This article previously appeared in the Daily Telegraph (28th April)
Yesterday, the Office for National Statistics published figures showing the level of net dependency on the UK State. Their figures define net dependency as the proportion of households receiving more in benefits (including benefits in kind) than they pay in taxes. The figure now stands at 50.5%.
In the 1980s and 1990s, this figure was just over 40% – that is to say that around four in ten households received more in benefits than they paid in taxes. But this dramatically changed in the New Labour era, which left office with well over half of the population being deemed net dependent on the State. In 2010, the level of net dependency had jumped to 53.5%, representing a 10 percentage point increase since a decade before.
Of course, part of the growth in net dependency on the State arose from the consequences of the financial crisis. Yet Labour’s enormous increase in spending on public services and welfare was equally responsible for this worrying trend. Public spending grew from just 34.5% of GDP in 2000 to 41% of GDP just before the financial crisis hit the UK in 2007-08.
Interestingly, it was not just the very poorest that became increasingly dependent on the State over the New Labour years. The middle quintile of households – which people typically refer to as “middle income households” – went from being net contributors to the State to significant net recipients.
There has been some progress in recent years, with dependency on the State falling since 2010. The Government’s excellent record on promoting high levels of employment has helped achieve this, but levels of net dependency remain too high. Over half of households are still net dependent on the State.
Why exactly is this a problem? Well, there are potentially major democratic implications from the majority of the population being net recipients of the State.
The UK’s fiscal position remains an issue. While the budget deficit has fallen sharply since 2010, it is still around £60 billion. And, of course, the UK – like many other Western economies – will need to make adjustments from factors such as an aging population. Major structural reforms will be needed to tackle these challenges. But, of course, high levels of State dependency make it all the more difficult for politicians to advocate the necessary reforms.
There are also, of course, social consequences associated with growing dependency on the State. To some extent, the growth in dependency over the New Labour years came about due to the so-called ‘poverty trap’. The benefits system had left many workers facing some of the highest marginal tax rates in the OECD, leading to a huge disincentive to enter the labour market.
It is important for the next Government to reduce dependency further. Thankfully, the Coalition Government and the Conservative Government since 2015 have begun to deal with issues associated with working incentives. Those in receipt of Universal Credit will now face marginal tax rates of 63%, which is a major improvement from the past. However, more needs to be done in reducing this. After all, this rate is still over 50% higher than the top rate of tax.
Broader welfare reforms are also important, and many of the changes made to working age benefits over the past few years have been necessary. However, savings from the welfare bill cannot be purely focused on the working age population.
It is also now time to address the issue of benefits for pensioners, who have largely been shielded from cuts in public expenditure. The triple lock on pensions, for example, is becoming increasingly hard to justify going forward. Had state pensions been linked to earnings instead of the triple lock since 2010, the Exchequer would have saved over £7 billion per year. This policy is not sustainable in the long term.
Simply attempting to alleviate difficult economic and political circumstances with high levels of spending can only ever be a short term fix. While it is, of course, welcome there has been a fall in dependency since 2010, it remains too high. The next Government must continue seek to continue this downward trend.