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Welfare Myth Number One - Benefits Are Expensive

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This is the first in occasional series on welfare myths - those persuasive facts that everybody knows to be true, but which, on closer examination turn out to be totally false.

Welfare Myth Number One is that the benefit system is expensive. When politicians want to frighten us they add together the cost of all benefits and pensions and get a staggering figure of £180 billion. We are then told that this figure is far too high and no longer affordable. They even imply that the high cost of benefits is the reason why our economy is in such trouble and why the government is cutting benefits by 20%.

However these figures are utterly misleading.

If I give you £10 but immediately take back £9 I have not given you £10 I have really given you £1. In the same way, to calculate the true cost of benefits we must take out the taxes that people pay from their benefits. For example, in 2010-11 the poorest 10% of families received an average of £104 per week in benefits. However they then paid £68 back to the government in taxes, leaving only £36 per week - or £5 per day.

The real cost of benefits is the net cost of benefits. That is, the cost of benefits after people have paid their taxes. We can find this data from the Office of National Statistics. For each household they have calculated both income, including benefits and taxes paid. So we can see how much better off people are, after taxes.

As the graph below shows, the poorest 40% of families are made a little better off because of the benefits system. The real cost of increasing the incomes of the poorest 40% of families is £27 billion. At the same time we can also see that the other 60% of families are worse off by a total of £213 billion.

2013-03-14-390NetBenefits20101101.jpg

What this shows is that most of our taxes do not go to fight poverty or redistribute income. £27 billion is less than 3% of GDP and about 6% of government spending. Fighting poverty is clearly a very low priority.

In fact many economists would argue that these benefits should not really be treated as government expenditure. Benefits are actually "transfer payments" - government is not spending money, government is shifting spending power from the rich to the poor. Cutting benefits and reducing the level of transfer payments can be very damaging to the economy because people on low incomes are less likely to:

  • Spend their money abroad
  • Save their money
  • Hide it from the tax man

This is just one more reason why the government's efforts to target cuts on disabled people and people in poverty is economic folly.

Next time a politician tells you benefits and pensions are expensive remember that they are not talking about the real cost of benefits. And remember the wise words of the great American cynic, H L Mencken:

The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.

I will explore who really benefits from the £213 billion of net taxes in a future welfare myth. If you are interested in these ideas you also might like to look at this more detailed essay on The Centre for Welfare Reform's website or join the Campaign for a Fair Society.