Benefits, inflation and redistribution

Paul Johnson

Hello, and welcome to this episode of the IFS Zooms In. I'm Paul Johnson, director of the Institute for Fiscal Studies, and today we're going to be talking about something very much in the news at the moment, the tax and benefit system and in particular its role in redistribution. I'm delighted to be joined today by Charlie Pickles, who's the director of the Reform think tank and also a member of the Social Security Advisory Committee. And Tom Waters, who's a senior economist at the IFS who spends his life working on issues of taxes and benefits. 

Now clearly, we've just had a huge mini budget or maxi budget, which has done a lot to change the structure of the personal tax system or at least to take it back to where it was a year ago. And we're having quite a lot of conversations now about whether benefits will rise even in line with prices next year as the government looks to find a way of balancing the books. So, today I hope we'll get into a bit of a discussion on how the redistribution within the tax and benefit system currently works, and how it's changed over time, and what we might want to do to make it better or indeed less redistributive, if that's what we want to achieve. So, Tom, let's start with you, can you just give us a sense of the scale of the tax and benefit system in the UK, particularly effects households. How much are we paying and how much are we getting back?

Tom Waters

So, on the tax side, in total when we look at across all taxes, something in the order of four in every £10 of national income the government takes in taxes. Now, some of that of course, is not for benefits, most of it is not for benefits, most of it goes and things like schools and hospitals and defence and so on. But when we look just at benefits, something like £220 billion a year is spent on benefits. That includes the state pension as well as working age benefits which people might be familiar with like Universal Credit. So, in total we're talking about pretty, pretty significant sums of money moving about through the tax and benefit system. 

Paul Johnson

And that pensions and benefits, what's that? About a quarter of public spending? 

Tom Waters

Yeah, something like that. 

Paul Johnson

Yeah, so about a quarter of everything that government spends is essentially money that's taken directly from us in one way or another, and given back to us. How important is all of this in redistributing things between people? I mean, Charlie, what's your - how do you describe just kind of how bigger job taxes or benefits do in redistribution?

Charlie Pickles  

They do a very big job, but I think it's important to note that within that very large figure that we just heard, about the 220 billion, I think about half of it, correct me if I'm wrong, is pensions, of course, which I think a lot of people would challenge the idea that that's really just redistribution because of course most people feel they're paying into the system and then they're getting something back. But if you look at the rest of that, so the roughly half that is going in what I suppose we would call Social Security benefits, the traditional welfare side of stuff, then that is highly redistributive. And actually has become more so I think if you think about the fact that it's become increasingly dependent on a means test. And so, you know under the coalition we saw certain kind of what were deemed middle class benefits being taken away or reduced. So, we've seen increasingly the benefit system, the welfare system, becoming something which is for low-income households, either those who don't have any income themselves or very low incomes from work. So, it plays a huge role in doing that and hopefully we might get into whether that's a good thing or whether it could be changed. 

Paul Johnson

Absolutely. And you make two really important points there, one is that a lot of the overall benefits bill, including pensions, is really about redistributing from us when we're young, to us when we're old. Obviously if you look today, it looks like the young people are paying for the old people, but the young people will one day be old and so, a big fraction of this redistribution is actually from me today to my older self. But another large fraction, as you say, is directly to people on low incomes. Though, Tom, I think it's also fair to say that quite a lot of people on low incomes now, weren't necessarily on low incomes yesterday and won't necessarily be on low incomes tomorrow, so, there's redistribution across their life as well. 

Tom Waters

Exactly, yeah. I think it's really helpful to think about redistribution in these two dimensions: redistribution across the lifetime for a given person, and redistribution between different people. And if you sort of try and tease apart these two parts of the system, some pretty large fraction of it is about redistributing within a single person’s lifetime, rather than kind of reducing overall, if you like, lifetime inequality by redistributing between people. 

