How governments created the present welfare mess

Robert Henderson

The current attempt by the British Coalition Government to radically alter the welfare state by severely restricting benefits is an exercise in gross hypocrisy. Why? Because the increasingly shrill and uncouth portrayal of those in receipt of benefits as scroungers by Tories’ (and some on the left like Labour MP Frank Field) overlooks one very inconvenient fact: it is the actions of governments of all political hues over the past 35 years which created the welfare mess we have today. Between them these governments have produced a situation where millions of Britons cannot either get a job at all or can only obtain a job which does not pay enough to support them and their families even meagrely. This has produced the truly mad situation where substantial benefits are out of necessity paid to not only the unemployed but to millions who are in work, mainly through tax credits and housing benefit, because the wages on offer are too low to allow someone to live an independent life.

Mass unemployment

How did this dire situation come about? Let us begin with the shrinkage of jobs. Sustained large-scale unemployment did not begin with Thatcher in 1979 but she greatly increased it. Unemployment was officially 1.4 million in 1979 and rose to over three million (even by the dole claimant count) by the mid-1980s (  http://econ.economicshelp.org/2007/03/uk-economy-under-mrs-thatcher-1979-1984.html ).

Shocking as the 1979 figure of 1.4 million was at the time, it was primarily the consequence of the oil price quadrupling after in 1973, something over which the Labour governments from 1974-79 had no control over because North Sea oil was not yet flowing in commercial quantities. Conversely, the remarkably rapid rise of unemployment in the 1980s was caused by the wilful economic vandalism of the Thatcher government which publicity celebrated (yes, I did say celebrated) destroying much of the UK’s heavy and extractive industries.

Privatisation

Privatisation was the platform which placed large swathes of the public services into private hands, including the strategically important providers of gas, electricity, telecommunications, railways and water. This alone removed several million well paid and secure jobs from the UK. It also created areas with structural unemployment. Many of those made redundant in such areas never again obtained anything other than a low paid job or, worse, never obtained a new job.

The early big privatisations , such as those of gas and telecommunications, were unashamed; other privatisations proceeded piecemeal through the contracting out of public services to private business. Later from the 1990s onwards came the Private Public Partnership and Private Finance Initiative which involved either joint financing between government and private business or private business providing the money for a project up-front with the taxpayer repaying the debt on generally extortionate terms over periods of time as long as thirty years. As well as reducing employment and service standards built up massive amounts of public debt whilst keeping most of it from being added to the official National Debt. Bizarrely, the supposedly Labour governments headed by Blair and Brown were even more enthusiastic than the Thatcher and Major governments about using private contractors for public works. The effect of all these various forms of privatisation was to reduce manpower and conditions of work radically.

Outsourcing

Privatisation was followed and after the 1980s accompanied by outsourcing. The Thatcher years broke the back of mainstream political resistance to laissez faire in both the domestic and foreign markets. British companies exported jobs to the Third World incontinently squeezing the available jobs further both in terms of numbers and pay and conditions. This trait was propelled to a significant degree by the willingness of British governments of any political colour to allow British companies to be purchased by foreign countries. These had even less reason to retain jobs in Britain than British owned businesses.

The European Union

When the Single European Act (SEA) was signed in 1986 the UK effectively lost control of its borders and its commerce and industry because the SEA required member states to allow the free movement of “goods, persons, services and capital”. ( http://europa.eu/legislation_summaries/institutional_affairs/treaties/treaties_singleact_en.htm). Later treaties whittled away the UK’s sovereignty a good deal further.

The signing up the SEA fitted the laissez faire economics of the Thatcher government in one sense – a single market within the EU – but not in another because it restricted UK trade with the rest of the world. The Thatcherites also found the remnants of state economic control in the EU such as the Common Agricultural Policy unpalatable. As time passed they also had a growing concern about the growing extent of EU ambitions to remove sovereignty.

For all these reasons the Thatcher government developed a policy of enlarging the EU. This policy was eventually adopted by all British governments up to this day – David Cameron is even now pushing for Turkey’s admission ( http://www.bbc.co.uk/blogs/seealso/2010/07/daily_view_camerons_turkey.html). The policy of enlargement was to have profound consequences for immigration as the EU expanded as workers from poor EU states, especially the new entrants from the old Soviet Bloc such as Poland flooded to the UK from 2004 onwards (  http://www.guardian.co.uk/uk/2010/jan/17/eastern-european-uk-migrants).

