Late at night on the 20th of July the Conservative government’s Welfare Reform Bill was endorsed by the House of Commons thanks to the abstention of most of the official opposition’s MPs. The acting Labour leader, Harriet Harman, instructed her party to abstain because she thinks that the Labour Party will be condemned to the electoral wilderness if it pursues economic policies that are not “sustainable” and “credible”.
The reforms aim to reduce the amount of money that the government spends on welfare. The cuts in the welfare budget are to be balanced by an increase in the minimum wage.
The government tells us that these policies are designed to create a “high wage, low tax, low welfare economy”. By abstaining from the vote the Labour Party leadership appears to embrace the idea that this vision of the economy is both “sustainable” and “credible”.
Which is peculiar, because there is little evidence that the strategy makes any sort of economic sense.
Welfare payments are designed to cover essential living expenses and no more, which means that most of the money that the government distributes as welfare is spent into the economy within a month. The government proposes to cut welfare spending by £12bn/year, which means a reduction of £1,000m in the amount of money circulating through the economy each month.
The Institute for Fiscal Studies calculates that the gross increase in employment income from the proposed minimum wage hike is around £4bn/year. Some of this will go to households that are not currently getting any money from the welfare budget (e.g. two earners, one of whom is in a well paid job). This extra money isn’t needed for essential living expenses which means much of it will lie idle in bank accounts instead of being spent into the economy. This means that the increase in minimum wage will contribute something less than £333m to the monthly cycle of money through the economy.
The net effect of these two policies – cutting welfare spending and increasing the minimum wage – will be to reduce the amount of money circulating through the economy each month by more than £666m.
Now, the people who think that the government’s strategy is credible and sustainable will tell you that lowering taxes is the very thing to fill this £666m/month gap. Let people keep more of their money and they’ll spend it into the economy and everything will be fine and dandy, goes the story.
The first problem with this “low tax boosts economic activity” theory is that there’s no evidence to support it. But there’s plenty of evidence from academics on both sides of the Atlantic (and even the mighty IMF) to say that the opposite is true: cutting taxes does not result in “trickle down” of money through the economy.
The other problem with the low tax proposition in relation to the current UK government’s strategy is that it’s not actually planning to cut taxes at all. The Institute for Fiscal Studies calculates that the proposals in the July budget represent a net tax increase of around £7.8bn over the next five years. The income from this tax increase will be used to offset the deficit: to reduce government borrowing in an attempt to balance the books sometime before the end of the decade. So the money that’s removed from the economy via the tax increase will merely replace money that’s normally added to the economy via government borrowing.
This tax increase (or deficit reduction) is the equivalent of taking £130m/month out of the economy in addition to the £666m/month that will be lost from the cuts to welfare spending – a total of at least £796m/month of regular spending throughout the economy that will no longer take place. To put that number in perspective it represents a loss of more than 2% of GDP.
That the Conservative government has managed to sell this strategy as a “credible” or “sustainable” way to run an economy is a triumph of political marketing. Along with their willing helpers in the mainstream media they have succeeded in conning a gullible electorate into believing that these reforms are necessary because there “isn’t enough money” to cover the current welfare budget.
While we may just about excuse the electorate for being economically ignorant we would hope that Her Majesty’s Most Loyal Opposition would be up to the task of exposing the government’s mendacity and/or incompetence. No such luck.
Sadly, even the MPs who voted against the reforms, including 48 Labour rebels, appear to have done so only because of the harm that cuts will do to people who rely on welfare payments. While this position is laudable from a moral perspective it falls far short of what we need from our elected representatives. Compassion for the vulnerable does nothing to put food on their tables.
We need the opposition parties to explain the idiocy of the government’s strategy and present us with alternative proposals that are genuinely credible and sustainable.
The entire thrust of the government’s argument hinges on the contention that there is “not enough money” to sustain current levels of public spending. Not enough money? Not enough of the the only commodity in the world that can be created at will by government at almost zero cost?
“Not enough money” is a ridiculous premise for an economic argument. It’s a naked Emperor prancing about in the public glare, asking to be mocked. It beggars belief that opposition MPs aren’t pointing at the Imperial buttocks and shrieking with laughter.
Those who voted against the Welfare Reform Bill need to get beyond compassionate posturing and get on with the business of working out how to make money work properly for everyone. Working out how money can reliably be made available for producing, distributing and consuming all of the stuff on which we all rely for our security and comfort. And once they’ve worked out the nuts and bolts of the system they need to develop a narrative that catches the imagination of the electorate, one that allows them to believe that there’s a credible and sustainable alternative to the dismal refrain of “not enough money”.
As for the Labour MPs who abstained from the vote, they might as well resign en-masse. What’s the point of an Official Opposition that’s incapable of opposing such crass economic incompetence?