Middle class beneficiaries of welfare payments are a drag on reform
This year I have been in a rather unusual demographic – both entitled (I didn’t claim it) to a winter fuel allowance of £250 as an over-60 and receiving a Child Trust Fund payment of a similar £250 for having a new daughter. As somebody in a well-paid job there is no sense in which I “need” these untaxed benefits – personally I’d just prefer to pay £500 less tax. It would be less bother.
These schemes are examples of universal benefits – which are held by their supporters to avoid the dreadful stigma of means-testing. They still need some action on the part of the recipient to set them in motion, however, so one wonders whether they are quite as universally received as their advocates suggest.
Be that as it may, both these benefits are difficult to justify in economic terms.
The winter fuel allowance (WFA) is paid to nearly 13 million people and costs the taxpayer £2.5 billion a year. It is often discussed in relation to the concept of “fuel poverty” – an idea pushed by groups like Age UK, which claims that thousands of pensioners die each year of the cold and that the WFA prevents thousands more such deaths.
Last year the Environment, Food and Rural Affairs Committee caused a stir by pointing out that only around 12% of recipients fall within the usual definition of fuel poverty, i.e. people spending more than 10% of their income on heating. Perhaps more fundamentally, I query the whole concept of fuel poverty as distinct from low income. We don’t have a concept of “food poverty” or “clothes poverty”. What is special about heating as compared with other essential spending? The proportion of any given level of income people spend on fuel can vary for many reasons – the age and size of the dwelling, the amount of time people spend in it, the number of people in the household. The winter fuel allowance, therefore, is crudely targeted. It is also a subsidy to fuel use, at a time when we are told we should be reducing fuel consumption on climate change grounds, and thus to the profits of energy companies.
The Child Trust Fund is also of questionable utility. It is intended to give children a start in life by putting some money into a fund, topped up by a further £250 at age 7, which it is hoped will be augmented by families’ own savings (for which there are tax benefits). Young people thus get some money for themselves at age 18 to help them with education or other worthy purpose. Again, this is not well-targeted and assumes that many families would not save at all without this “nudge” from the state. It is also a policy the efficacy of which even in its own terms is difficult to assess. Introduced in 2002, it will be 2020 before any young people see the money and we are in a position to judge whether the exercise was worthwhile. Meanwhile it is costing us around £350 million a year in direct payments alone.
The huge majority of beneficiaries of both these schemes do not really need them in any objectively measurable sense. People in genuine poverty could be helped more effectively at considerably less cost. But these schemes were devised with the political objective of tying the middle class into the vast army of recipients of welfare largesse, currently swallowing up 30% of all government spending. This makes the project of reducing government spending so much more difficult as it makes virtually everybody a potential victim of heartless “cuts”.
The government appears to want to keep winter fuel allowance, but may reduce spending on the Child Trust Fund. I wish that this was based on an objective analysis of the costs and benefits of the schemes. I fear, however, that a more likely reason is that there are 13 million beneficiaries per year in one scheme but only 750,000 or so in the other. Do the political math: Messrs Cameron and Clegg will have done it.