Immigration

On top of all this came immigration from outside the EU. This really took off from the advent of Blair as Prime Minister in 1997. The combined net immigration from both the EU and the rest of the world (RoW) was 50,000 in the year before Blair took office . This rose to 250,000 in 2010, the year Labour lost power ( http://www.telegraph.co.uk/news/uknews/immigration/9713954/Interactive-graphic-how-UK-migration-has-changed-1964-2011.html). The British population has officially increased by a net 3 million from immigration since 1997 ( http://www.migrationwatchuk.org/). How far these figures are accurate is debatable, but they certainly do not overstate the numbers which rest on the 2010 UK census. It is probable that they substantially understate it as illegal immigrants will not appear in a census for obvious reasons and foreigners generally may be cautious about registering for a census because they come from countries where the state is not trusted in any way.

Massive immigration produced severe competition for jobs, most of them low-skill or unskilled, but also for skilled workers especially in the building trade. The immigrants not only took jobs from native Britons but did so by accepting much lower wages. The huge influx of immigrants also had the adverse effect of helping to raise housing costs, both for buying and renting.

Housing: the poison in the UK economy

House prices were inflated by the failure of all governments to continue to build enough new social housing from the mid-eighties onwards,by the introduction of Right-to-Buy (RTB) which greatly reduced the existing stock of social housing by giving tenants the opportunity to buy the properties they rented at huge discounts and the lunatic absence of controls over the provision of mortgages, which at the height of their absurdity were being offered at 125% of the value of a property. Come the crash of 2008 no deposit mortgages vanished and lenders began to demand deposits of 20-30%. The result was property prices too high for most first time buyers because they could not raise the deposit and a general weakening of the housing market as those with mortgages found that they could not re-mortgage on affordable terms when short term deals came to an end or obtain mortgages for a new property. The freezing of the property market meant that more and more needed to rent. Most could not find social housing and were left at the mercy of private landlords who relentlessly raised rents to unaffordable levels for large sections of even the employed.

To understand exactly how inflated property have become compare the prices today with what they were in 1955. Then the average residential property price was around £2,000. Uprated for inflation the average price of properties today would be around £40,000. It is housing costs which are the primary poison in the British economy. If there was sufficient housing to both rent and buy at the sort of prices to wages ratio which existed even 20 years ago, much of the general problem of rising benefit costs would not exist.

The manipulation of the UK’s unemployment statistics

Today the official unemployment figure for those drawing unemployment benefit (the claimant count) is 1.54 million, which is the nearest to the way the 1979 figure is calculated. The 2013 Independent Labour Organisation measure of those seeking work has unemployment at 2.52 million. ( http://www.hrmguide.co.uk/jobmarket/unemployment.htm) However, the contrast between the 1979 unemployment figure (1.4 million) and the one now is a false one because the figures are not really comparable. This is because there has been a massaging of the unemployment figures, many more pupils staying on a at school after the age of sixteen and a dramatic rise in those going into higher education.

Thatcher began the government’s habit of fudging the employment figures by cynically shifting people from the unemployment registers to long-term sick benefit. By 2011 2.6 million were claiming such benefit. ( http://statistics.dwp.gov.uk/asd/index.php?page=statistical_summaries). In 1979 around 600,000 were doing so ( http://www.guardian.co.uk/society/2011/jan/19/lax-benefit-rules-not-responsible-more-disability).

To this distortion was added the constant changing of the rules for eligibility for claiming benefits, the definition of who was unemployed and the exclusion from the unemployment claimant figures of those engaged in government training schemes receiving what was to all intents and purposes unemployment benefit . To put the cherry on the massaging of the statistics those in training were counted as employed in the total workforce statistics. This suppressed the unemployment figure as expressed as a percentage of the total workforce. There were also issues with students. Between November 1986 to September 1990 they could claim some unemployment benefits in the summer vacation. They were excluded from the unemployment count. (( http://www.radstats.org.uk/no072/article4.htm).

These changes to and exclusions from the unemployment statistics had considerable repercussions. The Bank of England wrote in 1991 “…although unemployment is falling because there are more jobs, it is also true that much of the decline in the claimant count which has occurred since mid-1986 has been due to a shift in the unemployment/employment relationship resulting from changes in the Government’s range of Special Employment Measures – especially the introduction of more rigorous availability for work tests and the rapid growth of the Restart programme (quoted in SSAC, 1991, p. 59). Ibid.

On top of all this came the vast increases in the numbers in post-16 education. The 1980s saw the beginning of the governmental drive to have much larger numbers of schoolchildren staying at school until they were eighteen . By 2011 they had almost doubled from the rate of those staying at school after the age of sixteen from what it was in in 1980 (see p10 www.parliament.uk/briefing-papers/sn04252.pdf). From 2015 all those under the age of 18 will, in theory at least, have to be either in education or training –  http://www.sec-ed.co.uk/news/warning-over-raising-of-school-leaving-age-to-18).

