As HL Mencken pointed out, to every complex problem there is a solution that is clear, simple and wrong. But not so for the UK’s current budgetary woes. I have a clear and simple solution that would make Rachel Reeves’ accounts problems disappear into the ether, and I can even lower tax rates as I do so. The answer is 60/40.
We currently measure poverty as being under 60% of median household income – with or without housing costs to taste. This is not a measure of poverty: it is one of inequality. It is about having only two pairs of Primark shoes instead of three pairs of Air Jordans. Actual deprivation, real grinding poverty, simply does not exist in this nation today. Which is, as I’ve pointed out before, why the definition was changed to one of inequality. If the actual aim is to be able to dispossess the rich, then having already solved poverty deprives revolutionaries of their rallying call. Redefining poverty to mean ‘a little less than others’ allows you to keep juicing up the mob.
We also have a more modern claim that ‘low wages’ are to be defined as less than 66% of median. This is why the Low Pay Commission is tasked with raising the minimum wage to that 66% – so that someone can gurn at the despatch box while claiming to have solved low wages. Never mind the consequences for youth unemployment, or all the other effects of a minimum wage that is set too high.
Both of these figures – the 60% and the 66% – are simply too high. If we leave the market to set incomes, many people will end up being on less than 66% of median wages, and even more on less than 60% of median household income. The cost of avoiding this is vast. Indeed, my opinion is that that’s rather why the targets are set so high – so as to be able to insist upon wholesale dispossession of the rich to be able to meet said targets. But the truth is this cost is too high to be borne over any medium or long term.
Of course, Kate Pickett and Richard Wilkinson’s 2009 bestseller ‘The Spirit Level’ tells us that everything bad happens because of inequality. That’s always been a dodgy assertion, with dodgy statistics used to try to prove it. But, more than a decade since the original publication, we can now test the proposition again. Income inequality is now lower than it was in 2007, than in 2001. Wealth inequality is largely unchanged since the turn of the millennium. If the theory’s true then everyone should be as unhappy as they were two decades back. Unhappy about the economy that is. Which isn’t, in the slightest, true. Everyone’s in fact shrieking about how there’s been no economic growth, no growth in real wages and whenssomeonegonnadosummataboutit? Unhappier that is, in the absence of economic growth but with the same, or lower, inequality of incomes and wealth.
We are taxing – and regulating, which is an issue for another day – too much for growth to happen. We’re taxing too much, because our poverty and low wage definitions are too high. That means we’ve got to find vast gobs of money to hit the targets. The result is a stagnant economy, which we can see does not, in fact, make people happy, even if inequality isn’t rising.
All this is before we even get to the costs of going on the sick and the rest. Which just redoubles the problem, for who wants the sick to live in poverty? But we have two problems stemming from that. One is that, if you can gain 60% of median income without having to work, then more people will be tempted to game the system than would happen if it were set lower. The second is that raising both those who cannot work – justly – and those who will not work – incentivised by the welfare system – to that 60% level is just mindblowingly expensive.
At which point an observation. There’s a super little calculator of world incomes (no, don’t use the World Inequality one, that gives only national, not global, comparators) which will tell you where any particular income would rank in the global distribution. Yes, of course, it’s already adjusted for the different prices of things in different places. And the results are interesting.
UK median household income is some £35,000. For two adults, one child, 60% of that (£21,000) puts you on the edge of the top 20% of all global incomes. For an individual, it takes you to the edge of the world’s top 5%. I submit that being near the top 5% of global incomes – adjusted, recall, for the costs of things – is not poverty. Actually, I’d insist that being around the top 20% isn’t either. It certainly isn’t something we should be guaranteeing to everyone in the country at the cost of taxing everyone else so much that nothing ever gets better.
Even 40% of UK median household income (£14,000), puts you, as an individual, just outside the global top 10%. For two adults and a child, top 30%. As it happens, 40% of UK median wages at 2,000 hours a year puts you also just on that edge, as an individual, of the top 10% of global wages.
And, well, what do we owe to our fellows? Sure, the vicissitudes of life and chance, Rawls’ veil of ignorance and all that. But I’m deeply unconvinced that we owe everyone a roughly middle-class existence, even as we shouldn’t abandon them to endure true poverty. More, I’m unconvinced that we owe everyone that near-equality of incomes through tax and redistribution to the point that the lives of all our children aren’t going to get any better because there’s no damn economic growth.
So, let’s just switch. Move from that guarantee – okay, that aim – of 60% of median income, of 66% national minimum wage, to 40%. There’s a joy here that we can, in fact, do this. As the OECD says:
OECD uses multiple relative poverty lines set at 40%, 50% and 60% of median income as a benchmark for international comparisons; other countries and organisations use fixed proportions of mean income. There is some discussion as to whether the mean or the median should be used as a reference. The proportion used to determine the poverty line (typically in the range 0.4 – 0.6) is wholly arbitrary.
We can use 40%. So, let us do so.
At which point, numbers become a little more hazy. For quite how much will be saved by this is unknown. But it is certain that the truly expensive thing is getting people up from the 40 to the 60. Few would, even in the most Gradgrind of free markets, earn 40% or less of the median wage. Or would have household incomes below that 40% again. Further, getting those who do up to that level would be cheap, not expensive like the current system. A 40% level would also solve all the incentive problems of people making nearly as much by not working as by doing so – for that very same reason that few would ever, even in the most Worstallian of free market economies, be making 40% of median income.
The Worstall Calculator (back of envelope: 1; pencil: 1) suggests to me that we might be able to reduce redistribution by as much as 10% of GDP this way: 5% to make Reeves’ sums add up; 5% in tax cuts.
So, as I say, let’s do it. If we change our definition of poverty, making sure that none are poor would be a piece of p… well, that stuff that the current system seems to spray about with such abandon.
The only problem I really foresee with this is that revolutionaries are always outflanked to their left. I can already hear that throatclearing, the ahems, as while my analysis of the ancien regime is clearly correct and even Girondist, the Montagnards and Jacobins will be sure to follow.
35% anyone? 30?
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