It might be unpopular to say it, but removing the Winter Fuel Allowance from all and making it means-tested is a good idea. An excellent one, in fact. It is, possibly, true that tying it to pension credit will make so many more claim that benefit that the change will end up being a money-loser for government overall, but it’s still a good idea.
How far, though, can we push this principle? What about the old age pension itself? It is, after all, a benefit. Perhaps access to every such benefit could be restricted by means-testing. Even, if this isn’t blasphemy against the national religion, the National Health Service itself.
The prompting for these heretical thoughts is a new report by Chris Pope from the Manhattan Institute, called ‘America’s Surprisingly Effective Welfare State’. Its thesis is straightforward, but startling:
The U.S. welfare state is often disparaged for failing to distribute benefits to all citizens. But its greater targeting of expenditures makes it more effective than many European welfare systems.
This is, indeed, surprising. Surely we all know that, by comparison to much of Europe, the US poverty rate is horrendous: 14 or 15% live in poverty, nearly 20% of children and so on. But those statistics are an artefact of a big transatlantic difference, and not the one you probably think.
There are differences in what we both call poverty, yes. But more than that, poverty here in Europe is measured after everything that government does to alleviate it. It’s always post-tax, post-benefit numbers that are used. This is not so in the US: there, poverty is measured by cash income only. But most US poverty alleviation is done via either the tax system (the EITC, equivalent to our working tax credits) or goods and services in kind. That latter approach includes Section 8 housing vouchers, rather than housing benefit, Medicaid for health care and on and on – through some 160 programmes.
So, in the American system most of the things done to alleviate poverty simply are not counted in the measure of who is still in poverty. The American poverty rate reveals who would be in poverty if government didn’t help. The European figures, by contrast, tally who is still in poverty despite government assistance.
That leaves an open question: how well does the American approach do at actually alleviating poverty?
Rather well, in fact. Child poverty drops to perhaps 2%, for example – a rate that shames most European societies. And the American system is much better at killing off child poverty than it is at ending poverty among working age adults. Which, you know, might be the right way round.
Why does the American system solve specific problems better than European approaches? According to the new report, the answer is that the American system is conditional. In our phrasing, it’s almost always means-tested. If you’re poor, you get help; if you’re not, you don’t. That stands in contrast to the varied European systems that try to provide universal benefits.
As should be obvious, trying to provide for everyone is more expensive than providing for only those who are truly in need. Directed support makes it possible to spend more on each recipient and to do so while taxing into submission less of the rest of the economy.
In many US states, income tax levels (including Federal taxes) are actually as high or even higher than they are here in the UK. The big difference is that the Federal tax system doesn’t have a VAT. Lane Kenworthy has calculated that if the US Feds were to try and raise as much as a European welfare state then it would have to be through the imposition of a VAT. So, by being selective on who gains benefits the US spares itself that entire 20 to 25% tax on everything bought.
There is the other side of this, too. A standard left-wing British response is to say that any service – say, healthcare – that is only for the poor will be bad. This is part of the logic behind Labour’s antipathy to private education – if we can force the rich into the state system, then we’ll make them care about how bad that state system is. Well, there’s a point there.
But the end result of the American system, with its focus on means-testing, is that the bottom 10% of Americans live about as well as the bottom 10% of Swedes. The rest of Americans live much higher on the hog than Swedes do. The tax burden required to finance directed benefits is so much lower than that necessary for universal ones that the economic growth rate, over time, makes the whole society richer. Yes, it’s a more unequal society – at least on paper – but also a wealthier one.
At minimum this seems an idea worth considering. Kill the universality of government cash and gain, over time, a richer society while still aiding – in some ways, more effectively – those really in need.
As for the winter heating top-up, the journalist Christopher Fildes used to have at least one column every year announcing his receipt of it. Also, how kind it was – if stupid – that everyone else was paying to upgrade the quality of wine his next few cases would contain.
Taxing ourselves to aid the poor is something we’re going to do as a society. But taxing ourselves more lightly to raise only as much money as the poor really need does have its attractions, no? The US shows that this approach can alleviate poverty in two senses. It relieves the poor in their need, and does so without driving ourselves into poverty to pay for it.
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