  Because of the shortage of alternative smaller unit accommodation, it has been impossible for many people to avoid this penalty. (The Scottish Government has taken steps to reduce the impact on individuals at the expense of the overall Scottish budget).

d) Food bank providers in Scotland identify welfare reform, benefit delays, benefit sanctions, and falling incomes as the main factors driving the increased demand for food aid.

And not merely is the UK welfare system a cruel and failed system, it will continue to fail, because it is based on a mistaken philosophy. The basic philosophy, (which is unstated, but clearly implicit), is that the solution to the problems of economic inactivity and unemployment is to apply a big enough stick, and people will be motivated to enter the labour market and find jobs. In other words, the whole approach is based on the premise that the fault is with the individual, not with the jobs market.

This view is at least understandable, (if still mistaken), when viewed from the context of politicians with a mindset conditioned by the overheated economy of the South East of England: (after all, who can forget that the Tory Minister who resigned recently from the Foreign Office was quoted as saying that it was impossible to live in London on £120,000 a year). But to put the primary blame on the individual in areas such as Wales, the North of England, or large tracts of Scotland, is nonsensical. The current UK welfare system is guaranteed to perpetuate hopelessness and misery until the UK comes up with a viable economic model: a model which is not London centric, but which spreads economic activity much more equitably across the UK: a model which provides opportunities for all in the community and is not purely market driven.

So the case against the UK, in terms of its failing welfare system, is indeed very easy to make. But is there a positive case that things could be done much better in an independent Scotland? Absolutely.

First of all, once we are no longer shackled to the UK doctrine that poverty is the fault of the individual, we can take immediate steps to make the system more humane: for example, by scrapping the bedroom tax once and for all: by removing punitive sanctions: and by abolishing the perverse incentives on the staff operating the benefits system which lead, effectively, to penalisation of claimants and recipients.

Secondly, we need to build upon work which is already being done to give people the skills they need to participate in the labour force. Although there have been big improvements, it is still the case that those with no formal qualifications represent more than 14% of the working age population in East Ayrshire, Glasgow, North Ayrshire, North Lanarkshire, and West Dunbartonshire – and the national average is over 10%.  In addition there is a suspicion that some of the training currently labelled as apprenticeships amounts to little more than re-labelling of fairly limited training which would be taking place anyway. Increased support for apprenticeships needs to be accompanied by tougher validation criteria, so that effective skills training is actually delivered.

But none of these steps is going to have much impact on poverty and economic inactivity unless increased opportunities are available in the jobs market. This is where an independent Scottish government could actually do a great deal: and here are some examples of how.

It could use its license issuing powers in relation to oil, gas, and renewables, to make sure that much more of the employment associated with energy development actually took place in Scotland. At present, although Scotland has over 80% of UK oil and gas production, it only accounts for 45% of oil related jobs: this must change. And we should follow the Norwegian system, of making the issue of licences conditional upon partnership deals which ensure that a Scottish National Energy Corporation develops its own expertise – and is an equity partner in sharing profits.

We could do much more in Scotland to use the massive buying power associated with public sector procurement, (over £10 billion per annum), to help the Scottish jobs market. The key step would be to split up contracts, which currently can be very large, so that Scottish small and medium sized companies could compete effectively. There is no need for us to be in the present position where, for example, Scottish Water’s investment programme of around £500 million a year mostly goes to large companies with headquarters located outside Scotland: where the non PFI Southern General in Glasgow contract went to companies outside Scotland: and where public library books are almost all contracted through companies firth of Scotland.

All of this could be remedied without falling foul of the terms of EU procurement Directives. But achieving effective change will require Scottish Ministers to ensure that their writ actually runs through the network of Departmental and non-elected bodies, such as Health Boards, which constitute the public sector. At present, for reasons which are not entirely clear, Ministers have been reluctant to use their powers to make sure that every part of the public sector implements procurement policies which are fully in the public interest. Experience in other European countries operating under EU rules shows that this is perfectly possible.

To give another example of what could be done under independence: once we have control of taxation powers, we can use tax much more intelligently to encourage activity which will benefit both the jobs market and the economy. Appropriate structuring of tax incentives could ensure that companies find it much more attractive to locate activities like research and development, and headquarters functions, in Scotland. Or introducing tax allowances for work undertaken by householders on renovation and improvement could boost investment in the housing stock, with the added advantage of moving work which currently often takes place in the black economy back into the mainstream, (and tax paying), economy. This would have further benefits in terms of making a large number of small firms much more likely to increase employment, and offer apprenticeships.

Assuming that an independent Scotland is a full member of the EU, we would be in a much better position than now to get in at ground level in the design of EU funded research and development initiatives, so helping to increase participation by Scottish firms.

