Whither universal benefits?

I agreed with more than the usual fraction of a John Harris article today: his argument that universal benefits should stay universal actually had something approaching good points in it. In the current climate of discussions about what benefits we should means-test or remove to save money, Harris points out the problems with that approach:

As the child benefit fiasco proves, means-testing and selectivity cost huge amounts of money and governmental effort. In stigmatising help and demanding engagement with a labyrinthine machine, selective benefits often fail to reach the people they are meant for (which is why over 25% of kids entitled to free school meals don't get them, and the means-testing of winter fuel payment would be dangerous).
He's spot on. The child benefits change was particularly demented; the oft-quoted case where two parents both earning £X,000 keep their child benefit, but the stay-at-home mother and her partner who earns £(X+10),0000 get nothing, makes absolutely no sense. The reason it was proposed was a consequence of existing bureaucracy; the tax system has no real concept of a "household" and thus making any benefits change relating to household income would either rely on people's innate honesty - stop sniggering at the back - or require a massive, expensive and likely terribly unpopular re-engineering of the taxation system. Thus we are landed with another government-sourced taxation distortion (very high marginal tax for earners with children between £50K and £60K), and now there's precedent for it I expect other benefits to be means-tested in the same way.

Of course, Harris doesn't really address the flip side of universal benefits - they're rather expensive. The Guardian's excellent visual guide to Government spending points at £12bn in child benefit and £30bn in personal tax credits per year. If you want to reduce child benefit / tax credit spending, limit it to two children. No distortions, as easy to administer as the current system. Job done. Of course, this won't go down well with families of 3+ children. But let's remember there's no money left. We can't afford our current spending. We're about at the peak of what we can tax without being Laffered. Spending on state pensions (£74bn) is only going to go up.

Something Harris skips lightly over is the NHS, a great example of universal benefit. It costs £100bn annually (plus £7bn if you include its pension scheme). So every taxpayer, say 30m of them, has to find £3,300 to cover themselves. But they also have to cover non-taxpayers - the elderly, children and the non-working - so that's nearly £7K in taxes just to cover the running costs of the NHS. With the increasing fraction of elderly patients requiring expensive residential care for degenerative diseases and conditions, that too is only going to go up, and sharply. The Dilnot Commission report on residential care proposed capping care costs at £35K, though the Government is now talking about nearly double that limit as life expectancies and the costs of caring continue to rise.

Universal benefits are simple to administer and not generally distorting, far superior to means tested benefits, but that's not why they are threatened. They are threatened because:

  • the pay-as-you-go pensions model is far too close to a pyramid/Ponzi scheme, so that promised payments that seemed affordable 40 years ago are anything but;
  • improvements in nutrition and healthcare mean that people are living longer and thus living long enough to suffer from expensive-to-treat diseases and afflictions; and
  • public jealousy at high earners is putting pressure on politicians to make choices that make little economic sense (e.g. means testing for child benefit, winter fuel allowance etc.).
And yet, if we measure a society by anything it should be by the way it treats those who cannot look after themselves - the impoverished elderly, the seriously mentally ill, those crippled by disease or injury who simply cannot work. How are we going to afford the care these people need, if we have to provide the same care to everyone else?

This is not to say that Harris's article is all on solid ground. Case in point:

Funny, too, that such high-ups as George Osborne bemoans "taxing people on low incomes to pay for the child benefit of those earning so much more" when, as he must know, a progressive taxation system ensures that this has never actually happened.
If you could actually save £2bn in child benefit this way, you could direct that tax saving to increasing the threshold at which people start paying income tax. Thus, since we are currently paying child benefit to high earners, we are losing the opportunity to tax less people on low incomes. George Osborne is - in this case - right.

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