The UK economy and the welfare state

Posted by RDN under Economic affairs / Mind & body / RDN's media outings on 2 April 2016

For an outing on the BBC 1 Big Questions ethics show, I pulled together some research on whether Britain was a fair society. My general view is that one should worry about the poor, on the assumption that they are unhappy because of poverty and need help. It is not a dead cert that people in need of help can be given it, of course. Moreover, it may well not matter whether (or even how much) a country is unequal. Nor is the amount of welfare spending by any means a perfect indicator of whether a country is a good place for either rich or poor to live. Other posts have discussed those themes. (Try an in-site search for “inequality”.)  This one is intended to capture a picture of where the UK is compared with its neighbours, and – even more important – with other broadly comparable countries, in matters of wealth, welfare spending and educational outcomes.

 

Broadly speaking, I think it would be odd (though perhaps interesting and good) if Britain were to be very different in its economy or its welfare provision from western, northern mainland Europe, which I take to be divided into the “Continental” and the “Scandinavian” countries (which I perhaps too loosely think of as including the Nordic countries), or the Anglosphere. I do not want the UK to be worried that it is a bit different from, say, Denmark or Canada, or from France or Australia.

The UK is an odd country, as all countries are. I like it. But I would worry if its economy did much worse than any of those which can reasonably be compared to it; likewise, I would worry if our welfare system cost much more than such comparators. Actually, because I am a right-winger, I am pretty sure I think we should aim to be pretty rich, and that we should aim to have a quite small welfare budget. Underlying all these thoughts is a hope that the poor in the UK should be at least as well off as they are in other comparable countries, but also an ideological commitment to the idea that welfare is a bad way of sustaining them in well-being.

Where are we in the league tables?

UK GDP

The UK is (on one reasonable count, published by Index Mundi) the 8th biggest economy in the world. It is dwarfed by the US and China, whose economies are very large and very different from each other. Several very large economies (not least Russia, whose economy is close in size to the UK’s) have wealth which depends on natural resources. It is really equivalent countries with less rich natural geology which bear serious and easy comparison. The UK has an economy of rather similar size to that of France, and their economic, industrial and agricultural histories are fairly similar, as are their populations. The big difference between the UK and France is that the latter has continued to pursue largely statist, or state-corporatist, policies whilst the UK has developed important elements of a much freer market approach.

One important way of filtering a ranking of countries’ wealth is to do so in per capita terms. This approach does not give any sense of differences between degrees (or kinds) of inequality between people within countries, nor how social spending may iron out some wealth inequalities. Out of Index Mundi’s top 100 countries by per capita wealth, the UK comes 35th at $37,500. It is quite similar to (within $2000 difference), but richer than, France (40th), Finland (39th) and Japan (37th), and poorer than Germany (30th), Denmark (32nd), Belgium (33rd). Amongst industrialised countries, the US (15th), Hong Kong (16th), Guernsey (17th), Netherlands (19th) and Canada (20th) are all a good bit richer per head than the UK; whilst the citizens of Spain (47th), Italy (51st), Czech Republic (57th) are all a good bit poorer.
Research evidence:
http://www.indexmundi.com/g/r.aspx?t=100&v=65
http://www.indexmundi.com/g/r.aspx?t=100&v=67

UK government spending

The UK state takes and spends a percentage of GDP pretty close to the OECD average. Some key numbers illustrate a general story of the UK being at the ‘socialistic’ end of the Anglosphere, and of the ‘Continental’ giants vying with the Nordic, or Scandinavian, countries in spending more: the US state tax-take is 38.8%; the UK’s, 45.5%; Denmark’s, 56.5%; and France’s is 57%.

The UK is reducing the share of GDP devoted to public spending. It is now, under a Tory Prime Minister and Chancellor of the Exchequer, about where it was in New Labour’s heyday, but is headed toward a state-take something like (in percentage terms) the situation of the mid-1930s, though  a huge GDP in our time compared with that of the ’30s produces a vastly bigger quantum of state spending in real terms (adjusted for inflation).

