Are we becoming too dependent on the state?

I have to tip my hat to Civitas. The ‘Tufton Street’ think tank made quite a splash on Monday, including bagging the front page of the Daily Mail, with two striking claims.

One was that over half of UK households now receive more in benefits from the government than they pay in tax. The other is that the top 10% of earners pay more than half of all income tax.

Both headlines are correct, but a bit more analysis is needed to interpret these figures properly.

For a start, this is not new information. The Civitas report itself acknowledges that it is simply repackaging data which was first published by the Office for National Statistics (ONS) in July last year. The ONS revealed that the proportion of individuals receiving more in benefits than they paid in taxes jumped from 47.5% in the fiscal year 2019/20 to 54.2% in 2020/21.

Crucially, these figures are heavily influenced by the pandemic. The accompanying recession led to a fall in tax revenues and an increase in welfare payments, thus increasing the proportion of working-age households who received more in benefits than they paid in tax. As the economy recovers, this proportion should fall back.

Second, it is important to understand that the definition of ‘benefits’ here includes state education and healthcare, as well as cash payments such as Universal Credit and the State Pension. The spike in government spending on health in response to the pandemic therefore also helps to explain the jump in the figure for 2020/21.

Third, this is another issue which is largely about different generations. The ‘winners’ are mainly younger households with children in state schools, and older households receiving the state pension and making more use of the NHS. The ‘losers’ are mainly working households where the head is aged between 45 and 65. (The chart below is from the original ONS report, where you can also find the underlying data.)

Arguably, then, the system is doing what it is intended to do – helping people to smooth their income and expenditure during recessions, and over their lifetimes. Put another way, get rid of all those pesky kids, and oldies, and the rest of us could pay a lot less tax.

The fact that the top 10% of earners pay more than half of all income tax isn’t the killer statistic that some seem to think, either. Again, this is a progressive tax system working as it should, with people on the highest incomes paying a bigger share of income tax. The missing piece of information here is that the top 10% of earners receive around 35% of the total income of all taxpayers.

In fact, you might expect the combination of an unequal distribution of income and a progressive tax and benefit system to mean that over 50% of households receive more in benefits than they pay in tax.

Nonetheless, Civitas is surely on to something. Looking past the fluctuations over the economic cycle, the proportion of households ‘taking out’ more than they ‘pay in’ does appear to be on an upward trend. (The chart below is from the Civitas report.)

The aging of the population and growing demands on the health service are only likely to reinforce this trend. The UK is also dropping rapidly down the international league tables for tax competitiveness. This is not sustainable, without significant costs.

What’s more, there is an obvious danger that the exceptional response to the pandemic becomes the norm, and the government is always expected to ‘step in’ to bail out every household and business at risk. Indeed, we are already seeing signs of that in the responses to the cost of living crisis.

This is where the Civitas report has done us a favour. It effectively makes the point that the existing welfare state is already pretty good at redistributing income and protecting the most vulnerable. But the government cannot be asked to do much more.

This piece was first published by The Spectator on 23 January 2023

ps. I’ve tweeted a bit more on the distribution of income tax here

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