Paul Johnson

And if we look at the working age bit of this, as Charlie just said, a large part of that, I mean the vast bulk of that now actually is means tested benefits. Now if we look back forty/fifty years ago, the large bulk of it would have been quite different, it would have been what much closer to what Beveridge was thinking about back in the 1940s, which was a social insurance system, you pay in and then you get out if you're unemployed, or if you're sick, or if you're retired, irrespective of income. So actually, that trend has been going up a lot longer than just the coalition government, hasn't it?

Tom Waters 

Yeah, yeah, absolutely. It used to be that a large fraction of benefits were these so-called contributory benefits, they made at most, in fact, most of benefit spending. If we went back to the late seventies, where it would typically be you pay in whilst you're working, you lose your job and then you get unemployment benefit in, sort of, in return and that that part of the system has shrunk and shrunk and shrunk. I think I'm right in saying it now it accounts for about 8% of benefits. And so, I think, yeah, that, you know, that reflects a choice that governments have made that to try and distribute money more towards those who are poor today, who you know, perhaps need help right now. And the best way of getting money to people who are poor today is to use the means tested benefit system, because that's targeting specifically on those with lower incomes, rather than kind of thinking about this slightly longer-term contributory element where you're giving cash to those who have paid in a bit more in the past.

Paul Johnson

You can see the logic of that, can't you? But what's the, there are downsides as well.?

Charlie Pickles  

You can, and there are downsides. I think there's one other thing that I'd want to add in, in terms of understanding those trends that we've seen over the past few decades, which is also that certain parts of the system have become incredibly expensive, which has forced some of those decisions around targeting at you know those with the sort of really kind of quite deep need for support. So, if you think about how much, for example, goes on housing support, so just over three decades ago, it was about, I think a third or something like that of what we spend today on housing, if you think about disability benefits, huge increases in the expenditure support disabled people. And so, as those costs have increased, obviously you can either decide to keep, you know, ever growing the welfare budget, much like we're doing with the health budget, or you have to make decisions about where you want to put that money and that's another of I think the reasons that we've seen the kind of death of contributory principle and the shift towards means testing within that. And I think that's also set policy decisions as we heard around how you support people, and so, the way in which you're redistributing income, you know, where do you want to, which parts of people's lives do you want to support? 

Tom Waters

And yeah, I'd say kind of related to that, is what that kind of underlines is how like the benefit system part of what it's doing is patching up if you like wider problems. So obviously if we had, if we could magically make people much healthier, that would reduce spending on disability benefits. Or if we could get rents down that will reduce spending on housing benefits. So, yeah, some of these big pressures on housing and disability in particular we've seen over decades reflecting the fact that there's these wider trends in society, which the government then tries to kind of patch up through the welfare system. 

Charlie Pickles

And conversely, on that point about health, if we had healthier people, we would spend less, possibly if we spent a bit more to support people, we might have healthier people as well. So, there's kind of these two sides, I think, to that coin, you know we presumably will go on, as Paul you said at the start, to talk about uprating benefits, but you know the level of benefits for some people is incredibly low and that has a direct impact on their health, which then impacts their ability to work and potentially to be net contributors to the economy rather than needing to be dependent on benefits. So, I think it's quite a complicated picture when you think about whether the way we redistribute money is actually being effective or in some ways might even be being counterproductive in the model that we've got. 

Paul Johnson

Yeah, I think that's really interesting, and it really speaks to another issue which is about who the people are who are getting these benefits. I think it is still very much in the public mind that benefits are for unemployed people. And I think it's true to say that only a tiny fraction of benefits actually go to people who are actually unemployed. 

Charlie Pickles

That that's exactly right and actually we've had some unhelpful journalists recently saying - kind of lumping everybody together essentially, and saying we've got, you know, this, whatever it is, five million people who are out of work that should be in work. But, but actually you're right, most of those people or a majority of those people are actually people with disabilities or an illness and they're not only some way from the labour market but actually they're not required even to be looking for work. You know, the system essentially says no, we are parking you on benefits and that that's what we're doing and then you have people with, for example, a lone parent with very young children with caring responsibilities who again are not required to look for work and so on aren't unemployed. And actually, probably the most striking thing, which I think people are becoming slightly more aware of in policy circles and amongst politicians, is that around 40% of the Universal Credit caseload, actually people who are in work on low earnings. 

