Building shield

This week, David Cameron spoke of the need to move from a “low wage, high tax, high welfare society to a higher wage, lower tax, lower welfare society.”

Certainly, this is what is required if the Government is to cut £12 billion from the welfare budget. The difficulty of doing so is summarised by George Eaton in the New Statesman:

“Before the election, David Cameron vowed to maintain the “triple lock” on the state pension… and ruled out cuts to universal pensioner benefits, such as Winter Fuel Payments and free bus passes. Under pressure from Labour, he later added child benefit to the list of no-go areas. 

“If they are to meet their target of cutting welfare by £12bn by 2017-18, this leaves the Tories with £10.5bn of reductions to make from just £125bn of the welfare budget (the protected payments amount to £95bn). The cuts announced so far – a two-year freeze in working-age benefits, the reduction of the benefit cap from £26,000 to £23,000 and the removal of housing benefit from 18-21-year-olds – amount to just £1.5bn.”

It is widely assumed that this leaves tax credits “as the most obvious place for the axe to fall”:

“They are the largest of the unprotected areas (accounting for £30bn) and have long been regarded by the Tories as emblematic of Labour’s statist meddling. Ahead of Osborne’s emergency Budget on 8 July, the party is reportedly considering saving £5bn by returning tax credits to their 2003/04 levels in real-terms.”

The scaling back of tax credits would place a greater reliance on other work incentives – which is where the higher wages and lower taxes come in.

Though it is argued that tax credits provide the most precise tool for incentivising work, the counter-argument is that freeing wages from Income Tax and National Insurance by lifting thresholds sends a more powerful and reliable signal.

The signal is further amplified when wages – and especially entry-level wages – are higher. Raising the minimum wage and encouraging employers to invest in a well-motivated workforce is therefore an essential part of the low tax, low welfare, high wage trinity.

There is the potential here for a new political consensus. George Eaton remarks that “an increasing number on the left denounce tax credits as an inefficient subsidy to corporate cheapskates.” He doesn’t think that the Government is likely to heed the associated call for a statutory living wage, but he does recommend that ministers pinch an idea from Labour:

Before the election, the party proposed the introduction of ‘make work pay’ contracts, which would provide a tax rebate to those companies that sign up to become living wage employers. For every £1 that employers pay to raise salaries to living wage-level, the Treasury saves 49p. Under Labour’s plan, the chunk of this accounted for by higher tax revenues (32p) would have been paid back to firms that signed up, while the Exchequer banked the remainder.”

Something is deeply wrong with a status quo that rewards companies for pursuing a low wage business model at the expense of those who endeavour to pay a living wage. As I argued on the Deep End last year “in topping up poverty pay, the modern welfare state effectively subsidises one business model, but not the other… This represents a major distortion of the market – one that all conservatives should object to.”

Undoing this distortion isn’t solely a matter of fairness, it’s also about rebalancing the economy and achieving basic fiscal objectives.

16 comments for: Heresy of the week: A “lower-tax, lower welfare” society? Sounds like a job for the living wage

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