There are a number of theories about why government spending in developed countries has such a persistent upward tendency, only coming to a halt once the public has been so thoroughly milked that for most types of taxes, the peak of the Laffer curve comes within sight. But the most plausible ‘Occam’s razor’ style explanation is the fiscal illusion effect: the benefits of Big Government are tangible and concentrated; the costs are obscure and dispersed.

On the one hand, most of us have no idea how much government largesse actually costs us. We know how much income tax, employee national insurance and council tax we pay, but those account for not even half of total tax revenue. All other taxes and quasi-taxes are more or less opaque. Could you give a realistic estimate of how much you pay in VAT, fuel duty, the various alcohol duties, air passenger duty and climate change levy, etc.? Could you guess what proportion of so-called ‘employer’ national insurance rates has actually been subtracted from your salary, or what proportion of so-called business rates and corporation tax is actually added to the consumer prices you pay? Do you know what part of your electricity and heating bills are explained by renewable energy obligations, a tax in everything but name? No, because these are paid in dribs and drabs, spread out, scattered, and often obfuscated.

Yet at the same time, if you receive income transfers from the government, you will presumably have a fairly good idea of the sums involved. Transfers such as Child Benefit or Winter Fuel Payment are discrete, regular and tangible, and the same applies to near-cash equivalents like free TV licenses or free bus passes. Libertarians sometimes argue that the state grows by robbing Peter to pay Paul, thus securing Paul’s vote. But nowadays, a substantial proportion of government activity consists of robbing Peter to pay Peter. More precisely, of picking Peter’s back pocket many, many times, taking only a small sum each time, and then eventually handing him back a large sum at once and upfront. These mechanisms were identified over a hundred years ago by the proto-Public Choice economist Amilcare Puviani, and systematised in the 1960s by James M. Buchanan. Universal pensioner benefits in the UK, which have recently come under fire because they extend to households who are not ‘needy’ by any stretch of the imagination, fit that description quite neatly.

Friends of Big Government rely on fiscal illusions, because governments could not grow as fat without them. This is why there is nothing surprising or inconsistent if a commentator such as Owen Jones now defends benefits for wealthy pensioners. If you want fiscal exploitation to work in the long run, you have to keep the milk cows happy, which means throwing them some goodies once in a while, exclaiming ‘see, you’re getting something in return for that milk!’ Advocates of government obesity like Jones know this, as the following passage shows:

‘Stripping the welfare state of its universalism will breed a middle-class that is furious about paying large chunks of tax, getting nothing back and subsidising the supposedly less deserving.’

Ending universal old-age benefits would not just be fiscally sound. It would also be a – very small –step towards greater fiscal transparency. No wonder the Owen Joneses of the country are railing against it.


Head of Health and Welfare

Dr Kristian Niemietz joined the IEA in 2008 as Poverty Research Fellow, becoming its Senior Research Fellow in 2013 and Head of Health and Welfare in 2015. Kristian is also a Fellow of the Age Endeavour Fellowship. He 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). In 2013, he completed a PhD in Political Economy at King’s College London. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and at King's College London, where he taught Economics throughout his postgraduate studies. He is a regular contributor to various journals in the UK, Germany and Switzerland.

3 thoughts on “The fiscal illusion: is this why Owen Jones defends benefits for wealthy pensioners?”

  1. Posted 07/05/2013 at 11:54 | Permalink

    Indeed – but this is a long-standing doctrine of the welfare state, made perfectly explicit by the Beveridge Report, its foundational work. The Report argued that the welfare state must be universal, in order that it receive the support of all groups in society. This is true in most cases – education, healthcare etc. This does indeed explain why people like Owen Jones are so strongly resistant to any changes to these benefits which threaten their universality, as they also perceive that people are far less happy to pay for something which they do not receive (witness greater hostility to unemployment benefit, say, than to the NHS). In my view, the best way to dismantle the welfare state from the point of view of political strategy would be to gradually deny its benefits to ‘the rich’ – those on a certain household income would be denied ‘free’ healthcare and education but it would not be denied to those on lower incomes.

  2. Posted 07/05/2013 at 12:45 | Permalink

    While there are strong political-economy arguments for scrapping universal benefits, there are enormous problems associated with means-testing – in particular the negative effect it has on incentives to work and save. If universal benefits are ended, it’s important that other benefit rates are adjusted to limit the harmful impact of extending means-testing.

  3. Posted 07/05/2013 at 14:00 | Permalink

    Richard – I agree, which is one of the many arguments that are used against doing so. But these problems could be overcome by a reforming government of real courage and with clarity of vision. Some chance!!
    Ultimately, however, these issues demonstrate why there should not be a welfare state at any level of income, but the vast apparatus can only be rolled back – if at all – by gradual changes.

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