Whither welfare?

In Britain as elsewhere in the west, the rising cost of welfare has reached the point that governments are looking for reform. Ian Duncan-Smith, for instance, the welfare secretary wants to take all those complex, creaking benefits and merge them into a single, simple system – a system which he plans to call a universal credit. It is a good idea but is not going to achieve anything worthwhile. The whole thing is being looked at the wrong way round. Everyone has been deceived by the “gross pay” illusion.

The issue here, and throughout the western world, is the difference between the employer’s gross labour costs and the employees net purchasing power. The first figure is about 80% higher than the second. In some other countries is it more than 100%. This encourages employees to replace labour by machines or simply to not to employ enough staff. It is very much worse in Sweden where shops and offices are so understaffed that one takes a numbered slip for one’s place in the queue. At busy periods there is often time to do the rest of one’s shopping or go and have a snack before one gets to the front of the queue. Yet unemployment amongst young people is one of the major issues in the present Swedish election campaign. Needless to say, there has been little mention of this gross labour cost/net purchasing power ratio.

Since cutting benefits is no solution in a humane society – in Britain at least, they are more or less at bare subsistence, the unemployed cannot price themselves into work without pricing themselves out of existence. Part of the solution must be to raise all labour-related tax thresholds and to cut VAT, since the latter must also be built-into benefits – resulting in churning.

And another part of the solution must be to move to some system of Basic Income, payable regardless of circumstances, which is unfortunately not possible without a root-and-branch reform of the tax system.

The second issue is the inflexibility of the property market. It is actually quite easy to start a business. But after the problem of labour costs, the second killer factor is rents. You cannot do much of a business working from home. You need premises of the right sort in the right place. Look around any high street or factory estate and you will find vacant premises, as well as empty derelict plots of land. This shows that rents and property prices do not fall to market-clearing levels. In fact, the government has just changed the rules and rewards owners who knock down their vacant buildings by reducing their business rate bill to nil. This latter will also continue until there is a root-and-branch reform of the tax system.

But nothing will happen until there is a better analysis and understanding of what is actually happening.