Research evidence:
[https://data.oecd.org/gga/general-government-spending.htm.]

Welfare spending

A Survey of the GB Benefit System, IFS Briefing Note BN13 shows that social security (defined as support in cash or pension payments) accounts for 13% of GB (that is: UK minus Northern Ireland) GDP and 29% of all government spending.

The UK’s social spending (defined as including health, education and social security) is very near the OECD (or, ‘rich country’) average of about 22% of GDP. It is 10 % lower than the highest (France, with 30+ %) and about 5% higher than the US or Australia (with Canada, another Anglosphere comparator,  spending a little less than any other anglophone rich country). This is the picture after the UK recently reduced the social spending share of its GDP, as did Canada, Germany, Ireland and Greece.

So what?

This country has a large economy and a large welfare state. It seems not to be able to afford the latter, if one assumes that public debt should be fairly modest. It may be that the public should be prepared to pay more taxes for more welfare, and perhaps they could be persuaded to do so, maybe without denting their preparedness to work. However, the left seems to have failed to make that case, and the right doesn’t try to.

The role of the rich, the poor and the middling masses

When wondering whether the UK is a fair place, we need to understand what the rich contribute to the poor, what the poor get from the rich. The right (let’s say, The Telegraph) stress how much the rich pay in tax. The left (let’s say, The Guardian) like to stress how (as a percentage of their income) the tax burden is greater on the poor. Cool analysis from the UK statistical service, ONS, reminds us that, such tax as the poor pay, is largely subsidised by the rich. More complex, but vital, to thinking about fairness and the need for the welfare state, is analysis (found in the previous reference) as to what proportion of tax-payers (it is very large) either get in benefits as more or as much as they pay in tax.

This last point energises an argument, as yet in its infancy, as to whether savings and insurance could deliver for most people a better service than taxes do. Likewise, firms (for profit and non-profit), charities, and co-operatives could be the providers of the services. The teasing points are: how would the poor be subsidised in the paying their own way, and how would one maintain a solid base of facilities and services shared by the majority of the population, irrespective of class or income?

Welfare and the poor

The poor of the UK have either failed the welfare state or been failed by it. They have been given a free education for several generations but remain substantially illiterate, inumerate and uninformed, let alone – many of them – reluctant to take up the manual work which is all their lack of education allows them. The data from the OECD Pisa programme of school comparisons see UK in the middle 20s in word ranking for maths, reading and science, and slipping or treading water, not least as countries whose economies used to be much less-developed than ours up their educational game.

In the UK, according to House of Commons and Trades Union Council (TUC) work, about a quarter of adults have very low literacy levels. These cases of illiteracy are more common, and stubbornly so, in young adults than in old adults and much more amongst poor than well-off people. The UK seems to be almost uniquely backward amongst OECD countries in these depressing trends.

As substantial numbers of Poles and other eastern Europeans arrive to take up working class work, they remind us that they have absorbed skills and attitudes which have eluded swathes of our homegrown young.

It seems quite possible that all the economies of the world which have been used to being rich will face very severe competition from countries which we are used to think of as poor. Britain may do quite well as Indians and Chinese and many others bring low costs to their new enterprises: our own economy and culture have a decent head-start when it comes at least to the brain-power businesses which look like being the future.

But there is a big conundrum about the less-skilled areas. The British working class will increasingly compete with the working classes of the whole world (whether the latter produce things at home or come here to do it). Britain has been quite successful in maintaining a low-pay, low productivity sector, and it has flourished as the country finds its way out of the banking crash and recessions of 2008 and after. But that seems an improbable model for the future. At some point, one assumes, firms would rather invest in machinery rather than rely on even quite cheap labour.

In short: is modern welfare anywhere near producing a more developed working class, and ideally one which renders redundant all the old notions of what such an identity consists in?

 

 

 

 

 

 

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