Paul Johnson

And again, a complete, I mean a huge difference to where we were thirty/forty years ago, the increase in the number of people in work on benefits, partly because the benefit system is a lot more generous than it was certainly before 1997, and also very big increases in the number of people with disabilities. 

Tom Waters

Yeah, exactly, particularly the tax credit reforms around the turn of the Millennium were targeted at getting money towards people who are on low incomes, but not just those who are out of work, but those who are in work on low incomes as well and in some cases trying to kind of improve their financial incentives, strengthen their financial incentives, to get into work and so that has led to this this shift kind of contemporaneously with, related to this shift to means testing, this shift to target more and more towards those who are in work.

Paul Johnson

So, it's an interesting thought experiment, I mean before 1997 there was this little benefit called Family Credit, which involved I think just a billion or two going to people in work; we've now got tens of billions going in tax credits, Universal Credit, to people in work. Charlie, can we imagine a world in which we went back to that less generous welfare state where we actually weren't paying so much to so many people in work? That would save, if you would take the in-work part of the current system back to where it was twenty-five years ago, you could fix a big part of the Chancellor Fiscal hole?

Charlie Pickles

You could, yes, politically I think that would be challenging, is that the right word to say? In all seriousness, though we have a huge number of people who are in very low paid work, and so, yes, you could say, well, that's not the state's responsibility, it's not other taxpayers’ responsibility to top up that income. But as we were saying earlier, there are all sorts of knock-on effects within the you know, public services within the kind of, you know, the broader sense of the redistributive system where you would start picking up those costs. So, for example someone who - which we're seeing at the moment, even with the sort of income top ups in place - who can't make ends meet, who are struggling, the anxiety, the stress, that knock on health impacts, you're probably more likely to then fall out of work and be entirely dependent on benefits, as well as no longer paying, if you were paying some taxes or National Insurance. So, I think you would, it wouldn't be as simple as saying we'd just take off this X billion pounds and what is it, probably something in the region of 30 billion I would guess, for the current tax credits, or tax credits and the equivalent in UC, you would, some of that you would put back into the system via other costs. 

But there's also surely a moral question here, I don't if I'm allowed to say that in a very IFS economics focused discussion. But, I think you know the mark of surely, the mark of a compassionate society has to be the ability to support those who are in challenging, vulnerable situations and you know, I think it's even for those who believe that, you know, the welfare state is bloated or, you know, there should be more people kind of doing more hours or going back to work, this particular group of people, they are working and it may be that they can't work more hours or they can't get a better paid job in their local area, so, they're doing the very thing that the system wants them to do, which is to go out and work in really low paid, probably not particularly secure, maybe enjoyable, but probably for a lot of people not particularly enjoyable - you know you go out because you have to make some money because you, you know, need to pay your bills. And then we're going to turn around them and say oh, despite the fact you're doing the right thing, we're no longer going to give you a bit of extra income so that you can really meet those costs that you've got. Because let's face it and all these people are living in a life of luxury, they are still struggling even with that top up. So, I'd like to think that we would have the compassion to say actually that's not a bad thing to redistribute some of that money because some of us have been fortunate enough to, you know, have a better education, maybe a better experience in early years, you know, to work in an area which society is deemed to be more valuable in monetary terms because we happen to be able to work in that and say, you know what I'm happy to pay some of my taxes towards someone who's been less fortunate. 

Tom Waters

Yeah, I think, it kind of, as you say, it’s obviously a moral question so narrowly on the economics, there’s only so much you can say

Charlie Pickles

Back on point.

