Tag Archives: International comparisons

The distributional implications of universality (again)

Paul Johnson, the director of the IFS, has an article in the Times (also available on the IFS website without a paywall) about how different ideas about fairness are behind some of our political disagreements. There’s plenty to agree with in the piece. But when he touches on a couple of themes that regular readers of the Policy Sketchbook will be somewhere between familiar with and bored of – social care reform and redistribution – Paul says some things that I think are a bit misleading.

Here are the offending paragraphs:

“The Conservatives got into dreadful trouble over their manifesto proposals on social care funding. We have spent decades making no progress on how to reform the funding system, partly because of the way we think about fairness. Some think it unfair that anyone should have to use their own assets, including their house, to pay for care. Yet one of the reasons why proposals to cap the amount that anyone has to pay have not been implemented is because, compared with the system we have today, the winners would be the relatively well-off.

In fact, this is a fundamental disagreement about the role of the state as much as it is about fairness. If you think the state is there to provide a degree of social insurance, stepping in where private insurance markets don’t work to pay for those who are unlucky enough to need care, then you are likely to favour it paying all the costs above a certain level. That’s how we tend to think of the NHS. But if you think the state is there just to redistribute money from rich to poor then you might think it unfair.”

This is a familiar take: moving to universal benefits means less redistribution and benefits the well-off. But is it true? Well, that depends. The most important thing to remember when thinking about the distributional impact of changes in government spending is that the money doesn’t just appear out of thin air. The effect of a policy on the level of redistribution that government does depends on how it is paid for. By choosing different funding sources you can get pretty much any distributional effect you want, but some scenarios are more relevant and plausible than others.

Three different ways of paying for a universal benefit

So let’s take a look at the distributional consequences of moving from a means-tested benefit to a universal one, paid for in different ways. We’ll use a stylised example for clarity, but the conclusions generalise pretty well. Imagine we have a benefit worth £1000 per person, but means-tested so that only the bottom 30% of the income distribution get it. An independent commission recommends making this universal, so that everyone gets the benefit regardless of their income. There are broadly three ways we can pay for this and each has different distributional consequences.

Reducing means-tested benefits to pay for universal benefits is regressive

One way to pay for the new universal benefit would be to reprioritise some money that is currently spent on means-tested benefits. It’s trivial to see that this is going to be regressive, but let’s run the numbers anyway. Let’s say we take the money that is currently spent on our stylised means-tested benefit and use it to fund a universal version. Instead of the bottom 30% of the income distribution getting a benefit worth £1000, everyone now gets one worth £300. The bottom 30% lose £700 each and everyone else gains £300. This is nailed-on regressive and it would be a similar story if the money were reprioritised from some other area of means-tested spending.

Means-testing one universal benefit to pay for another is distributionally neutral

Another way of paying for the new universal benefit is to reduce universality in another area. This is the sort of thing that was discussed in the wake of the Dilnot Report: universal coverage for social care could be funded by means-testing some of the universal benefits that older people currently get, like winter fuel allowance or free bus passes. The distributional consequences of the switch would depend on the details, but it would be roughly neutral – we are taking money away from the same people who will get more from the new benefit.

Paying for a universal benefit through higher taxes hits the rich

The third way that we could pay for the new universal benefit is through higher taxes. We can design taxes with various distributional profiles, but we can get an idea of who would be hit by a “typical” tax rise if we look at the distribution of current UK taxes as a whole.

The chart below (based on ONS data) shows the distributional impact of extending our £1000 benefit to the whole population and funding it through an increase in “general taxation” – by which we mean a tax rise with the same distributional profile as the current UK tax system. The (positive) green bars show the additional benefits people in each income decile get and the (negative) red bars show the additional taxes they pay. The red and green bars sum to zero because, at risk of labouring the point, the money has not appeared out of thin air.

The winners from this shift to universal benefits are not the poorest, who already got the benefit, but it would be misleading to say they are the “relatively well-off”. The winners are the people in the middle, especially those just above the current means-test threshold. The biggest losers by far (in cash terms) are the richest 10%. This is a key point: the main distributional effect of a tax-funded change from means-tested to universal benefits is to move money from the people at the top of the income distribution to the people in the middle.

