At the Autumn Statement in December last year, the Chancellor outlined his plans to reach an absolute budget surplus by 2018/19. In its latest Economic and Fiscal Outlook, the OBR forecasts that under that plan for deficit reduction, public spending will reach 35.2% of GDP. The Labour party has strongly condemned these plans to cut the deficit and has argued in favour of higher taxes and more public spending. The result would be that under the Labour party’s plans, the state would be a larger share of the economy by 2020 than envisaged by the Government.
The size of the state matters because it reflects the level of economic freedom in a country and influences long term economic growth rates. It also matters because the size of the state in the UK has a strong, positive correlation with welfare dependency.
Welfare dependency is an economically and socially destructive phenomenon. Not only does it lead to blunted work incentives but has the pernicious effect of engendering a culture of low aspirations in some communities. The welfare state should be about protecting the vulnerable in their times of need and where possible helping them to get back to a situation of self-reliance. Unfortunately, rather than a transitory phase, welfare dependency has become a permanent trap for many households. As President Franklin Roosevelt declared, dependency “induces a spiritual and moral disintegration fundamentally destructive to the national fibre. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit.”
All the political parties are, at least rhetorically, in favour reducing welfare dependency. Upon becoming Prime Minister in 1997, Tony Blair proclaimed that “the new welfare state must encourage work, not dependency” and Gordon Brown promised to “slash welfare dependency.” Unfortunately these efforts failed. Dependency, which can be defined as the percentage of households receiving more in benefits than they paid in taxes, rose from 45.9% in 1997 to 53.5% in 2010 when the Labour party left office.
This proportion fell to 52% in 2012/13, the latest year for which data is available. Of particular note is that the net dependency of the middle 20% of households fell by 17% compared to two years before. However, with more than half of households receiving more in benefits than they pay in taxes, it is still too high.