Issue 191 of SOCIALIST REVIEW Published November 1995 Copyright Socialist Review

Can we afford the welfare state?

Health, benefits and pensions are too expensive, we are told, as our rulers set about attacking public spending and welfare. In this special report, our writers find that there is a future for collective provision
Socialist Review

There is nothing new about cuts in welfare spending. They go back at least 20 years. Increasingly, though, it is being argued that the welfare state has reached a turning point. It is in crisis because of rising, unfulfillable demands. We can no longer afford the 'generous' state handouts which postwar welfarism took as its starting point. As the Department of Social Security put it in 1993, spending may 'outstrip the nation's ability to pay'.

The figures seem to support this alarming picture of welfare running out of control. The main welfare services in 1992-93 cost nearly 160 billion. They devoured almost two thirds of all government spending--over a quarter of our national income. The trend seems ever upwards. In the three years up to 1992-93 the share of national income going to welfare had risen from 21.4 percent to 26.4 percent.

If that isn't bad enough, the alarmists claim, worse is to come. Even if you continue to cap spending on things like health and education (accounting between them for nearly 69 billion), spending on cash benefits, of which pensions are the largest item at 28.6 billion, threatens to go stratospheric. The conclusion appears unavoidable: welfare is eating up the sources of wealth, thus threatening both the productive capacity of the nation and welfare itself.

Hence the need, as the expression goes, 'to review priorities'--to rethink welfare from scratch. Welfare can no longer be, as Beveridge and the 1945 Labour government took it to be, a matter of rough equality in which everyone 'paid their stamps' and everyone was entitled to benefits in time of need. Resources can never keep pace with demand. So welfare must be restricted to a system of safety nets, with those able to look after themselves being 'encouraged' to fund their own welfare.

We are back with the prewar assumption that welfare cannot be a right--it must be 'means tested'. The Tories may have led the way, claiming that the introduction of 'market reforms', particularly into health, is the only way to preserve welfare spending in the altered situation. But 'modernising' Labour has followed in their wake. Tony Blair's predecessor, John Smith, set up the Commission on Social Justice under Sir Gordon Borrie, whose workings took for granted that the principles underpinning the postwar welfare state were no longer valid.

Yet so deep is the commitment among most ordinary people to the ideal of the welfare state that the Tories have not dared attempt a frontal assault as some of their loonier right wing 'free marketeers' are urging. Labour has been even more cautious about the new consensus, conscious as it is of its own base and the Tories' unpopularity. Yet Labour's endorsement of the general conclusions of the Borrie Commission, the 'radical thinking' about benefits which comes from MPs like Frank Field and--most importantly--the telling silence on reversing the Tories' cuts are all straws in the wind.

So insidious is the argument that we're running out of money that people can fall for the argument that the only way to retain a properly funded health service is through increasing general taxation. This is what the opinion polls show and what the Liberals exploit in their demand for an extra tax which will be earmarked (hypothecated in the jargon) for particular services. Yet the argument rests on spurious facts. It is simply not true that we are running out of money. The resources that exist at present in our society could be marshalled to fund the welfare system--we do not even have to wait for the development of a future socialist society. But to reallocate these resources would be to challenge the priorities of the present system.

The first point is that the scale of the supposed crisis is vastly exaggerated. As John Hills, an expert on welfare spending and a critic of the government, in a recent Joseph Rowntree foundation report, the Future of Welfare, demonstrates, total welfare spending since the mid-1970s has averaged just below the 25 percent mark as a proportion of national income. This doesn't represent spending out of control but rather the maturing of the welfare state. The proportion has gone up and down depending on the economic cycle. Its current growth to 26.4 percent is no more than a sign of the depth and duration of the recent recession. At the height of the Lawson boom in the late 1980s it was only a little higher than 20 percent.

What has changed is that over the last few years a greater proportion of welfare spending has gone on social security and health (as opposed to education and housing). This should not surprise us. Unemployment has remained high even during economic recovery, and joblessness, together with increasing, chronic poverty, has put pressure on this area of welfare spending. It's not true, either, that Britain's welfare spending is out of kilter compared with other advanced nations. Spending per head of population in this country is way down the European league--17th amongst the leading industrialised countries of the world.

At the heart of the Tories' insistence on means testing, efficiency and the like is their aim of shifting the burden of taxation more and more on to the shoulders of the poor. It is their priorities, not the real facts about funding, which determine what is spent on welfare.

That is proved simply by looking at what would have happened if the tax regime that was in place in 1978-79, before the Tories returned to power, was still in operation today. In 1978 the top rate of tax stood at 83 percent. It now stands at 40 percent--less than half. Over the past 16 years 14.8 billion has filled top taxpayers' pockets. And 9 billion of that went to just 190,000 people. The Child Poverty Action Group concluded that the state would have an extra 31.4 billion at its disposal had taxation remained at previous levels.

The Tories say that reducing the top rate of tax reduced tax evasion. But the figures tell a different story. More tax than ever remains uncollected: it rose from 847 million to 4.3 billion between 1979 and 1990. And between 1990 and 1992 a further 3.1 billion was written off as 'uncollectable'--at a time when the Tories decided that public finances were short of 3.2 billion that could only be raised through imposing VAT on fuel.

Tax changes have also led to the poor paying more. Means testing social security benefits leads to a greater overall tax burden on the low paid. In 1993 more than half a million workers found that part of their income got taxed at 50 percent or over.

The real scandal, though, is the way in which company profits have been allowed to escape contributing to welfare spending. Cuts in corporation tax have allowed company owners and shareholders a bonanza. Dividends have soared. Between 1980 and 1992 the payout was a shade under 150 billion. And the payout continues. The Labour Research Department reported that in the first half of 1995 the dividends dished out by industrial and commercial companies to their shareholders were 13.5 billion--25 percent higher than the first half of 1994.

The conclusion is obvious. There is only a crisis in the welfare state because the money needed for it is either spent on the wrong kind of things (3 billion on Trident, 14 billion on the European Fighter Aircraft and 2.5 billion on new helicopters for the army) or is held in the wrong hands.

Punitive rates of tax for the wealthy, a crackdown on tax avoidance, high rates of tax on inheritance, on companies and above all on dividends would more than ease the strain on welfare spending and even improve the services on offer. Then there would be no need to put up tax for ordinary people by a penny or distress the old with threats of lower standards of living.
Gareth Jenkins


Return to Contents page: Return to Socialist Review Index Home page