And a newly independent Scotland would be the focus of worldwide attention – and of positive interest from the widespread Scottish diaspora – which we would be able to harness for marketing, and to attract inward investment. It is noteable how successful Ireland has been in doing just this over the years.

These are only a few examples of the positive things an independent Scotland could do. But fundamentally, it is important not to lose sight of the big picture. The UK as a whole has a failing economic model, with decades of declining competitiveness, and a chronic deficit in the current account of its balance of payments which presently stands at around 4% of UK GDP. When you have to borrow to live, as the UK does, then tackling the problems of poverty and economic inactivity is extremely difficult: and the kind of inhumane benefits system the UK has now is an almost pre-ordained result. And another consequence of the UK’s dire economic straits, and its associated reliance on the City of London, is that it depends upon there being extremely high earners in society in order for the Treasury to get the tax receipts it needs: under no circumstances must this group of extremely high earners be frightened or over taxed into going elsewhere. Hence the following statement, not by some rabid Tory, but from Chuka Imunna, hotly tipped as a possible future Labour leader “I don’t have a problem with people making a lot of money, so long as they pay their taxes and it’s good for our economy.” (May, 2014).

Scotland’s problems are quite different. We have been running a huge balance of payments surplus: but because of the scale of the outflow of after tax profits, we have failed to benefit. Our problems are how to change things so that we retain more of these outflows, and then to use this to build a secure and sustainable future. But these are problems which are eminently solvable: whereas no-one in charge of the UK has the remotest idea how to solve its problems.

It has been an argument often put forward by prominent “no” campaigners  that the case for independence often amounts to little more than listing what is wrong with the union, without spelling out whether, and how, independence will make things better. Quite to the contrary, the above gives just a flavour of what would be possible in an independent Scotland. But the converse truth is that fundamental change is impossible if Scotland stays in the union.



Categories: Austerity Britain

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11 replies

  1. Published his earlier in the week with my colleague, Simon Duffy. An argument for basic income in Scotland, and the scrapping of the DWP http://www.centreforwelfarereform.org/library/by-date/lets-scrap-the-dwp.html

  2. As a Relief Support Worker working with ‘Homeless Persons’ in several locations, I thought I had become inured to the horror stories that ‘Sanctions’ cause.. I was wrong.
    The latest involved a ‘recovering drug abuser’ who was determined to conquer his addictions.
    A support package was put in place to aid his determination. He religiously kept to his hefty schedule of meetings with drugs workers, therapists.
    Then he was called to face an inquisition at the Benefits Office at the exact same time as the law stated he had to meet his Probation Officer.
    Simple you might think. Reschedule the Benefits Office appointment.
    No chance. He was told that he must attend or else lose his Benefits. Appeals from myself and his Probation Officer failed on ‘ confidentiality’ grounds.
    The guy had a stark choice – Miss the Benefits Appointment you starve. Miss the Probation Appointment -Go to Jail Don’t pass GO.

    In addition the scandal of Iraq and Afghanistan Veterans currently in prison or currently Homeless should shame any right thinking country.
    These are individuals that, with the right support and opportunity, could offer so much particularly in the Oil and Gas Industry.
    Our new Government must address these issues as a matter of priority.

    • Justin
      Thank you for sharing that. Only when you hear such a specific story do you realise how bad it has become.

      Why have we accepted this for so long?

  3. A Basic Income, or Citizens Income, whatever you call it, is a necessity in the long run because automation and globalisation mean there simply are not enough jobs for all the people, bu a long way. Owners of capital (the automated factories) take in all the money, and without the need to pay workers, how does the money return to the ordinary people? Without the money returning how are people to buy the goods? Only a progressive taxation system and a Citizens Income has any hope of working int he long term. You could even see the current size of the wefare state as a kind of Citizens Income with punitive social control.

    The other side of this is taxation – I think it is clear that taxing something will discourage it. So why tax poor and middle people’s labour? The fairest thing to tax is the private use of the commons, such as resource exploitation (oil, minerals etc) and of course land use – if you think the land is a common resource of the nation then shouldn’t people who exclusively occupy large areas of the country, pay into the common fund for that privelege?

    The combination of land value tax and citizens income has had serious economic argument in favour of it for generations but I guess is too challenging to the rich and powerful ever to see the light of day. But I would hope in a newly Independent Scotland that these ideas would at least get somethign of an airing and be seriously considered.

  4. Such a real waft of fresh air from the Cuthberts.

    It’s a totally missing element in UK Gov thinking, even under their ‘unthinkable’ category.

    We, who acknowledge the viciousness of the present system, know it would be seen as a perverse way to go about ‘government’ and a target for ridicule and bellicosity.

    I do hope the Cuthberts will be very close to the shaping of a new society in our independent Scotland.