But you may have noticed something else in the chart. The bottom 30% of the income distribution also lose out, because they pay more tax and don’t get any additional benefit. They don’t pay much in absolute terms, but relative to their income it’s quite a lot. The chart below shows the same figures as a proportion of income: the richest still pay the most on this measure, but now the poorest are not far behind.

Now, unless you think that the bottom 30% do rather too well out of government as things stand, this doesn’t seem particularly fair. Luckily, it’s cheap to fix, since the bottom 30% only pays 7% of the cost of this policy if the money is raised through general taxation. If we were to exempt them from these tax rises, we’d still have enough to fund a universal benefit worth £970 for the rest of the population. But the point is worth noting: if universal benefits are to be funded through tax rises, the additional taxes shouldn’t hit the poorest.

The size of the state

So we’ve seen three different ways of paying for a new universal benefit with three different distributional effects: regressive, neutral and progressive. It should be obvious by now that unless you are clear which one of these you think will happen, you shouldn’t be saying anything about the distributional consequences.

How we assume the additional spending will be balanced rather depends on our assumptions about the size of the state. If we believe that tax rises are impossible or highly undesirable, then we are going to want a new universal benefit to be paid for by reprioritising spending. Up to a point we can reprioritise from other universal benefits and get something distributionally neutral – but so much of the British state is already means-tested that (unless you are willing to go for pensions or the NHS) there is limited capacity for such reprioritisation. With a fixed public spending envelope and tax profile there is only so much universality you can afford if you also want to do a certain amount of redistribution and under these assumptions, Paul’s claim that “the winners would be the relatively well-off” is just about defensible – although for a small spending item like the Dilnot reforms it would be quite easy to reprioritise spending in a neutral or progressive way.

But if we assume that more universal benefits will mean higher taxes then the picture looks very different. As shown above, the biggest losers from this would be the richest and the winners would be the people in the middle. And there are a couple of reasons to believe that this is ultimately the more reasonable assumption.

The first is that the people who are in favour of universal benefits tend to be the people who are in favour of higher taxes. Elect a government that does one, they are likely to do the other. We can see this in the recent Labour manifesto, where universal free university tuition was proposed, funded by an increase in income tax. Although the Dilnot Commission didn’t say much about how its proposals should be funded, the previous abortive attempt at social care reform (Labour’s National Care Service) was to be funded by an increase in inheritance tax.

The second is that countries with more universal benefits tend to have higher tax rates. There’s more going on in these figures than just universality versus means-testing, but in general the countries with the most universal benefits, such as the Nordics, France and Belgium, raise the most in taxes. Internationally, means-testing goes with low taxes and universality goes with high taxes.

Some conclusions

To be fair to Paul, he is far from the only person to go around saying that universal benefits are regressive. It’s even true under certain assumptions – specifically that the UK must remain a low tax country. The problem is that no one who writes opinion pieces saying that universal benefits are regressive ever seems to find space to clarify that this is their assumption. If they did, readers would probably notice that this isn’t what the proponents of universality are usually proposing, and it isn’t what countries with more universal benefits do. Moving towards a European model with more universal benefits and higher taxes would most likely amount to a transfer from the rich to the people in the middle of the income distribution. I doubt that fans of redistribution would, as Paul suggests, think this is unfair.

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The magic money tree

On Question Time this weekend, Theresa May was confronted by a nurse whose pay has been squeezed under the Coalition and Conservative governments. Her response to the nurse’s complaints was that “there isn’t a magic money tree that we can shake that suddenly provides for everything that people want”. Theresa May is of course right. There is, as far as we know, not a magic money tree. However, I fear that as an explanation for why nurses can’t have a pay rise, her statement is lacking.

That is not to say that there is no link between magic money trees and nurses’ pay. If there were indeed a magic money tree, then its harvest could surely be used to pay nurses more[1]. The absence of such a tree is a necessary condition for it being impossible to pay nurses more – but it is not sufficient. The reason for this is that there are types of money that are not magical and do not grow on trees. In failing to address the availability of this more mundane form of money, Theresa May has, not for the first time, not really answered the question.

