Why are some employees paid a low wage? In the run up to the UK Budget on Wednesday, some commentators are arguing that the answer is, in effect, “because employers can get away with it”. Why not, then, the logic goes, simply raise the national minimum wage (£6.50 until October for over-21s; £6.70 thereafter) to the level of the so-called Living Wage (£7.85 outside of London; £9.15 in the capital)?

Why not, while we’re at it, cut tax credits, since they are “subsidies” to employers? After all, the argument continues, since employers can pay higher wages, tax credits allow them to pay lower wages than they otherwise would and to pocket the extra. Read more

Poverty has many causes. The subject is studied by economists, sociologists, historians and epidemiologists, as well as increasingly, psychologists, cognitive scientists and even geneticists. And the idea that the government has to do more than redistribute income to improve children’s “life chances” has been apparent for a long time, too. Under Tony Blair, the UK set up task forces and policy units charged with addressing the “multidimensional” nature of poverty in 21st century Britain.

I think one reason why Iain Duncan Smith irks many policy wonks is that it can often seem that he believes he was the first politician to figure out that poverty is about more than money. That, and because having a deep belief in the rightness of one’s cause is not the same as being right about one’s policies. (A very lefty error, that.)  Read more

Iain Duncan Smith has said he wants employers to pay higher wages to employees who receive tax credits. Like other critics of the current system of topping up pay, the work and pensions secretary suggests that tax credits are “subsidies” for employers who would otherwise pay employees higher wages. At the Budget next week, George Osborne, chancellor, is widely expected to announce cuts to spending on tax credits.

In his analysis, Mr Duncan Smith implicitly makes a couple of assumptions. The first is that tax credits suppress wages. This might be the case when employers are so powerful that they can keep wages down. It might also be the case if tax credits were to lead companies to spend less on capital that could help increase productivity. These are not mad ideas; the story of the minimum wage in the UK suggests that simple economic models cannot fully explain the relationship between employers and employees. Fewer jobs were lost than many economists predicted at the time.  Read more

The question raised by Labour’s intervention – and the various Conservative announcements, past, present and future – is ‘where does this end?’ Curbing migrants’ access to condiments, the Paddington Bear movie, Cafe Nero loyalty cards? Contrary to what politicians seem to think, there is no reluctance among Britons to talk about immigration – quite the opposite. The Labour and Conservative parties have talked a lot about migration. They’ve incrementally become tougher on EU migrants’ access to benefits. And has it curbed the rise of Ukip? It doesn’t seem so.  Read more

Welfare, migration and Britain’s membership of the EU – three areas of policy that are unlikely to prompt cool thinking. Throw them together, as in the question of which benefits EU migrants should be entitled to, and you have a recipe for opacity.

On Tuesday, a European Court of Justice ruling cleared a few things up. It could – could – make for more comprehensible policy in an area that has been full of confusion, empty rhetoric, and public anger. It will also encourage the prime minister to think he can go further in restricting access to some benefits for some EU nationals, a move he is reportedly considering. This is not because the ruling changed EU law but because it clarified the law, implying that, broadly, the approach successive UK governments have taken is legal.

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This week the UK government began sending letters to income taxpayers that suggest how the state spends its citizens’ money. For example, someone paying £10,000 in direct taxes will be told that they are “contributing” £1,900 to public spending on health, which accounts for 19 per cent of state expenditure; £100 to overseas aid, which makes up 1 per cent of spending, and so on (see picture). George Osborne says that by giving people bespoke descriptions of how their contributions equate to spending by various parts of the state, he is increasing transparency.

On the contrary, the chancellor is being opaque. What is pitched as an exercise in numerical transparency is also a lesson in how language confuses public policy.

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On Tuesday morning George Osborne was asked by the BBC’s Evan Davis whether he’d rather fund Crossrail 2 or trans-Pennine rail, assuming that both projects had a positive benefit to cost ratio. Politicians tend to shun hypothetical questions but the Chancellor of the Exchequer used this one to make the following argument:

‘I hope we don’t have to make a choice between the two. I think the real choice in our country is actually spending money on this big economic infrastructure, transpennine rail links, Crossrail 2 in London and the like, and spending money on, for example, welfare payments which are not generating either a real economic return and at the same time, are trapping people in poverty.’

Whenever someone mentions what the “real” this or that is, be careful. There are many choices involved in how the British state should spends its tax revenues and indeed what size the state should be in the first place. To reduce them to one “real” choice representing a fraction of overall spend is like saying that the real choice I face is between a Heart of Midlothian season ticket and feeding myself. (Essentials, both.)  Read more

At Wednesday’s Budget, the chancellor announced details of the “welfare cap”, which was first proposed in 2011. This is different from the benefits cap: the limit on the amount one household can receive in benefits per week. The former is a big, potentially sensible idea; the latter is a small, stupid idea.

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The previous post looked at the changes announced on Tuesday to “childcare accounts”, a subsidy to working parents to help pay for nursery and/or childminders. But for lower income parents, there was a more important change announced regarding Universal Credit, the government’s all-singing, all-dancing, not-yet-working reform to the benefits system, due to be rolled out at some point in the next few years.

Most of the coverage on the childcare changes has focused on the subsidy. But the Universal Credit changes are important and they affect a lot of people: about one half of all households with dependent children will receive UC.

The childcare fix announced today suggests how, in a complex system where rates are being changed from year to year, such disincentives can still emerge. The change sounds simple: under UC, the government will now pay for up to 85 per cent of childcare costs, rather than 70 per cent, as previously proposed. This is why it was necessary:

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David Cameron, prime minister, has described his government’s “welfare” reforms as a “moral mission”. I support much of what the coalition is trying to do; for example, the effective marginal tax rate for people such as Natalie should come down under Universal Credit. (It could also have come down without a massive project but that is for another post.) Any government taking power in 2010 would have had to cut the social security budget.

But the government’s haughty self-righteousness is risible in the face of evidence of unnecessary suffering. The rhetoric around benefits and the millions who receive them is already toxic. We could do without the idea that pointing out problems is somehow treacherous. If you look at what the Christian leaders are saying, as this atheist has, they are careful to focus on the practical consequences of specific decisions. There was only one side talking the language of crusade last week and it was not the ones whose job it is to promote the idea of ascension. Read more

Universal Credit is the government’s flagship reform to the benefits system. It is also in complete disarray, according to a National Audit Office report released on Thursday. The document is perhaps the most scathing NAO verdict I have read on a large public project. Read more