Towards a free-market anti-poverty strategy
Yet these policies were already pursued ambitiously in the decade up until the recession, when the British welfare state was inflated to Scandinavian proportions, and the success has been modest. For a while, living standards of low earners did improve, but this strategy never developed a momentum of its own. It only worked as long as ever-increasing injections of state money were forthcoming. Now that it is no longer viable, the poverty industry has no alternative to offer, since its whole agenda is based on welfare expansion. This leaves a huge vacuum, waiting to be filled with ideas for an alternative strategy.
In one important respect, the coalition is already broadly on the right track in this regard. With the Universal Credit and accompanying welfare changes, the coalition is undertaking some sensible steps to tackle chronic worklessness and welfare dependency. Given the UK’s extremely high proportion of children in workless households, these steps are more than necessary.
But welfare reform cannot be the only ingredient in an effective anti-poverty agenda, because it does not address the concerns of those in low-paid occupations who, despite reasonable working hours, still struggle to pay their bills. A comprehensive anti-poverty strategy must aim at raising the living standards of low-to-middle income earners more broadly.
The most promising way to achieve this is to address the causes of the UK’s exceptionally high level of basic living costs. This is an area with a lot of room for improvement. Housing costs in the UK are among the highest in the world. Childcare costs are considerably higher than in most other developed countries. Food prices and energy prices are less unusual in an international perspective, but still a lot higher than they have to be. And the overuse of ‘sin taxes’ makes the structure of consumption taxes highly regressive.
Housing is the most important one of these areas. Historically, the rule-of-thumb formula has been that a region’s average house price is between two and three times the average annual income in that region. Nowadays, in most UK regions, house prices are more than five times the average income, and rent levels have increased alongside. The reason is not hard to find. Due to overly restrictive planning laws, and local decision makers bending over backwards to appease ‘nimby’ groups, the UK has built fewer new homes than any other European country over the past three decades (relative to population size). The economics of this is simple, but the politics is extremely difficult, since the nimby machinery is well-oiled. For a start, ‘nimbys’ never call themselves ‘nimbys’, of course. They describe themselves in more winsome terms like ‘countryside campaigners’, ‘conservation groups, ‘concerned local citizens’ or simply ‘the local community’. They are also good at diverting the housing debate towards red herrings such as brownfield sites, empty homes, underused homes, second homes, land banking, or immigration. Yet the determinants of house prices are quite well researched, and most of the literature shows that the single most important factor is the severity of building restrictions. There are other factors, but none of them can explain more than a small share of Britain’s housing cost explosion. The only way to resolve the issue is to allow a massive expansion of the housing stock.
A government which aims to address this issue must abandon the comfortable illusion that groups like the Campaign to Protect Rural England can be reasoned with. A reform-minded government must find the courage to confront such groups, and expose them for the vested interests that they are, rather than back down as soon as a few sound bytes (‘concreting over the countryside’ etc.) are thrown at them.
Childcare is another area which contains huge efficiency reserves. Once a relatively informal sector, it has been turned into a highly standardised and regulated profession, which has wiped out the market’s low-cost segment. Public childcare subsidies in the UK are on a par with Swedish levels, but the difference is that in Sweden, these subsidies cover almost all childcare costs. British parents, in contrast, are still faced with steep out-of-pocket payments. A thorough deregulation of the sector could make childcare more easily affordable, which, as a positive side-effect, would facilitate labour market participation among parents.
In the coming negotiations with the EU about the possible repatriation of competencies, an opt-out from the wasteful Common Agricultural Policy should be one of the top negotiating points. The aim of this must not be to replace the CAP with an equally wasteful British equivalent, but to establish an unsubsidised agricultural sector that is fully exposed to free trade. This is how New Zealand and Australia have brought domestic wholesale food prices into line with world market prices, a boon for low-income consumers.
Environmental policy also needs a good deal of tidying up. Environmental protection is a laudable aim as long as it means improving environmental quality at a tolerable cost, but modern environmentalism has become a form of moralistic anti-consumerism, which is no longer really about the environment. Many ‘green’ taxes in the UK already exceed available estimates of the environmental cost of the taxed activity, which means that they have ceased to be genuine environmental taxes. This should be rectified. Most importantly, the renewable energy subsidies that are forced on consumers via their electricity bills – a green tax in all but name – should be scrapped entirely. They are just another example of an industrial policy which attempts to pick winners, and ends up breeding white elephants.
Finally, the overuse of ‘sin taxes’ has to stop. Insofar as people’s lifestyle choice impose costs on others, these should be dealt with directly. For example, there is no reason why a hospitalisation with alcohol intoxication should be free of charge. User fees, not sin taxes, are the appropriate way of dealing with such costs.
These are ways of addressing the high cost of living, which, if pursued decisively, could lead to a virtuous circle: with living costs tumbling, out-of-work benefits could be reduced to keep the living standards of their recipients constant while the living standards of the low-paid increase, thus improving incentives to work. At the same time, fewer people would be exposed to benefit withdrawal rates, which would improve incentives to, for example, move from part-time employment to full-time employment. This would lead to a fall in benefit expenditure and an increase in tax revenue, which could then be used to finance tax cuts for low earners, improving work incentives further.
A free-market anti-poverty agenda would be economically sound, fiscally neutral (at worst), and workable even in an adverse economic climate. It would not cost taxpayers any money, but admittedly, it would be hugely expensive in terms of political capital: if a party is looking for a way to upset a multitude of noisy interest groups at once, this is it.
This article originally appeared in Crossbow magazine.