A more charitable interpretation of Theresa May’s statement is that she is trying to argue that we can’t afford to increase government spending above current levels. Government spending is financed by taxes or debt, which must be repaid from future taxes, so the ability of a government to afford a given level of spending is dependent on its ability to raise taxes. One reason that some developing countries struggle to fund public services such as health care is that they have weak public institutions and so can’t raise taxes very effectively. The UK and most other rich countries are much better at collecting taxes and have larger public sectors. But their scope for public spending is not unlimited, for two reasons: high taxes and a large public sector might have a distortionary effect on the economy, discouraging economic activity and squeezing out the private sector; or democratic processes might limit the size of the state by voting out governments that raise taxes.

This is all very complicated and hotly disputed, but one way to understand whether the UK could conceivable have higher public spending is to look at how we compare to other countries. The chart below (based on OECD data) compares public spending as a share of GDP with GDP per capita, for all OECD countries where data is available[2].

On both measures, we are roughly in the middle. GDP per capita in the UK is about the same as Japan, France and Finland, higher than Spain and Italy, and a fair bit lower than most other Western European countries. Public spending (as a share of GDP) is lower than in most Western European Countries, but higher than Japan, Australia or the US.

It is also fairly clear that, as far as this dataset goes, there is no relationship between the two variables. Sweden, Austria and Denmark have much higher public spending than the UK, but this doesn’t stop them having much higher economic output. On the other hand, Australia and the US manage higher economic output with lower public spending. It seems that (within the range of this chart) pretty much any combination is possible. Of course, this doesn’t prove that higher taxes wouldn’t be bad for the UK economy. Perhaps our economy is so fragile that it would be crippled by any tax rises. But if you are going to argue this you are going to have to convince me that it is impossible for us to achieve what much of the rest of Western Europe can.

The political question is more difficult to analyse. Yes, other countries have larger public sectors, but they also have different political cultures. Perhaps the British are fundamentally different to our European neighbours and would simply not stand for the tax rises that are required to finance better health care and pay rises for nurses. Perhaps we are and will always remain a low tax country.

I don’t have a strong opinion on the optimal size of government, but I do wish we could have an honest debate about it. When someone says “we can’t afford it”, we need to be clear that this is nonsense. What they are really saying is that they do not think that we should raise the taxes required to pay for it. This is a debate that we need to have, but saying “we can’t afford it” is not the way to go about it.

The phrase “magic money tree” is even worse: it is designed to ridicule the suggestion that public spending should be increased. A nurse asking for a pay rise is as stupid as someone who believes that money grows on magical trees. Repeating this phrase whenever anyone suggests spending public money on something is not only nonsensical but frankly offensive.

 


[1] This statement is not the main point of this post and I don’t want to hear from any macro-economists about the inflationary effects of magic money trees.

[2] Excluding Ireland and Luxembourg, whose results are heavily distorted by their role as tax havens.

2043: a demographic end to German hegemony

Throughout the recent Eurozone crisis, it has been taken for granted that Germany calls the shots in Europe. The reason for this is that it has by some distance the largest economy – some 40% larger than the economies of the UK and France, the next biggest countries by GDP.

The German economy is big for two reasons. First, there are a lot of people working in Germany: there are around 49 million people aged 20-64, compared to around 38 million in the UK and 37 million in France. Second, as you may have heard, Germany is pretty efficient. Economic output per person aged 20-64 is around $71,000 per year, compared to just $65,000 in the UK and $66,000 in France. That doesn’t make the Germans the most productive people in Europe – Sweden and the Netherlands both produce over $75,000 per year per working age person, but they are much smaller countries.

GDP per worker in large EU economies

But something is happening in Germany that might fundamentally alter the dynamics of the European Union: the population is shrinking. While all developed countries are seeing a rise in the proportion of older people in their populations as life expectancies rise, Germany also has falling birth rates. As the chart below shows, birth rates in France and the UK are expected to remain fairly flat over the next 35 years. But in Germany, the birth rate is projected to tail off dramatically, meaning that as young people age they are not replaced. The result of this is that the working age population will shrink significantly in absolute terms (while it stays roughly the same size in France and grows in the UK).

Demographics in large EU economies

This means that even if Germany retains its productivity advantage over Britain and France, the size of their economies will converge. In fact, if relative productivity remains constant, the UK economy will be larger than the German economy sometime in the early 2040s and France (probably) sometime in the 2050s.