Tom Waters

Back to message. So now I think yeah it get it does exactly get to what do you think the point of the welfare state is and you know if you think the point of it is to stop people falling into kind of severe case of low living standards and, you know, really being able to not be able to afford the very basics, then you might focus more on the kind of the unemployment, the disability sort of side of things. On the other hand you think, actually, part of what the welfare state is trying to do is just to provide a better standard living to people who aren't, you know, on the brink of homelessness, but aren't enjoying particularly - are still enjoying quite low living standards. And yeah, I think obviously where you come down that is partly is partly a political decision. I think it's notable that there's been a bit of a shift away from talking about Social Security, towards talking about benefits or welfare and to some extent that reflects it because if you think of focusing on unemployment and disability, it's kind of security against the possibility that you might lose your job, or you might become seriously unwell, as opposed to perhaps more permanent, or at least at least much longer lasting arrangement where you are in work and you're going to work for many years, but getting that kind of top up regulates, it’s less of kind of a security arrangement, more of that top up to low pay.

Charlie Pickles

And it is worth I think reflecting on the fact that those households that make up households in poverty have also shifted quite a lot over the past few decades, even longer. and quite a significant proportion are actually in work, so, these are families where there is at least one person in work, often not a second earner and that's another conversation about the benefits system and perhaps how to incentivise that. But you know, a very large chunk of the families in poverty are in work in poverty, and therefore it's, I don't think it's even quite as simple as saying you know, is this about security? Great point as it is. You know these families don't have security. You know they can't make ends meet without the top ups. And you know we should have a big conversation about genuinely reformist policies, which we're definitely not having at the moment, but we should have that about well, what would it take to upskill people? You know, what would it take to have better quality housing, you know, and to lower some of those housing costs? You know, what would it take to really boost life chances for some of these, you know, young people who are growing up in intergenerationally poor households? But we're not doing that, and so, in the meantime, the least we can do is make sure that people can heat their homes and feed the children. 

Paul Johnson

So, what you're describing is a system as, as Tom said earlier, where the Social Security system, the welfare system, is picking up the pieces of all sorts of problems in society.

Charlie Pickles

Absolutely.

Paul Johnson

Poor health, unemployment, high housing costs, all of those sorts of things. What would you put on top of that in order to achieve the sorts of things that you're talking about to improve more broadly people capacity as it were to do more for themselves, I think is in a sense what you're suggesting?

Charlie Pickles  

So, I think you need a system that, A) works with the grain of human behaviour and supports people to achieve the things they want to do. And I think if you take for example the very large part of the benefit cohort, to use a very impersonal phrase, which is disabled people, actually the system itself is almost designed to trap them on benefits and not particularly generous benefits. So, I think you would want to look at how can we have a system that actually offers the sort of support, whether that's employment support, whether it's skill support, whether it's actually timely mental health, because we know that the growing proportion of those who on disability, out of work disability benefits are there for mental health reasons, and they can't access support at the moment so, think about how you can do that. You know, on housing, again, IFS has done some brilliant work on this showing the shift in tenure of housing, actually, if we got on and you know, I mean gosh, how many people say this almost on a daily basis, but we actually got on with building high quality social housing, we wouldn't be spending so much and actually people wouldn't be struggling to meet the private rental costs because mostly the benefit system doesn't even really cover the, you know, the housing bit you get for your rent benefits doesn't really cover the housing costs for people in the private rental market. But ultimately, it is. It's investing in people, isn't it? It's investing in making sure that people can have that mental health support that they can access good quality education, just because you're from a poorer background doesn't mean you have to go to a bad school. You know, it's all those sorts of things which are other ways we redistribute income. So, when people, a certain person in particular, says, you know, the tax isn't about redistribution, of course, it shouldn't just be about redistribution in fact, if it was, we would end up with worse public services because we disincentivise enterprise, wouldn't we? So of course, you don't want it to be just about that, but fundamentally some of it has to be about that. But we should think about that, not just about the benefit system, about can we give an extra pound to this household, we should think about it in the broader sense, to again quote on new PM, which is about all of the public services that go into enabling people to reach their potential. 

Paul Johnson

And what we've ended up with, I think is the implication of what you're saying, is almost a pared back state that is doing just enough to prevent poverty and to give people the help once they’ve fallen through all the other safety nets, but not enough to support them more broadly. Now obviously the concern from the chancellor’s point of view is what you're suggesting sounds, at least in the short run, like it be rather more expensive than what we've got what we've got at the moment. 

