End universal benefits, and reduce complexity

Apparently, the Labour Party is performing a U-turn on universal benefits, or at least on the Winter Fuel Payment. So far, the principle of universality has been seen as sacrosanct. Now, a removal of the payment from wealthy recipients is no longer off the cards. Unsurprisingly, the responses have been mixed.

There are sensible economic arguments against the conversion of universal benefits into means-tested ones. If pursued on its own, without adjustments elsewhere in the welfare system, an increase in means-testing leads to a further deterioration in incentives to work and save. But there are also objections against means-testing which are a lot less sensible, especially the claims that it ‘increases complexity’.

Of course it is true that by itself, a means-tested transfer is more complex to administer than a universal one. The rate of a means-tested benefit differs from recipient to recipient, depending on their income, savings, and sometimes other variables. Thus, in order to administer a means-tested transfer, it is necessary to collect and constantly update a lot of information about the recipients. This is not true for universal transfers, which do not differ a lot between recipients, and which therefore require little detailed information about them.

But while the total cost of running a means-tested transfer system is certainly high, what is more relevant is the marginal cost: the administrative infrastructure for means-testing is already in place anyway, and there is no need to build up a new one. The most efficient way to means-test a hitherto universal transfer is to roll it into an already existing means-tested one, and piggy-back on the latter’s administrative infrastructure, rather than duplicate it. It is not as if we have a shortage of means-tested benefits, or of welfare bureaucrats.

The mess over Child Benefit, for example, could have been avoided if Child Benefit had been merged with Child Tax Credit. The Winter Fuel Payment, meanwhile, could be merged it with the means-tested Pension Credit. But while we are doing that, why not convert free bus passes and free TV licences into cash payments, and roll them into the Pension Credit as well? Or in fact, why not go further and merge the resulting super-Pension Credit into the Universal Credit, thus ending the illogical distinction between old-age benefits and working-age benefits? And once that is done, why not merge the whole package with the tax system, leaving one single system of positive and negative taxation?

In a welfare system which already relies so heavily on means-testing, the complexity argument is a red herring. It is possible to end universal benefits, and decrease the overall system’s complexity at the same time. That, however, would substantially reduce the fiscal illusion effect, and I can see why both the political class and the Big-Government intelligentsia would dread that prospect.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

2 thoughts on “End universal benefits, and reduce complexity”

  1. Posted 09/06/2013 at 07:00 | Permalink

    Rolling benefits into one inasmauch as possible has to be a good idea.
    But maybe the bus pass is a special issue. The administration of issuing a bus pass (a one off) is tiny and as long as travel is limited to off peak there is little if no marginal cost as these buses run almost empty during off peak travel. ( I don’t believe that bus schedules would be reduced if there were changes to the universality of bus passes ?) The benefits of pensioners getting out of the house / socialising rather than immobile and isolated at home are self evident

  2. Posted 10/06/2013 at 11:19 | Permalink

    The problem is that the free bus pass prescribes one particular form of transport, crowding out others. It should be the job of the bus operators to fill their vacant spaces in off-peak times. Selective discounts can be one way of doing that.

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