GDP projections for large EU economies

It’s difficult to project what will happen in Europe over the next year, let alone the next 30 years. But, assuming the European Union survives in something like its present form – and assuming the UK remains intact and a part of it – the balance of power in the EU may well shift towards our side of the channel. Something to bear in mind for the upcoming referendum: stay in the EU, wait for 30 years, then we (or our children) will be running the show. What could possibly go wrong?

The UK does not spend a disproportionate amount on benefits

OK, I know I’m a bit late to this party, but even by the standards of government publications, this paragraph from George Osborne’s recent Summer Budget (section 3.4) is a stinker:

However, despite progress during the last Parliament there is still more to do. Taxpayers are still being asked to pay for welfare expenditure that remains disproportionately high. 7% of global expenditure on social protection is spent in the UK, despite the fact that the UK produces 4% of global GDP and has only 1% of the world’s population. As chart 1.14 shows, spending on working-age welfare has increased significantly in real terms over the last few decades. Too many families continue to be trapped on benefits. The Budget sets out the next stage of welfare reform, delivering on the government’s commitment to save £12 billion from the working age welfare bill.

I’m not sure where these figures came from, but there are very plausible. It would in fact be surprising if the UK did not spend a “disproportionate” amount on social protection (broadly speaking, public pensions, social care and benefits) when compared to the whole world. Many people living in developing countries are in desperate need of social protection, either because they are too ill to work, there are no jobs available, or for any number of other reasons. But they don’t have access to it. The governments of these countries may be corrupt and not care about the needs of large proportions of the population, or they may simply lack the infrastructure needed to collect enough taxes to provide meaningful social protection. Western countries are much richer than the world as a whole and have much stronger institutions, so they are able to spend more than the global average on social protection. This is a good thing.

So it is a nonsense to compare the UK to the global average. This is the wrong comparator group and sets a laughably low ambition for what a government can do to enhance the welfare of its citizens. It makes more sense to compare the UK to other OECD countries.

Spending on social protection as a % of GDP in OECD countries

The figures look rather as you would expect. The UK spends a smaller share of its wealth on social protection than almost all other rich European countries. If we are spending a disproportionate amount on this, spare a thought for the poor French! The Summer Budget figures imply that they account for 11% of global social protection spending and only 4% of global GDP.

There is one country that clearly bucks this trend. The US is a very rich country (GDP per capita is nearly 50% higher than in the UK) but it spends relatively little on social protection. However, while the US is a great country that UK would do well to emulate in many areas, it is not a leading light in the field of social protection. To take a random example, women in the US get precisely zero paid maternity leave.

To summarise: the UK does not spend a disproportionate amount on social protection. In fact, we spend less than most comparable countries in Europe. Nonetheless, the US shows that it’s possible to spend a smaller proportion of GDP on these things, but we might have to become 50% richer and cancel maternity leave to achieve it.

Reasonable arguments can be made for reforming parts of our benefits system, but this is one of the weakest and most disingenuous I have seen. While it is careful to stop short of telling an outright, falsifiable lie, its purpose is clear: it is seeking to mislead the reader. Although it removes the risk of that gotcha moment when a full-blown lie is exposed, seeking to mislead is morally equivalent to lying and politicians should be called out for it more often.

Good marks, bad vibes

George Monbiot tells us that pushy parents are ruining their kids’ lives. Although, of course (and as George recognises), we don’t know whether pushy parents are ruining their kids’ lives. There aren’t many trials conducted of parenting techniques, and even if there were it would be impossible to make them properly randomised and controlled. It’s just not realistic that we could impose different parenting styles on two equivalent groups.

So we are left with a series of hints and suggestive facts. George mentions a few from a UK perspective: more children are in mental health care, more are admitted to hospital for self-harm and more have counselling for exam stress. Alongside this is a general feeling that we are putting more pressure on kids to succeed in school. This really isn’t much evidence. There’s no reason why we would link the first two (admittedly worrying) trends to pushy parents. And it seems just as plausible that the third is driven by increasing use of counselling as increasing levels of exam stress.