  5. How refreshing to read this analysis of welfare not as an intolerable, insurmountable burden but as an important contribution to a civil society, and to the creation of a productive economy. Every day now brings forward fresh thinking on Britain’s supposedly insurmountable problems to the Scottish public, not as an academic exercise but with the prospect of ideas not just being brought forward, but to be considered practically – politically, in a new Scotland beyond 18th September, 2014; and implemented.

    What we start with in the Cuthberts’ analysis is the implicit proposition that Scotland’s under-utilised people possess talents that should be discovered, nurtured, developed and in turn, in time, that will make a contribution to society; indeed an economic contribution. That is an objective that may prove productive for many, elusive for some, unattainable for all, but it is an objective worth embracing.

    In the comments above taxation was mentioned. Taxation is necessary but it is also true that it can be “discouraging” to enterprise. In Britain the Westminster political cartel presents a false dichotomy between the needs of enterprise and tax raising. Thus when the SNP suggests it may reduce Corporation Tax by 3% (to encourage investment, job growth and therefore increase the population of taxpayers) Labour responds with an argument to raise the higher rate income tax threshold to 50%; a crude and foolish form of crass reductionism that suggests this somehow proves they are more sensitive to perceived inequality in Scotland. In fact it is just bad economic policy, and I do not need to digress into Labour’s appalling record in office as the apologists for City excess and for Britain’s failure to rein in aggressive tax avoidance to make the case.

    In 1964 Arnold Harberger showed in an influential series of papers that ‘deadweight loss’ (excess burden) caused by distortions in personal income tax in the US reduced welfare by 0.4% of GNP. Feldstein (1999) used Harberger’s approach to explore the impact of tax distortions and argued that “Microeconomic estimates imply a deadweight loss of as much as 30% of revenue or more than ten times Harberger’s classic 1964 estimate.The relative deadweight loss caused by increasing existing tax rates [in the US] is substantially greater and may exceed $2 per $1 of revenue”. This is not an argument to have no personal tax, but rather an important reminder not to focus on marginal tax rates, but rather on producing a tax regime that both encourages enterprise and labour; actually raises the tax revenues intended to be produced, and distributes the tax burden equitably. None of these things actually happen in Britain’s Byzantine, impenetrable, devious and defective tax system that is effectively designed to defeat both HMRC and equity. The marginal tax rate for the very rich in Britain is not decisive in determining the tax they pay. They may pay a very low actual rate of tax depending on the disposition of their affairs in a global economy.

    If we look at the UK’s total tax burden the Guardian noted that “the amount of tax lost through non-payment and avoidance increased last year [2011-12] to £35bn” (11, October, 2013). The capacity of major international companies to generate large incomes in the UK and pay virtually no tax has become legendary. I will not recite them here. Ironically it was a consequence of Harberger’s work that something counter-intuitive arises from the extremely bad tax systems currently operated, as in Britain.

    James R Hines has argued in a paper on Harberger’s contribution (2002) that:

    “In his original article on the subject, Harberger (1962) estimated that, using reasonable simplifying assumptions and parameter values, the burden of the U.S. corporate income tax was in fact borne primarily by owners of capital, so that this paradoxical outcome did not materialize [that corporate income taxation might increase the after-tax returns to owners of corporate stock]. In subsequently reconsidering this question in an era of much more mobile international capital flows, Harberger (1983) estimated that the burden of the U.S. corporate income tax is largely if not entirely borne by labor. The reasoning is that international capital flows more or less require that corporate investments in the United States yield the same real after-tax rate of return available elsewhere in the world. Since labor is much less mobile internationally, it follows that the primary effect of higher U.S. corporate taxes might well be to reduce the after-tax wages of American workers, with after-tax corporate profits little affected.”

    Hines acknowledges that there is not a consensus among economists on Harberger’s remarkable finding, but there are better ways to tackle the development of an efficient, useful and equitable taxation system than Britain, caught in an aspiration to turn London into the largest offshore tax-haven in the world, is capable of producing. It is one of the great, and rewarding challenges for an independent Scotland to address this issue ‘foursquare’. There is wisdom in reducing the corporate tax rate in Scotland if it corrects this failure, and also acts as a disincentive to corporations to seek to avoid tax – as the SNP proposes. Establishing tax rates requires subtlety and sophistication, not Labour’s mindless rhetoric.

    • Absolutely brilliant.

      The system used in Denmark, correct me if I’m wrong, would provoke outrage from the Westminster Parties if anyone even suggested moving in that direction.
      Yet the people in Denmark are widely regarded to be one of the most content (if not THE most content) people in the world.
      WHY?

  6. A very substantial contribution to the debate. But surely “companies firth of Scotland” should be “furth of Scotland”.

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