George Osborne’s Budget package includes a cap on the overall level of benefit spending – excluding pensions and some unemployment benefits. Labour has tonight said it will vote with the Government to support it. I’ve blogged before – and before I joined the Labour Party – about the regressive effects of benefits caps and why Labour should be very wary of backing them – it looks to me that we’re returning to some fairly discredited rhetoric. It seems to me that this is a perverse and dangerous decision – one motivated more by dubious politics than sound economics.
I can – up to a point – understand the politics. Labour argues that it must show that it is firm and competent on the economy. As a matter of principle, it wants to reduce the benefits bill. And it is absolutely right to do so: the fact that so many people – including millions in work – are dependent on social security is scandalous and a clear symptom of economic failure. The levels of housing benefit in particular are the result of a broken private rented sector that incentivises and rewards greedy landlords. Nobody – apart from a Government wholly in thrall to the rentier class – would be prepared to see such a situation continue. And, for the occasional similarity of the rhetoric, Labour’s and the Coalition’s positions are diametrically opposed; Labour sees growth as a pre-requisite for reducing the benefits bill, the Tories see cuts as the pre-requisite of growth, despite the mounting evidence to the contrary; the Liberal Democrats are probably just confused.
But, now with the Coalition still in office, there are strong political and economic reasons for not supporting a benefit cap.
First, it undermines the principle that benefits are a matter of right; if you meet certain criteria you have a right to claim as a citizen that is not constrained by budgetary considerations. Your right to benefits, as a matter of principle, is a matter of law, not how much there is in Ian Duncan Smith’s kitty. A cap enshrines the view that social security is a matter, not of right, but of largesse. And the more you move away from benefits as a matter of right – indeed the further you move from universality – the costs and complexities mount. Appeasing the Daily Mail doesn’t come cheap.
It’s also a dog-whistle: the Tories are using phrases like “making work pay” once again when the facts show that we have some of the lowest levels of benefit in Europe; some of the highest withdrawal rates (which means the effective marginal tax rates as people move out of benefits are scandalously high) and of course millions of people receiving benefits are in work; work doesn’t pay because the pay’s too low, not because benefits are too high. And the benefits caught by the cap are, interestingly enough, mostly in-work benefits like child benefit and tax credits – or disability allowance.
And economically it’s flawed too. Low and capped benefits exacerbate the effects of recession, both through the multiplier effect of cutting incomes – the multiplier effect of benefits is high as they are virtually all spent – and through the stabilising effect that more generous benefits bring. And with an economy on its knees after four years of ideologically-driven austerity – in which pay is still falling and such recovery as is taking place is simply not reaching the people who have lost most since 2010 – we really can’t afford that sort of added uncertainty and instability. We are in no position to be arguing perverse macroeconomics in order to make a political point.
In fact, you can only really argue the case for a cap while retaining the principle of fairness if you are very confident that you can stimulate the economy to the point where real wages are rising – and, in the context of the past four years, rising quite fast – and employment is rising too; where growth is occurring and, crucially, where the proceeds of growth are being recouped in wages. And of course in that situation a benefit cap is meaningless.
So, in the immediate term, under a coalition enacting savage austerity economics, a cap is likely to exacerbate the problem; in the longer term, under a Labour government prepared to abandon the austerity mindset, you wouldn’t need it anyway. So why back it? The logic seems to point inexorably the other way.