Budget 2012: are personal tax statements just political point-scoring?

economy, personal finances, political events, taxation

Author(s):  Graeme Cooke
Published date:  21 Mar 2012
Source:  Guardian, Comment is Free

Among all the smoke and mirrors of today's budget, George Osborne is hoping to make one thing crystal clear: what your taxes are spent on. Announcing the introduction of annual personal tax statements he said they would make the tax system "simple and transparent" by showing people how much of their money had been allocated to different items of government spending.

The Daily Telegraph reported a government source as saying: "When people see how much they pay towards welfare, the argument about whether to cap benefits will be brought into sharp relief." According to the figures quoted, somebody earning £25,000 would find out that £1,900 of their money goes on funding welfare.

The case for transparency is a good one. We should be more up front about how much people pay in tax and what it pays for in return. It is especially important to be open about that debate when the public finances are tight and the trade-offs are sharp. But the chancellor must avoid partial transparency. It wouldn't be impossible, for practical reasons, to break down every line of public expenditure. But it would be misleading in the extreme to have one single line in a personal tax statement for "welfare".

Ministers have been know to refer to a £200bn benefits bill, arguing that it accounts for somewhere between a third and a half of all public spending. This is (sort of) true, but is a gross simplification, lumping together a vast array of different payments, serving different purposes, for different groups of people. If you analyse the £188bn of welfare spending, based on Institute for Fiscal Studies figures relating to 2009-10, the first thing that is immediately striking is that over two-fifths (42%) of welfare spending goes on pensioners: a whooping £77bn in total. And more than 15% – £31bn – goes on children, via child benefit and the child tax credit. That's almost £6 out of every £10 of welfare spending accounted for and, so far, not a "scrounger" in sight. Then we've got another 10% going on support for disabled people – and this should not be confused with incapacity benefit, now called employment and support allowance, or ESA. A further 5% goes to carers and boosting the incomes of the working poor.

breakdown of welfare spending 2009 to 2011

That takes us up to almost three-quarters of the total. So what's left?

It might surprise people to find out that only a shade over a 10th of the benefits bill – and a far smaller share of total public spending – is actually spent on directly replacing the incomes of those not in work, through jobseeker's allowance, income support and ESA (£21bn in total). This proportion will almost certainly have risen in the last couple of years, owing to rising unemployment, and it's the part most sensitive to the economic cycle.

The remaining large items of spending are council tax benefit (£5bn) and housing benefit (£20bn). Together these account for £1 in every £7 of welfare spending, which will strike many people as high. The government has caused controversy by chopping bits off the housing benefit bill, but it has done so without really exploring why the cost of this benefit has been rising. As our recent IPPR report showed, the explanation can be traced back to the generation-long shift from building homes to subsidising rents. This has squeezed the supply of affordable homes and contributed to rent inflation, especially in the private rented sector.

This analysis is not an argument for exempting the benefits system from the important task of deficit reduction – still less fixing the benefits system in aspic. We need a highly active, conditional welfare system that enables (and expects) people to take advantage of employment growth, when it returns. Gateways to benefits need to be policed, to ensure scarce resources reach those for whom they are intended. And we need to be prepared to face up to tough choices if we are going to advance new priorities. For instance, it might make sense to hold down rises in child benefit to make it possible to build up better provision of childcare.

But all of these important issues must be addressed on the basis of facts. So the chancellor should opt for proper transparency on tax and spend if he wants to inform public discussion not just score political points.

 
 

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Graeme Cooke, Research Director