In its preview of Cameron’s speech, the Sun highlights the Tory leader saying that “…in a Conservative Britain, if you put in the effort to bring in a wage, you will be better off.” The implicit reference, here, is to Labour’s combined tax and benefit system, which frequently acts to disincentivise extra work. All too often, effort isn’t met by reward – so what’s the point?
As the Centre for Social Justice’s recent Dynamic Britain report showed, this effect impinges, above all, on the least well-off in society – and with tragic consequences. It’s all to do with effective marginal tax rates, which measure what proportion of a small rise in earnings would be lost to both tax and the withdrawal of benefits. For those looking to get off benefits and back into work, the marginal tax rates are dauntingly, disgracefully, high. On the journey back into full employment, many claimants receive only 5, 10, 15 pence from every extra pound they earn. Again, the same question springs to mind: what’s the point?
The story is told by this graph from the CSJ report, which plots the marginal tax rates faced by a single person, aged over 25 and without children, against their journey from benefit dependency to employment:
The different colours represent the points at which different benefits are withdrawn, but the top line tells you all you need to know. At the start of the journey, 100 percent of every extra pound earned is lost to the withdrawal of Jobseekers’ Allowance. It then goes through 90, 80, 70 percent – with that daunting mustard-coloured spike – before finally settling at 31 percent when this person is earning a wage of around £13,000 a year. You can see why people think they shouldn’t bother to work more. The system, quite literally, encourages benefit dependency.
So what’s Mr Cameron going to do about this? The CSJ have proposed an answer: a simplified, dynamic benefit system, which flattens out the marginal tax rate, and makes sure that claimants always receive around half of any extra money they earn. But while David Freud, the Tory welfare adviser, is said to be receptive to this type of thinking, the Tory leadership aren’t. They’re concerned about the upfront costs – roughly £3 billion – of the plan. And I hear, too, that there are worries that Labour might spin any benefit simplification as the “nasty Tories” cutting benefits.
Instead, the Tory leadership are minded to leave the benefits system alone for some time to come. It’s a “post-election aim” we’re told, whenever the topic arises. And we haven’t heard anything more about it in Machester, despite this being set up as the “Get Britain Working” conference. It’s a great shame. The current set-up is, quite simply, a moral and economic failure. If Cameron doesn’t fix it, then that will be at least one pledge in his speech today that will be broken.
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