But perhaps we can do better. If parents are putting pressure on kids to do well at school, what effects would we expect to see? Well first, we would presumably see kids doing better at school. I’m not willing to believe that making kids study harder doesn’t generally improve their grades. The question then is whether this is accompanied by any negative outcomes, such as stress, unhappiness or mental health problems.

As it happens, we have some internationally comparable data on these things. The OECD’s PISA tests assess how well children in countries across the world’s perform in exams; and George’s article points us towards a recent international survey of children’s wellbeing, which asks kids from a number of countries how they feel about their home and school life. To minimise confounding factors, I’ve chosen a question closely linked to exam performance (satisfaction with grades) and compared this to the country’s performance on the PISA tests.*

Children from countries that do better on PISA tests are less satisfied with the school marks

The results are quite striking. I had really expected to find no correlation (that’s what usually happens when I have an idea like this) but in fact there is a strong negative correlation. Children from countries that do better on PISA tests are less satisfied with their grades.

Of course this doesn’t prove anything about causality. I’m not sure it’s plausible that higher marks cause lower satisfaction, but it seems possible that never being satisfied might drive kids on to do better. It’s also possible that something else (pushy parents, say) is making kids perform well in exams, but at the same time making them feel bad about it. Or of course, further investigation might reveal this result to be a fluke.

At the very least, though, this should make people question the hand-wringing that accompanies the release of the OECD’s PISA ranking, in which the UK is invariably at best stagnant, at worst declining”. Emulating countries like South Korea, which sit near the top of the rankings, might amount to making our kids do better at exams but feel rotten about it. It’s not obvious to me that this is the route to a happy and successful life.


 

* The data don’t refer to quite the same year, or to children of quite the same age, but I think that it is still a relevant comparison.

Means-testing and the progressive state

In Sweden, the amount you get from the state pension is linked to the amount you earned while you were working. That is, the richer you are, the more you get.

I can already hear the howls of “regressive” if this was suggested in the UK. Broadly speaking, our public pension pays out a flat rate (provided you’ve paid national insurance for enough years) which is just about enough for someone to live on. It seems more likely that we would take that away from wealthy people than give them an enhanced rate. Just look at the debate around the winter fuel allowance, which is effectively just a cold-weather top-up to the state pension.

This raises a paradox. Any Guardian reader knows that Sweden is a socialist utopia with high taxes, strong public services and lots of redistribution. How can they be doing something so regressive?

Of course, richer people in the UK also get bigger pensions than poorer people. The difference is that this is done privately, rather than by the government. In the UK, many people pay money into private sector pensions and when they retire they can convert this to an annuity (or at least they could until the government abolished pensions). The Swedish public system mirrors this setup by counting up how much you pay in and converting that to an annuity when you retire. The more you put in, the more you get out.

This is just not how we do things in the UK. State support (the NHS aside) is usually seen as a last resort for the destitute, to prevent poverty and starvation. Means-testing is used to target government resources on the poor and prevent them going to the rich. This is our idea of progressive government.

But our progressive European neighbours like the Nordics actually do a lot less means-testing than we do, while managing to be highly redistributive and have lower inequality than us. How do they manage that? By having higher taxes and a larger public sector. In general, the most progressive countries in the world are characterised not by their efforts to target spending on the poor, but by universal benefits and relatively high, progressive taxes.

Now it is possible to argue that this model is not optimal and that a smaller state would be good for economic growth. In that case means-testing makes sense, since it allows you to achieve more redistribution if you are constrained by the need to keep government small. Alternatively, it could allow you to shrink the size of government if you are constrained by the need to redistribute. Limiting benefits to the poor also supports the small state cause in a more insidious way, by stigmatising claimants and undermining public support for state spending.

I am yet to hear a UK politician make the argument that means-testing is the corollary of small government and low taxes. Instead, Nick Clegg tells us that he “doesn’t see why someone like Alan Sugar should be entitled to a winter fuel payment” since he’s “got a bob or two”. I’m sure that Nick Clegg understands the link between means-testing and the size of the state, but libertarians and state shrinkers clearly think that it is easier to get their policies through by having a pop at the rich than to try to convince voters of the merits of small government. Which is a shame, since there is an interesting debate to be had.