Despite the mandate of this Government being derived from
its commitment to whipping out the structural deficit by the end of a five year
period, the Coalition is somehow on the path to failure. Whilst the targets are
the right ones for the UK’s economic credibility, the means have been
counterproductive and badly thought out.
With the forecast that the official national debt is due to
rise by £605 billion over the course of this parliament alone (from 53% GDP to a
staggering 76% GDP) it is clear that the Coalition’s commitment to a
sustainable economy has been thrown off course. This increased borrowing has
not been evoked as a desperate attempt to restart business and provide growth,
rather it has actually gone mostly on meeting the demands of an increased
welfare bill, fuelled by the sharp rise in public sector unemployment. This
clearly isn’t sustainable.
The Government’s agenda was to make up the downsizing of the
public sector with increases of jobs in the private sector. This has not
happened for two primary reasons. One being that it is unrealistic to expect to
make it up over a short period of time. Secondly, and most worryingly of all,
it is because they haven’t provided the policies conducive to growing private
enterprise. Putting this agenda on the back-burner for now, one way in which
the government can bring down public spending, and therefore the structural
deficit and national debt is to consider something very radical to bring down
welfare costs. The negative income tax could be the lifeline this Government
needs.
The reduction of the deficit has been made up mostly by tax
increases and cuts to investment programmes. This simply won’t do as it is a
short-term strategy, it is an ill-thought out way to meet the immediate goal of
eradicating the deficit. This, even if
it were to work, may succeed in giving the government credibility in the eyes
of the public, but long-term doesn’t sort out the structural problems with the
UK economy. Growth aside, one of the biggest of which is welfare costs.
Before the Coalition took office, the cost of welfare under
Labour exceeded tax receipts by almost £25 billion annually. This model was
indicative of a government attempting to grow dependency and therefore its own
power rather than growing a healthy economy. Osborne took the pragmatic
approach in his first budget of raising taxes to meet this unbelievable
short-coming. Whilst this was understandable, especially because of the Tories
fixation on reassuring the public of the earnestness of their centrist agenda,
it was a mistake.
The answer isn’t to raise taxes, as common sense perhaps
would dictate. Taxes were too high under Labour already. The real problem was
that the extortionate costs of welfare dwarf the issue of high taxation.
Cameron and Osborne should not have been trying to meet the demands of
increased welfare, rather they should have been looking to remedy the problem
of this unsustainable public spending.
The conventional methods are limited. For instance simply
cutting the provision doesn’t resolve the problem of dependency culture. It simply scapegoats and points the blame at
dependent individuals and punishes them, fuelled by populist demand, for their ‘moral’
failures. This doesn’t offer any kind of redemption for individuals in such
circumstance. It only aids social disenfranchisement, rather than encourages
them to engage in employment which in the process helps both the individual and
the rest of society.
Another method practiced is increasing the provision. This
method is perhaps even more damaging as it enables and validates a culture of
dependency and inactivity. It takes away any remaining incentive to work, and
therefore the need to develop skills which make them more employable. Rather, increased
provision traps them in poverty and therefore makes them ever more reliant on
state hand outs. This method takes away the human dignity and freedom of such
individuals. This sentiment is the primary cause of an Underclass which is so prominent
in modern social life. This of course is unacceptable. Although advocates often
have forgivable intentions which aim to solve such social ills, it creates vast
social problems and tensions. The means
to this end is wrong.
But, if the government takes away the reasons not to work,
leaving only the incentives of work for dependent individuals to ponder, this can
go a long way to ease this problem. However, the real issue of dependant
individuals is not the amount of welfare administered to them, rather it is the
very principle of welfare that it is a deterrent to finding employment, no
matter how little or large. Therefore dependency alone does not explain away
the increasing welfare costs. The biggest problem economically is its
flabbergasting inefficiency. Perhaps it’s time the Government considers a
negative income tax in the place of this highly flawed and detrimental system.
Critics, including myself (ideologically speaking) may argue
that the negative income tax does take away many of the incentives to work. In
addition, it also advocates ‘something for nothing’ benefits. It fails to
eradicate the notion that if one wishes not to work as hard, they can still be
subsidised by the State through taxation of hard-working tax payers. But in
reality welfarism is something that will not be resolved any time soon.
Accepting this, the negative income tax is far more efficient and
cost-effective to the tax-payer as it requires an inevitably much lower welfare
bill to individuals who do not make up the income required for a minimum
standard of living. Taking this pragmatic approach will surely bring the cost
of welfare down to realistic standards, whilst ensuring it always pays to work.
This is because the negative income tax would be ideally introduced in
conjunction with a flat rate income tax. Guaranteeing that the State never
penalises hard-working successes, whilst on the other hand rewarding idle
failures, will remove the problem of Government discrimination, inherent within
a ‘progressive’ tax system. It would ensure that every individual is treated equally
in the eyes of the State, the bedrock to a just democratic society.
Another possible problem a
negative income tax could encounter is the validity and fairness of the figure
estimated to be the ‘minimum standard of living’ wage. The Left, if ever to
enter government, would of course be inclined to increase this rate of entitlement.
This would allow for increased allowances. What this would do is hugely
damaging. It would ensure that tax payers are lumbered with a system that
disproportionately rewards failures and inadequacies. It would lead inevitably to abuses of a system
which was introduced purely for good intentions. Furthermore, socialists may
even increase the level of negative income tax, over Friedman’s recommended 50%.
This again disproportionately takes away the incentive to work, making the
system pointless. Certain legislative powers must therefore be enacted, such as
ring-fencing of the rates, to ensure the system always remains effective in rectifying
the problems it sets out to cure, rather than adding to them or causing new
levels of deep-rooted State dependency.
Those critical of the negative
income tax feel it would lead inevitably to the withdrawal of welfare altogether.
The temptation to libertarians may be to withdraw spending in welfare areas
such as health and education, with an expectation that individuals are fully
responsible for paying for their own services. This of course may be true and
whilst this argument cannot be dismissed, the truth is no sensible or
right-minded Government would believe that having no role to play in the
provision of welfare would have no negative impact on the workforce which
wealth generators employ. The risk is that it may lead to generations of infirm
and uneducated individuals. This causes a vast range of social problems which
of course aren’t amenable with market forces. Furthermore, an unhealthy and
unskilled work force holds back the economy. A Government surely realises its
greater vested interest of ensuring a strong, healthy, educated society as it enables
a strong, efficient and skilled workforce, essential for maintaining a strong
economy. The negative income tax must not be used as part of such an
ideological agenda. The implementation of a negative income tax must be viewed
simply as the means to the ends of a) making welfare vastly more efficient and b)
Making the tax system simpler and fairer.