Charlie Pickles

But I hear we can just borrow, so it's fine. 

Paul Johnson

Oh, that's all right. I just wanted to just spend a couple of minutes on this big issue of disability benefits and incapacity benefits because it's one of the one of the areas where spending has been ever upwards, despite really hard efforts by government to push it down and indeed all sorts of reports of people who are really very sick indeed not being able to get onto the benefits. Tom, what do we know about, and let's distinguish further listeners, the incapacity benefits from the disability benefits, what do we know about what's happened there and in particular why we seem to have this ever increasing number of people who are dependent on these benefits?

Tome Waters

Yeah. So, definitionally, incapacity benefits are benefits for those who are unwell to the extent that they can't work; and disability benefits are benefits for people who have higher living costs because of their disability, so they might need help with things like getting dressed, or preparing meals, or they might need help with getting around, you know, might need a wheelchair or something like that. So, in the UK we have these two, really quite distinct sets of benefits to deal with this. The incapacity, benefits they’re targeted basically at those who are out of work, and disability benefits are not means tested at all, and you could be in work, you could have you know, be on £1,000,000 a year in principle and still be getting disability benefits - in reality a pretty substantial majority of those who get these disability benefits are not in work, but they aren't actually formally means tested. And we have seen this shift, as Charlie was saying, towards mental health reasons, in both sets of benefits, as well as the main reason why people are becoming eligible for them. On disability benefits, we did some research on this recently and it's getting on for 50% of claimants getting it for mental health or social behavioural reasons, and that's up from something like a quarter, I think two decades ago. And so, and it really accounts for almost all of the rise in the in the number of people on it. And I think that, yeah there is a – it is interesting how this interacts with policy because back in 2013, the government implemented this new disability benefit called Person Independence Payment, which was to replace the old one disability living allowance and the aim was it would. People be reassessed more frequently, and they would be assessed under a different kind of scheme, and it would save the government 20% that the disability benefits bill. But if you actually just sort of look at what happened to disability benefits since then, spending has just gone up and actually you can just kind of see that, if you look at the chart, it's sort of steadily going up until 2013 when the reform happens, and then it just starts going up faster. And so, it's hard to say absolutely certainly what the effect of the reform was, but visually it looks like if anything it raised spending on disability benefits. And think yeah, it does, it is a real challenge because this is, even when the government explicitly tried to reduce spending, it basically looks like that was unsuccessful, and yet still at the same time, as you're saying Paul, we hear stories of people who seem pretty seriously unwell, and for one reason or another, don't get awarded the benefit. And so it does just look like an incredibly difficult policy area, where the government is in this sort of strange position of spending loads of money on it, and increasingly more on it, but still having these kinds of outcomes which seems to have clearly gone the wrong way. 

Paul Johnson

I guess you could have, and people from different perspectives might have different responses to what you've just said. One would be this is an indication of a serious failure in society. More and more people are ill, and more and more people are mentally ill, and that's forcing higher benefit payments and we need to do that. I suppose others might say, well, look, we're clearly getting better off and healthier and you're talking about increasing the number of people who say they've got mental health problems, shouldn't we just be really checking much harder that they really do have these problems, are we really all that much less mentally well than we were ten, twenty, thirty years ago, and maybe the problem is with the administration. I don't know, Charlie, whether you have a view on which of those is true or whether there's an element of truth in both?