The expansion of higher education was even more dramatic. In 1980 only 13% of young Britons went to into higher education (page F152 –  http://users.ecs.soton.ac.uk/nmg/1468-0297.00102.pdf). More than forty per cent of British school-leavers are now going on to start degree courses. (The last Labour government had a target of 50% of school-leavers entering higher education and in 2010/11 47% of those between the ages of 17-30 were in higher education - http://www.timeshighereducation.co.uk/419496.article)

The false classification of people as long-term sick rather than unemployed, the rise in children saying on at school and the increase in students taking degrees means the official statistics considerably understate the true level of unemployment. The wrongful classification speaks for itself, while the extended schooling and increased university participation is important because it delayed the point at which millions entered the employment market.

Exactly how distorting these interferences with the unemployment statistics are compared with those before 1980 is debatable, but its effects must be very substantial. Those between the age of 16-64 deemed economically inactive were 9.04 million according to the official figures issued in October 2012 ( http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/october-2012/statistical-bulletin.html. This gives an indication of the huge numbers who should really be listed as unemployed. Even if the schoolchildren above the age of 16, the students and the sick and disabled were discounted, there would be several million left. Add that to the official unemployment rate of around 2.5 million and the true unemployment rate could be in the region of 5 million or even more.

But the picture is even bleaker than that because large numbers of those now counted as employed are on short time. Many of those and the full time employed are on short contracts and have no security of employment.

Working tax credits

All of this – the destruction and export of jobs, mass immigration, and the government driven housing market – produced a Britain which had become both a low-wage economy and an extremely expensive place to live. Many people in full time employment could not afford to live on their pay. As rents soared housing benefit was increasingly taken up by even those who ordinarily would not have been thought of as being at the bottom of the income pile. Eye-watering amounts of housing benefit were paid for those with large families ( http://www.telegraph.co.uk/news/politics/5663014/Family-claims-147000-a-year-in-housing-benefit-for-seven-bedroom-home.html) , especially to those in London where by 2013 families in private rented accommodation were paying 59% of their household income according to the housing charity Shelter ( http://www.bbc.co.uk/news/uk-england-london-20943576).

In April 2003, the Blair government tacitly acknowledged that wages for many were simply inadequate to support life by introducing working tax credits. ( http://www.hmrc.gov.uk/taxcredits/start/who-qualifies/workingtaxcredit/work.htm). This had several pernicious effects. It acted as a subsidy for employers which allowed them to offer ever lower wages secure in the knowledge that the taxpayer would subsidize business by making up their inadequate wages with working tax credits. The regulations for working tax credits also allowed people to claim them when they were working part-time. This provided an incentive for employees to work the minimum hours, which were as little as 16 hours for a single parent. The employer also had an incentive to employ a number of part-timers rather than full time employees because the wages of the part timers could be kept below the level at which national insurance had to be paid . It thus became cheaper to employ two or three part-timers rather than one full timer.

The effects of working tax credits were made worse by the Blair and Brown governments ideologically driven desire to have every woman of working age out at work. This resulted in childcare tax credits ( http://www.hmrc.gov.uk/calcs/ccin.htm#1) whereby mothers were paid to leave their children in the hands of other women while they went out to work.

The benefits situation needs fixing but the way the Coalition is going about it is unreasonable. They are not starting from where we are now and taking regard of the effects of their changes in policy on people who are already encased in the circumstances of high unemployment, low paid and often insecure jobs and ever rising rents. Instead they are using the blunt instrument of cutting benefit suddenly and seriously disrupting the lives of millions.

Housing is the main bugbear. it makes no sense to say housing benefit will be capped if this makes continued residency in an area impossible because of rental costs way beyond their means or the £26,000 cap on benefits. The policy may well drive many people in employment out of the area in which they not only live but work causing them to become unemployed. Even if people are unemployed forcing them to move any real distance will have effects on those with children at school and take away the informal support mechanisms of family and friends.

Similarly, the attempt to move those in social housing out of their properties if they are deemed to be too large for those now resident there (the “bedroom tax”) is absurd unless there is smaller social housing accommodation they can move into. If this forces social housing tenants to move a long way from where they live they will suffer the same problems that those who move because they cannot afford private rented accommodation. If social housing tenants have to rent from private landlords that will cost more than the social housing. Such tenants on housing benefit would be more expensive for the taxpayer to support.