The great lie about the British welfare state
If there is one thing that appears to unite all sides of politics it is the concern about rising levels of welfare spending. Canute-like, a succession of chancellors from George Osborne to Rachel Reeves have sat on the beach and commanded the swelling Universal Credit bill to retreat. The panic on spending is understandable. Over the course of this Parliament, we are expected to spend an additional £51bn on working age welfare compared to pre-election levels.
The spiralling cost of welfare has though created one new industry: the commissioning of government reviews. We’ve had eight major reviews or white papers on employment, working age social security and capability assessments since 2010. We are now in the throes of our ninth, launched in December, and this time led by former Labour Cabinet Minister Alan Milburn. The more welfare reviews that we commission, the less effective they seem to be. Call it Milburn’s Law, after the government’s reviewer-in-chief..
Milburn’s Law is built on looking at the wrong thing. These reviews take as given the establishment consensus that rocketing expenditure is solely caused by a poorly designed welfare system. Fraser Nelson, the former editor of the Spectator, is the classic proponent of this view. In his recent Substack on welfare spending, he summed up the consensus by saying that increased welfare spending is “not a story of idle Brits, but good people trapped in a bad system”.
Nelson is half right. Our current predicament is certainly not a story of idle Brits. But nor is it about the design of the rules around universal credit. The cause is ideological: an economic liberalism that has given up on full employment. On the one hand, this consensus decries an active state to support employment through investing in new industries or protecting existing ones. On the other, it constantly calls for state action to incentivise employment, generally through tinkering with the welfare system.
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We’ve been here before. Karl Polanyi in The Great Transformation tells the story of economic liberals in the 19th century who believed that rising welfare expenditure was caused by an over generous welfare system. Yet anyone who has read Dickens or Gaskell knows that despite the threat of the workhouse, worklessness was endemic. In the 40 years before the First World War, for example, unemployment was higher in Britain than it is today. Then, as now, Polanyi describes how economic liberals could not accept that it was their economic system that caused the problem, not fecklessness.
Of course, you need to make sure that people are given encouragement to find work. However, the best route to encourage them is developing an economy that creates lots of decent, well-paid jobs. Despite the propaganda from people like Nelson, Britain did not experience a jobs miracle under the Coalition and Conservative governments before the pandemic. We created lots of jobs, but they were not decent or particularly well-paid.
Hospitality, retail, health and social care have driven the vast majority of new jobs created since the financial crisis. Many of these jobs lack clear career pathways, security or decent wages: the number of jobs paid the national minimum wage has more than doubled from 834,000 to 1.7m. Again, creating jobs is not a problem, creating good jobs is the challenge. The United States, the lodestar of the Nelson’s modern-day Manchester School, has seen working age poverty increase (just as it has in Britain) despite creating large numbers of jobs.
The only period where we successfully kept unemployment low and created a sustained increase in living standards for working people is during the postwar decades that Tories still reflexively decry. This fact must be ignored by today’s welfare reformers because it would require building the sort of political economy that they have consistently attacked for over 40 years: an active state with a focus on production not consumption and wealth. We cannot solve the problem of galloping welfare expenditure because the establishment cannot will the means to defeat it.
Last year I ran a thought experiment with a colleague. Imagine we had maintained the same level of spending as a proportion of GDP on subsiding industries, regional assistance programmes, and working-age welfare spending that we had in the “bad old days” of 1975 rather than running down industries, slashing investment and relying on the welfare “safety net” to avoid mass poverty. Our analysis found that under the “bad old days” approach we would have saved at least £30bn a year compared to what we are spending today, when comparing spending on working-age welfare expenditure, regional investment programmes, industrial and job subsidies.
Under the old model, we would have spent around £70bn last year on industrial and regional investment programmes to maintain employment – more than double the levels we are spending now. But the working-age welfare bill would have been considerably lower. Critics might say that we should look at the system overall, but our research found that despite a brief period of savings in the 1990s and early 2000s, the shift away from full employment as political goal has cost us nearly £200bn, not to mention the lives and communities scarred.
Whatever the technocratic daydreaming around welfare of the Walter Mitty variety, there is no system tweak or loophole closure that will fix things. This is the Great Welfare Lie. Record welfare expenditure is a feature, not a bug of our system. If anything, lots of people on welfare is considered useful to “discipline” workers through fear of claiming too much from profits. The former economic advisor to Margaret Thatcher, Sir Alan Budd, who helped build this system, once laid it the logic thus: “… raising unemployment was an extremely desirable way of reducing the strength of the working classes – if you like… what was engineered there in Marxist terms was a crisis of capitalism which re-created a reserve army of labour and has allowed the capitalists to make high profits ever since. (He added: “I would not say I believe that story, but when I really worry about all this I worry whether that indeed was really what was going on.”)
The “creative destruction” that Nelson & Co wish to see would follow this logic. It will always be expensive because it continually puts tens of thousands on the scrap heap as their employers shut without supporting good jobs that they can usefully do. But while we might be willing to tolerate Victorian levels of unemployment, we will not tolerate Victorian scenes of destitution. The current consensus is only sustained by the total political naivety of advocates who convince themselves the public will countenance the poverty it would cause. This in spite of the evidence that shows the proportion of people that think the government has a responsibility to provide a decent standard of living for the unemployed has gone up by 15 points since 2012, according to the latest British Social Attitudes Survey. Interestingly, the same survey found that 65 per cent think it should be the responsibility of the government to provide work for everyone that wants to.
The price of a low-cost welfare system is significant state investment in infrastructure (particularly energy) alongside active industrial and regional investment programmes. It requires significant upfront investment too. There are no easy savings to be made, but the long term social and economic outcomes are better for families, communities and the nation. The choice is essentially between paying people to stay at home and investing for people to be in work. We don’t need another review to tell us which is the better option.
[Further reading: Britain still needs welfare reform]
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