Charlie Pickles

I think, as Tom pointed out, that the makeup of those, the people who are actually both, as you say, on the incapacity, there’s the kind of income replacement part, and then the disability benefits the extra costs part of the system, the makeup has trained changed dramatically. And again, as Tom said, the fact that we have roughly half, or getting on for half, of each of those that are for mental health. And I think people, when you think of mental health, you think - and the fact that you're, you know, reliant on benefits for mental health reason, I think people think that must be quite an extreme mental health problem. You might think of someone with a, you know, profound learning disability or someone who suffers from maybe, you know, severe schizophrenia or something like that. Actually, the majority of these people are in a category which is, again exactly as Tom said, is effectively anxiety and depression. And the reason I point that out, and the reason I think it falls somewhere between Paul what you were describing, is that we should be, you know, mental health and depression, on the whole are things that can be treated, or people can be supported to live with. Loads of people who have depression or anxiety are in work and have coping mechanisms to deal with that. So, I think there definitely is something about saying, what is it that we're failing to do as a society that means that, I mean huge numbers, of people are - and it really is writing people off, you know, very few people, I think it's something like 2% of people who end up on incapacity related benefit ever leave them I mean you know we really are writing off thousands of people and talent that could be contributing parking them on benefits in part because we're failing to prevent people from developing these, what at least often start off as kind of mild to moderate conditions. I mean, we didn't, we probably don't want to get into the NHS and wait times here, but you know, how many people, people listening to this podcast, have themselves or a loved one or a friend who's tried to access, you know, pretty basic mental health support services and can't? You know, all of these contribute to people’s mental health deteriorating and then them ending up on benefit. 

So, I would come at it from saying I don't think, I think it's a great swathe of people who shouldn't be parked on benefits, not because they don't genuinely have an issue, but because actually, we should be able to provide the sort of health support, mental health support that means that they can work. And you know, also employers have a role to play, she flippantly says, employers do have a big role to play in this. But I think there is a challenge here where we shouldn't be seeing the numbers grow quite to the extent that they are.

Paul Johnson

And it's extraordinary, I mean we need to move off this particular topic, but the growth in particularly younger people on these benefits has been really staggering. 

Charlie Pickles

It's really shocking. 

Paul Johnson

And this used to be set of benefits essentially for people over particularly men over the age of fifty, and it's now right across the age distribution and particularly-

Charlie Pickles

Who’d done manual labour, and you know, that was basically what this was - yeah, it's nothing like that now.

Tom Waters

And even children, because children can get disability benefits, I think for children amongst, in the early teens, it's like 6% of them get disability living allowance, which is really, yeah really quite similar. 

Paul Johnson

We should move on to the other topic I want to get onto specifically, which is that recent days there's been discussion about whether the Chancellor can fill some of his fiscal hole by not increasing some of these benefits in line with inflation next April. Inflation clearly currently running at 10%, and it's been floated that maybe they should rise in line with earnings which are rising by more like 6% at the moment. And if you were to increase welfare benefits at that rate you would save six or £7 billion, so that's a saving worth having. And the argument, those in favour of such a policy would make is, well, if earnings are rising by that, isn't it unfair if people on benefits are doing better than that? So, is that not a reasonable choice that we could make? 

Tom Waters

So, you could so normally benefits go up in line with inflation, you could take the view that benefits should go up in line with earnings, and that would mean that, you know, people who get all their money, all their income from benefits would kind of kind of keep up with yeah, societies as a whole, on average, they wouldn't fall further behind, I mean to say, really. And that would be kind, that would be another view, I think that there's kind of arguments to be had for and against that. If you did do that, that would over the long run mean a much bigger welfare state than what we're actually kind of on track to have where we do price separating or inflationary uprating, because on the whole historically, earnings have risen faster than prices. So, you could have this I think that's a legitimate debate to have. Do you want to uprate by prices in general?  What seems to me to be probably something that's not advisable from the point of view of kind of benefit design, would be basically having a system where we uprate by the lower of earnings or prices. So, if the government would say, no, we're permanently switching from earnings, to earnings, that would be one thing. But if they said they will uprate by earnings this year, but if next year prices - earnings are going up faster than prices, well then, we'll switch back to uprating by prices, I think if we have that kind of system that's that would be, that's basically what we have for the state pension, but in reverse. So, the state pension rises by the fastest of earnings prices and, just for fun, 2.5%, whereas here would be a new system where arrives by the lowest of earnings and prices. And so that would mean in the long run the size of the benefit system would steadily decline in real terms. So, I think that kind of justification I think kind of can't make sense, it would just - because in the long run it would just mean an ever-declining size of the benefit system. 

