By Tim Worstall
As the namesake says:
The Prime Minister and the Chancellor have promised to reform welfare without making “crude cuts”. Alan Milburn’s review of young people and work is about to test whether that is possible. The uncomfortable truth for Labour is that there can be no fundamental realignment of incentives away from welfare and towards work without some reduction in benefits.
Quite so. And here’s the one simple trick to make that possible.
40%.
The very idea of relative poverty is little more than half a century old. But it is that idea that has us all trying to ensure - through our wallets and the taxandbenefits system - that everyone gets up to 60% of median income. For that’s our definition of relative poverty - less than 60% of median income.
Something that is this half-century old should still be malleable, plastic. It’s also true that over at the OECD and the like it’s possible to define poverty as 40%, 50% or 60% of the relevant median income. So, let us just change our definition from one of the allowables, 60, to another of them, 40.
The promise becomes that we’ll use that power of the state to try, at least, to ensure no one is below 40% of median. Current median household incomes and full year full time median wages are some £39,000. 40% of that is £15,600. For an individual that’s in the top 12% of global incomes - yes, adjusted for prices across geography. For a 2 adult, 2 child, family that’s in the top 40%. That seems like a reasonable promise to be making to people - the benefit gained by holding that winning lottery ticket in life of having been born British.
There are knock on effects : the minimum wage becomes £7.58 an hour (yes, it should be of the blended, full and part time, one). Not that there should be a minimum wage of course but one at that level would not cause all that many problems.
There are two big points to this. One is that we open out, again, the incentive to actually get on and do something. The difference between working and not working will be a significant difference in living standard - incentives matter. The other is that there really aren’t all that many people on £15k a year nor would be in any semblance of a more laissez faire society - nor all that many on £7.58 an hour. Thus dragging those few up to this level through the taxandbenefits system is hugely less expensive than the system we’ve got now. A saving that could - should - be used to lower the taxation of low incomes and so increase that incentive for a double bang for the tab of £sd.
We’ve changed the definition of poverty in the past, we can do so again. And that’s the one simple trick to solve pretty much all of the problems with our current welfare state. Working full time will get you to about the top 10% of global incomes, any disability, family structure, ill-fortune or even simple damn laziness still gets you into the top 50%. A fair enough promise we think. Also, one that solves most of our budget problems with the taxandbenefits system.