You might just kind of take the view that, you know, we want to have a smaller benefit system and do less redistribution, again this, you know, coming back to what we're saying before it's political question, moral question, rather than a narrow economics one. And obviously at the moment the government you know might be particularly looking for savings, but I think, yeah, on the kind of, particularly on the uprating, what we want to avoid would be a situation where we essentially have a double, a reverse double lock basically. 

Paul Johnson

Yeah, so the state pension in reverse, the triple lock reverse - always do the least generous. It's hard to disagree with what Tom is saying, isn't it, Charlie? The idea that you pick and choose when you're going to, how you're going to uprate service to make the benefit system almost randomly less generous over time. Not least given that the real price adjusted level of benefits people out of work is no higher now than it was fifty years ago. 

Charlie Pickles

And I think that is the really important point here, which is that the benefits or the kind of basic level of benefits is so low now. And you know, we've been actively eroding it for, I mean, at least the last decade because of the caps on the uprating and also then the freeze. So actually, people didn't see their benefits rising at all. And to do the moral bit again, what does that actually mean in practise? It means the poorest people in the country are getting poorer - that's literally what it means. And I think it's hard to justify, in the middle of a cost-of-living crisis, for a group of people from many of whom are already in poverty, many of whom are actually in quite deep and persistent poverty, to say, you know what, we've blown a big hole in the public finances by doing tax cuts. We'll just take it back from the poorest, we'll just, we'll just not uprate benefits properly, and that way we can save some money and plug that hole, I just, I think, again, to come back to my point about what sort of society do you want to live in, I think that's a very unfortunate position to take. 

Paul Johnson

What do you make of the fact that the Prime Minister seems to be at least floating it as a possibility? 

Charlie Pickles

I think that's a great question because I find it very difficult to understand what the rationale? I mean other than the obvious which is that it's worth billions of pounds. What the justification may be is the better word to use for, you know, ignoring the fact that this is a very poor group of people in the middle of a cost-of-living crisis. And you know, they have done some really good stuff around capping energy or reducing energy costs is probably the what we should say, and obviously the previous Chancellor had a, at the time a very good package to provide more support for people on benefits. But given where we are, given the numbers of inflation that you've just said, Paul, I really do struggle to understand why the Prime Minister would even have floated this, particularly given that the previous Chancellor had committed to uprating by the actual inflation figure. And let's remember, the last up rating has also made these families poorer because at the time at which the inflation rate was taken, which was, what was it 3.2% or something like that - last September measure, that doesn't come through until April and of course, by April this year we were double that. So, I don't know what, I genuinely, I can't understand the thinking other than, you know, oh gosh, we've got a big hole in in the public finances and what's a quick way. And, you know, let's face it Paul, and I say this as someone who spent the first two years and a bit of the coalition in the Department or Work and Pensions, and at the time when we were doing, we were forced to do the austerity measures, it is so easy to look at what, as we've said is actually the biggest budget - You know the DWP is the biggest budget, including pensions - and if you need to find very large sums of money quickly, people default to saying, well, we'll just take it out of welfare, I mean, that's what happened during the austerity years. And you know, when I worked for Ian Duncan Smith, we fought as hard as we could against the Treasury's desire to do that, but that is the automatic response. So, I think it's a lazy response, because the numbers are so big and I think it also ignores, as we said earlier, the potential knock-on impact in other areas of public services. 

Paul Johnson

Tom, before we finish, I just want to get on to the last element of this, which is something that you're writing about at the moment, which is that there are parts of the system which are getting less generous anyway, aren't they, just thinking about the benefit system, that's also true of the tax system, we’re just thinking about the benefit system. There are several elements of change that have happened over the last few years, which are gradually being rolled out to make the system less generous, and indeed some parts of the system which haven't been uprated for prices for a very long time, making it less generous, could you just take listeners through that a little bit to understand how, over time there are these elements which are, as I say, becoming less generous?

Tom Waters 

Yeah. So, in terms of - there's a couple of policies which are essentially being slowly rolled out, and I think probably the most important, yeah, the most important ones would be firstly Universal Credit, which now most working age benefit recipients are in Universal Credit, but there's still at least a couple of million who are on the old style of benefits, and they need to be moved across, they’ll be moved across over the next couple of years is the current plan. There are some people that represents a gain, they'll see an increase in their benefits others, they'll see a decline. What's more unambiguous is the rollout of what sometimes is being called being called the two child limits. So, if you're on means tested benefits, you now don't get any extra support for third and subsequent children. Each child gets an extra £3000 or so in benefit entitlement, but that only kicks into children born after 2017. So as every year passes, there's more children basically that were born after 2017, and so it slowly rolls out to them. So, I think those are probably the most important benefit reforms and that second one does really mean quite large declines in income for poor families and by definition poor families with lots of kids. And so, it's quite it does quite a lot to raise child poverty rates. 

            At the same time, we have, as you alluded to, the fact that various parts of the benefit system have just been frozen in cash terms sometimes for a long a long time. One of the ones we found was the Christmas bonus, which is paid to pensioners and disability benefit recipients, which has been £10 since 1977, over which time prices have more than quintupled. So, you know, I don't know about then maybe you could get a Christmas tree for £10 or something, I don't know. And so that, you know that in some sense it's a slightly silly example, because it's a very small benefit, but it shows that if you just leave things frozen in cash terms, it is really worth less and less and less over long periods of time.

One that's definitely more important would be the benefit cap, which was bought in in 2013, it was reduced in 2016, and then has been frozen ever since then, and is, you know, on current plans, will be frozen indefinitely. And so that means that for some people who are out of work, there's a maximum amount they can get in benefits, and so even when the main elements of benefits go up, people are subject to benefit cap see no change in their income and so we're just talking about you know, well benefits go up by prices or earnings or something, if you're affected by benefit caps, on current plans your benefits won't go up at all, and even worse, you know inflation is running at 10%.

Paul Johnson

And how many people is that affecting so? 

Tom Waters

At the moment it affects something like 120,000, but because inflation is so high at the moment, it looks like that might double just over the next few years to about quarter of a million households. So, we're not talking about extremely large numbers of households, but it does - for those it effects it's it represents a really quite large decline in income. And again, that's you know that's just over the next few years, the longer that this is left unchanged the more and more people it will affect and reduce their real incomes. 

Paul Johnson

Last word, Charlie. 

Charlie Pickles

Oh, make sure you uprate benefits by inflation. 

Paul Johnson

A very clear, very clear message, a very clear message to which I'm sure the Chancellor will be listening carefully.

Charlie Pickles

Let's hope so. 

Paul Johnson

And we have almost certainly run over our time, that's been a fantastic discussion. At the beginning of this, we thought we might cover taxes as well, but that was clearly far too ambitious. We’ve barely done justice to the benefit system, and just the working age part of it at that. But you will have gathered from this discussion that this is a big system, it's a complicated system, it's a system, as we've said, which picks up the pieces that failure right across the rest of society leaves behind. And it's a system which I think, to paraphrase what Charlie Pickles has been saying, needs a fundamental look so that we are doing more than just giving people enough to survive on, but helping them up through to improve their health, to improve their employability, and get them off benefits in the longer run, and that's a big issue. But given where we are, this is not a generous system for most people who are subsisting on it and cutting it by something like 5%, as increasing benefits only in line with earnings next April would do, looks a very difficult ask indeed.

Thank you so much Tom, thank you so much Charlie, and thank you everyone who has been listening to this episode of the IFS Zooms In. Some of what we were talking about there are going to be published as part of the IFS's forthcoming Green Budget, funded by the Nuffield Foundation and City. To see more of our work, do visit www.IFS.org.uk and to further supporters, do consider becoming a member for as little as £5 a month. See you next time.